-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CwPAZ60aMp/XW4xttY0PlrIzNrxHySwIgcZ/3FL4+jXZIEzkWq3M1AY6Ht0R3PD/ mfJVnNsVdNIm2feBFDFbcA== 0000950123-97-008996.txt : 19971030 0000950123-97-008996.hdr.sgml : 19971030 ACCESSION NUMBER: 0000950123-97-008996 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19971029 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: RUSSIAN WIRELESS TELEPHONE CO INC CENTRAL INDEX KEY: 0001030991 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE COMMUNICATIONS (NO RADIO TELEPHONE) [4813] IRS NUMBER: 133769217 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: SEC FILE NUMBER: 333-24177 FILM NUMBER: 97702909 BUSINESS ADDRESS: STREET 1: 780 THIRD AVENUE, SUITE 1600 CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2124862900 SB-2/A 1 AMENDMENT #3 TO FORM SB-2 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 29, 1997 REGISTRATION NO. 333-24177 ================================================================================ U.S. SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ AMENDMENT NO. 3 TO FORM SB-2 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------ RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER) DELAWARE 4813 13-3769217 (STATE OR OTHER JURISDICATION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
575 LEXINGTON AVENUE, SUITE 410, NEW YORK, NEW YORK 10022 (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. 575 LEXINGTON AVENUE, SUITE 410, NEW YORK, NEW YORK 10022 (212) 486-2900 (NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE) ------------------------ 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
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of the registration statement. 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. [ ] Continued on following page ================================================================================ 2 CALCULATION OF REGISTRATION FEE
======================================================================================================== PROPOSED PROPOSED MAXIMUM MAXIMUM AMOUNT OF TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION SECURITIES TO BE REGISTERED REGISTERED PER SECURITY OFFERING PRICE FEE - -------------------------------------------------------------------------------------------------------- Common Stock, $.01 Par Value (the "Common Stock") to be Sold by the Registrant......................... 1,867,500(1) $ 7.00 $13,072,500 $ 3,961.36 - -------------------------------------------------------------------------------------------------------- Common Stock to be Sold by Certain Selling Securityholders............ 1,185,000(2) 7.00 8,295,000 2,513.64 - -------------------------------------------------------------------------------------------------------- Warrants Expiring April 18, 1999 to be sold by Certain Selling Security Holders (the "Second Private Placement Warrants")............... 462,500 n/a n/a 0.00(4) - -------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of the Second Private Placement Warrants........................... 462,500(3) 7.70 3,561,250 1,079.17(4) - -------------------------------------------------------------------------------------------------------- Warrants Expiring Five Years After the Effective Date of this Registration Statement to be sold by Certain Selling Security Holders (the "Third Private Placement Warrants")......................... 2,000,015 n/a n/a 0.00(4) - -------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of Third Private Placement Warrants........................... 2,000,015(3) 5.75 11,500,086 3,484.87(4) - -------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of an Option Held by a Selling Securityholder..................... 25,000 2.00(5) 50,000 15.15 - -------------------------------------------------------------------------------------------------------- Representative's Warrant............. 1 10.00 10 n/a - -------------------------------------------------------------------------------------------------------- Common Stock Issuable Upon Exercise of Representative's Warrant........ 165,000(3) 11.55(6) 1,905,750 577.50 - -------------------------------------------------------------------------------------------------------- Totals..................... -- -- $38,384,596 $ 11,631.70* ========================================================================================================
* $18,996.44 was previously paid. Accordingly no further fee payment is due with respect to the filing of this amendment. (1) Includes 247,500 shares of Common Stock which the Underwriters have the option to purchase to cover over-allotments, if any. (2) Includes 30,000 shares of Common Stock which the Underwriters have agreed to purchase from a selling stockholder, and 1,155,000 shares of Common Stock to be offered on a delayed basis in non-underwritten transactions by certain selling securityholders. (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) Pursuant to Rule 457(g), no fee is due with respect to registration of the Second Private Placement Warrants or the Third Private Placement Warrants. Instead, such fees are due with respect to the registration of the Common Stock issuable upon exercise thereof. (5) Based upon the exercise price of the Option. (6) Based upon 165% of the maximum offering price of the Common Stock. 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. 3 EXPLANATORY NOTE The Registration Statement contains a Prospectus (the "Company Prospectus") which will be used in connection with the underwritten offering of 1,650,000 shares of the Common Stock, $.01 par value, of the Registrant (the "Common Stock"), 1,620,000 shares of which will be offered by the Registrant and 30,000 shares of which will be offered by a selling securityholder (the "Selling Stockholder"). 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 1,155,000 shares of Common Stock, 2,462,515 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." 4 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 OCTOBER 29, 1997 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. 1,650,000 SHARES OF COMMON STOCK Russian Wireless Telephone Company, Inc., a Delaware corporation (the "Company"), hereby offers (the "Offering") 1,620,000 shares of common stock, $.01 par value (the "Common Stock") of the Company. The initial public offering price of the Common Stock is $7.00. This Prospectus also relates to the offering (the "Selling Stockholder's Offering") of 30,000 shares of Common Stock by a selling stockholder (the "Selling Stockholder"). Prior to this Offering, there has been no market for the Common Stock. Although it is anticipated that the Common Stock will be traded in the over-the-counter market on the OTC Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the "OTC Bulletin Board"), there can be no assurance that such a market will develop after the completion of this Offering. The offering price of the shares of Common Stock offered hereby has been determined by negotiation between the Company and J.W. Barclay & Co., Inc., the representative of the Underwriters (the "Representative"), and is not necessarily related to the Company's asset value, net worth or other established criteria of value. See "Risk Factors" and "Underwriting." THESE ARE SPECULATIVE SECURITIES. THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK AND IMMEDIATE AND SUBSTANTIAL DILUTION. SEE "RISK FACTORS" ON PAGE 12 AND "DILUTION" ON PAGE 29. 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.
================================================================================================= UNDERWRITING PROCEEDS TO PRICE TO DISCOUNTS PROCEEDS TO SELLING PUBLIC AND COMMISSIONS(1) COMPANY(2) STOCKHOLDER(3) - ------------------------------------------------------------------------------------------------- Per Share................. $7.00 $.63 $6.37 $6.37 - ------------------------------------------------------------------------------------------------- Total(4).................. $11,550,000 $1,039,500 $10,319,400 $191,100 =================================================================================================
(1) Does not include (i) a warrant to be issued to the Representative to purchase 165,000 shares of Common Stock at an exercise price equal to 165% of the public offering price of the Common Stock (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 $125,000 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" and "Use of Proceeds." (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 $1,235,200 in the aggregate (or $1,287,175 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 $6,300 payable by the Selling Stockholder. (4) The Company has granted the Underwriters an option exercisable for a period of 45 days from the date of this Prospectus to purchase up to an additional 247,500 shares of Common Stock upon the same terms and conditions as the Common Stock 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 Stockholder will be $13,282,500, $1,195,425, $11,895,975 and $191,100, respectively. See "Underwriting." In addition to the Common Stock being offered by the Company and the Common Stock being offered by the Selling Stockholder pursuant to this Prospectus, the Registration Statement of which this Prospectus is a part also covers 1,155,000 shares of Common Stock, 2,450,015 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 granted by the Company to the Chairman of its Board of Directors, all of which are being offered by certain selling securityholders (the "Selling Securityholders"). --------------------- THE COMMON STOCK IS 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 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. The date of this Prospectus is , 1997 5 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. --------------------- 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 is materially complete, but 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 will be 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 which the Company will be filing 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 intends to distribute to its stockholders annual reports containing financial statements audited by its independent accountants approximately five months 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. 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 three closed joint stock companies organized under the laws of the Russian Federation, Corbina Telecommunications ("Corbina"), CompTel Ltd. ("CompTel") and Investelektrosvyaz ("Investelektro"). The Company is the owner and holder of 75% of the outstanding capital stock of Corbina and CompTel. CompTel is the owner and holder of 51% of the outstanding capital stock of Investelektro. The balance of the outstanding shares of capital stock of such companies is owned by individuals and entities domiciled in the Russian Federation, and by one individual who (a) is a former citizen of the Russian Federation, (b) is now a citizen of the United States, and (c) 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, such other stockholders or said key employee, or to enforce in the United States or outside of the United States judgments obtained against such joint stock companies, such other stockholders or such key employee in the United States courts, or to enforce in the United States courts judgments obtained against such joint stock companies, such other stockholders 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." 6 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; (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 Mr. Leibov; and (iii) "Investelektro" means Closed Joint Stock Company Investelektrosvyaz, a closed joint stock company organized under the laws of the Russian Federation which is 51% owned by CompTel and 49% owned by investors who are not employees, directors or stockholders of the Company. 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." THE COMPANY Russian Wireless Telephone Company, Inc., a Delaware corporation, through its Russian subsidiaries, Corbina, CompTel and Investelektro (collectively, the "Subsidiaries"), is a provider of local, domestic and international telecommunications services, principally in the metropolitan area of the city of Moscow and the suburban environs of Moscow in the Russian Federation (collectively, the "Moscow Region"). 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, among other things, 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, through Investelektro, intends to construct and operate state-of-the-art wireless local loop telecommunications systems in the cities of Moscow, St. Petersburg, Novosibirsk, Nizhny Novgorod and Ekaterinburg and the suburban environs of Moscow (the "Licensed Territory"). Investelektro, has received a license from the Ministry of Communications (the "MOC") which, pursuant to a governmental restructuring which occurred on March 17, 1997, has been renamed as the State Committee of the Russian Federation on Communications and Information (the "State Communications Committee"), authorizing it to construct and operate its proposed wireless local loop system in the Licensed Territory (the "License"), it has received preliminary approval regarding the assignment of radio frequencies for its use in connection with such operations and it is awaiting receipt of final approval of such frequency assignments. It is anticipated that the first wireless local loop system will be constructed in the Moscow Region. 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. 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 3 7 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 -- Investelektro'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. 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. 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, as evidenced by data published by the State Communications Committee revealing a waiting list for telephone line installations of 9.7 million in Russia at year end 1995. 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. 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 State Communications Committee, there were approximately 26 million telephone lines in Russia at year end 1995. This fact, coupled with the above-mentioned waiting list for telephone line installation of 9.7 million at year end 1995, has led the Company to conclude that significant pent-up demand for local and long distance telephone services exists in Russia, and that 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, based upon its review of population data published by the State Communications Committee, 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 State Communications Committee, 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. 4 8 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. RUSSIAN LONG DISTANCE MARKET The size of the Russian long distance market, according to data published by the State Communications Committee, 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 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. COMPANY INFORMATION 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 a provider 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 revenue source 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. During the year ended December 31, 1996, the Company incurred a net loss of $1,470,878 on total revenues of $8,043, and Corbina incurred a net loss of $209,813 on total revenues of $1,011,914. During the six month period ended June 30, 1997, the Company (excluding Corbina) incurred a net loss of $7,835,110 (including a one time compensation charge of $5,250,000 to account for the merger of Russian Wireless Telephone Company, Inc. ("Russian Wireless") with and into the Company) on minimal revenues, and Corbina incurred a net loss of $78,111 on total revenues of $1,265,435. See "Risk Factors" and "Business -- General Overview." The Company's office is located at 575 Lexington Avenue, 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 non-affiliated persons and issued to such persons an aggregate of 450,000 shares of Common Stock (the "Bridge Financing"), none of which are being registered for sale in this Offering. 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. 5 9 THE OFFERING Securities offered by The Company... 1,620,000 shares of Common Stock The Selling Stockholder............. 30,000 shares of Common Stock Common Stock Outstanding Before the Offering(1)....................... 2,485,000 shares Common Stock to be Outstanding After the Offering(2)..................... 4,105,000 shares 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 Investelektro'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 Investelektro's proposed wireless local loop telecommunications system in the Moscow Region, to repay $3,309,000 of indebtedness and for working capital. See "Use of Proceeds;" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." OTC Bulletin Board Symbol(3)........ RWTC 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; (iv) risks relating to the loss of Investelektro's wireless local loop license; (v) 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 (vi) 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 13. - --------------- (1) Does not include up to 4,237,515 shares of Common Stock consisting of (i) 750,000 shares issuable upon exercise of common stock purchase warrants issued to investors in the Company's first private placement of securities (the "First Private Placement Warrants"); (ii) 462,500 shares issuable upon exercise of 6 10 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; (iii) 2,000,015 shares issuable upon exercise of 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; (iv) 25,000 shares issuable upon exercise of an option issued to Jack W. Buechner, the Chairman of the Company's Board of Directors (the "Buechner Option"); and (v) 1,000,000 shares reserved for issuance under the Company's Omnibus Stock Option Plan (including 250,000 shares thereof issuable to Mr. Leibov pursuant to his employment agreement with the Company upon the occurrence of certain events. See "Description of Securities;" "Management;" and "Concurrent Registration of Securities." (2) Does not include up to 4,650,015 shares of Common Stock issuable in the events that (i) all of the 750,000 First Private Placement Warrants, the 462,500 Second Private Placement Warrants and the 2,000,015 Third Private Placement Warrants are fully exercised; (ii) the Company issues 165,000 shares of Common Stock upon exercise of the Representative's Warrant; (iii) the Company issues 247,500 shares of Common Stock upon full exercise of the Underwriters' over-allotment option; (iv) 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 (including up to 250,000 shares of Common Stock issuable to Mr. Leibov pursuant to his employment agreement); and (v) the 25,000 shares of Common Stock underlying the Buechner Option are issued. See "Management;" "Description of Securities;" and "Underwriting." (3) The Company anticipates that the Common Stock will be quoted on the OTC Bulletin Board. An OTC Bulletin Board quotation listing does not imply that a liquid and active market will develop or be sustained for the securities upon completion of the Offering. Pursuant to the terms of the restriction letter (the "Restriction Letter") between the Representative and the National Association of Securities Dealers, Inc. (the "NASD"), the Representative is prohibited from making a market in securities listed on the OTC Bulletin Board. Accordingly, the Representative will not make a market in the shares of Common Stock offered hereby. However, the Representative is not prohibited from executing buy and/or sell orders for its customers on an agency basis. See "Risk Factors -- Representative Will Not Make a Market in the Common Stock." 7 11 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 income statement data with respect to the six month period ended June 30, 1997 are derived from the unaudited financial statements appearing elsewhere herein. In the opinion of management of the Company, such unaudited financial statements have been prepared on the same basis as the audited financial statements and include all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation thereof. The income statement data for the six month period ended June 30, 1997 is not necessarily indicative of the results which may be expected for any interim period or the full fiscal year. The Proforma Combined Company information includes and accounts for the effects of the merger of Russian Wireless with and into the Company and the Company's acquisition of a 75% ownership interest in Corbina (i) on the statement of operations for the year ended December 31, 1996 as if the merger and acquisition had occurred on December 31, 1995; and (ii) on the statement of operations for the six months ended June 30, 1997 as if the merger and acquisition had occurred on December 31, 1996. The aforementioned information does not include financial results of CompTel or Investelektro, since the effects thereof were immaterial. 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 1,620,000 shares of Common Stock offered hereby (not including 247,500 shares of Common Stock subject to the Underwriters' Over-allotment Option) at an assumed offering price of $7.00 per share 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 June 30, 1997; (ii) on the statement of operations for the year ended December 31, 1996 as if such events had occurred on December 31, 1995; and (iii) on the statement of operations for the six months ended June 30, 1997 as if such events had occurred on December 31, 1996. The Company's employment agreement with Mr. Leibov contains certain performance based compensation provisions which provide, among other things, that, in the event that Corbina's operating income for any of its fiscal years ending during the five year term of the employment agreement shall be greater than $3,400,000, then, the Company shall transfer, subject to certain restrictions on transfer and a right of first refusal, such number of Corbina shares held by it equal to 10% of the total number of outstanding shares of Corbina, thereby reducing the Company's ownership of Corbina to 65%. If Corbina's revenues exceed $3,400,000 in any fiscal year following the transfer of such shares to Mr. Leibov, his employment agreement further provides that he shall be entitled to receive up to 250,000 shares of the Company's Common Stock calculated by dividing the difference between Corbina's operating income and $3,400,000 by the share price, as defined. The issuance of any shares to Mr. Leibov under his employment agreement will be charged to compensation expense and will be valued at the then present market price of such shares. See "Risk Factors -- Effect of Minority Ownership Interest Upon Potential Revenues and Net Income from Subsidiaries" and "Management -- Executive Employment Agreements." 8 12 STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996:
RUSSIAN WIRELESS CORBINA PROFORMA THE TELEPHONE TELECOM- PROFORMA COMBINED TRANSACTION PROFORMA AS COMPANY COMPANY, INC. MUNICATIONS(1) ADJUSTMENTS COMPANY ADJUSTMENTS ADJUSTED -------- ------------- -------------- ----------- -------- ----------- ----------- (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues................... -- -- $ 1,012 -- $ 1,012 -- $ 1,012 Cost of Services........... -- -- 827 -- 827 -- 827 ------- ------- ------- ------- ------- ------- ------- Gross Profit............... -- -- 185 -- 185 -- 185 Commission Income.......... $ 8 -- -- -- 8 -- 8 ------- ------- ------- ------- ------- ------- ------- Net Revenues............... 8 -- 185 -- 193 -- 193 Operating Expenses: Officer's Salaries....... $ 5,250(2) 100 -- -- $ 175(4) 5,525 $ 175(7) 5,700 Selling, General and Administrative Expenses............... 483 $ 35 372 (70)(4) 820 25(5) 845 Writedown of Equipment... -- -- Depreciation and Amortization........... 210 65(3) 275 275 ------- ------- ------- ------- ------- ------- ------- Total Operating Expenses... 793 35 372 5,420 6,620 200 6,820 ------- ------- ------- ------- ------- ------- ------- Operating Loss............. (785) (35) (187) (5,420) (6,427) (200) (6,627) Other (Income) Expenses: Interest and financing costs.................. 686 -- -- -- 686 (618)(6) 68 Foreign Exchange Loss.... -- -- 13 -- 13 13 ------- ------- ------- ------- ------- ------- ------- Loss Before Provision for Income Taxes and Extraordinary Items...... (1,471) (35) (200) (5,420) (7,126) 418 (6,708) Provision for Income Taxes.................... (9) (9) (9) ------- ------- ------- ------- ------- ------- ------- Loss Before Extraordinary Items.................... $(1,471) $ (35) $ (209) $(5,420) $(7,135) $ 418 $(6,717) ------- ------- ------- ------- ------- ------- ------- Net Loss Per Share......... $ (.64) $(14.00) $ (1,499) $ (2.41) $ (1.63)
9 13 STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1997:
THE PROFORMA COMPANY PROFORMA COMBINED TRANSACTION PROFORMA AS CONSOLIDATED ADJUSTMENTS COMPANY ADJUSTMENTS ADJUSTED ------------ ----------- --------- ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues............................ $ 1,266 -- $ 1,266 -- $ 1,266 Cost of Services.................... 1,197 -- 1,197 -- 1,197 ------- ---- ------- ----- ------- Gross Profit........................ 69 -- 69 -- 69 ------- ---- ------- ----- ------- Net Revenues Operating Expenses: Officers' Salaries................ 5,335 88(4) 5,423 175(7) 5,598 Selling, General and Administrative Expenses........ 473 (36)(4) 437 21(5) 458 Depreciation and Amortization..... 1,680 -- 1,680 -- 1,680 ------- ---- ------- ----- ------- Total Operating Expenses............ 7,488 52 7,540 196 7,736 Operating Loss...................... (7,419) (52) (7,471) (196) (7,667) Other (Income) Expenses: Interest and financing costs...... 420 -- 420 (386)(6) 34 Foreign Exchange Gain............. (4) -- (4) -- (4) ------- ---- ------- ----- ------- Loss Before Provision for Income Taxes............................. (7,835) (52) (7,887) 190 (7,697) Provision for Income Taxes.......... -- -- -- -- -- ------- ---- ------- ----- ------- Net Loss............................ $ (7,835) $ (52) $(7,887) $ 190 $ (7,697) ======= ==== ======= ===== ======= Net Loss Per Share.................. $ (2.78) $ (2.64) $ (1.86)
- --------------- Statement of Operations Proforma Adjustments: (1) Corbina's data is presented for the period from December 1, 1995 (inception) through December 31, 1996. Corbina commenced business operations in March 1996. (2) To record increase in compensation expense resulting from the merger of Russian Wireless with and into the Company, based on the assumed public offering price of the Common Stock of $7.00 per share. (3) To record amortization of goodwill in connection with the acquisition of Corbina. Goodwill is being amortized over a five year period. (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 aggregating $125,000 over a period of three years. 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 issuance of 25,000 additional shares of Common Stock valued at the assumed $7.00 offering price of the Common Stock pursuant to this Prospectus. Such shares are issuable pursuant to the Company's employment agreement with Mr. Leibov. See "Management -- Executive Employment Agreements." 10 14 BALANCE SHEET AT JUNE 30, 1997:
THE TRANSACTION PROFORMA AS COMPANY ADJUSTMENTS ADJUSTED -------- ------------ ----------- (DOLLARS IN THOUSANDS) Current Assets: Cash and Cash Equivalents............................... $ 25 $ 11,340(a) $ 5,615 (2,381)(b) (3,369)(c) Accounts Receivable, Net................................ 515 515 Prepaid Expenses and Other Current Assets............... 284 125(b) 409 -------- -------- -------- Total Current Assets.................................... 824 5,715 6,539 Property and Equipment, Net............................. 210 210 Deferred Registration Fees.............................. 762 (762)(d) 0 Goodwill in Corbina, Net................................ 294 294 Organization Costs...................................... 2 2 -------- -------- -------- Total Assets.................................. $ 2,092 $ 4,953 $ 7,045 ======== ======== ======== Current Liabilities: Notes Payable......................................... 2,899 (2,899)(c) 0 Accrued Interest Payable.............................. 494 (470)(c) 24 Accounts Payable and Accrued Expenses................. 1,848 (762)(d) 1,086 -------- -------- -------- Total Current Liabilities............................... 5,241 (4,131) 1,110 Long Term Debt.......................................... 389 389 Stockholders' Equity (Deficiency): Common Stock.......................................... 30 11(a) 41 Additional Paid In Capital.............................. 7,583 11,329(a) 16,656 (2,256)(b) Accumulated Deficit..................................... (11,151) (11,151) -------- -------- -------- Total Stockholders' Equity (Deficiency)................. (3,538) 9,084 5,546 -------- -------- -------- Total Liabilities and Stockholders' Equity $ 2,092 $ 4,953 $ 7,045 (Deficiency).......................................... ======== ======== ========
- --------------- Transaction Adjustments: (a) To reflect the issuance of 1,620,000 shares of Common Stock at $7.00 per share, and the cancellation of 500,000 shares of Common Stock which were returned by Mr. Nathan. (b) To record offering costs as follows: offering expenses consisting of professional fees, Blue Sky fees and expenses, printing and engraving costs and miscellaneous charges aggregating $920,000 (of which $762,000 already has been accrued), the Underwriters' discounts and commissions aggregating $1,020,600, the Representative's non-accountable expense allowance (net of a $25,000 advance) aggregating $315,200 and the Representative's pre-paid financial consulting fee of $125,000. See "Underwriting." (c) To record the repayment of debt and accrued interest at June 30, 1997 and to write-off unamortized discounts on notes payable to additional paid in capital. (d) To write-off $762,000 of deferred registration fees, including a $25,000 advance with respect to the Representative's non-accountable expense allowance against paid in capital. 11 15 RISK FACTORS An investment in the Common Stock and 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 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 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 $849,259, a stockholders' deficiency of $953,610 and an accumulated deficit of $3,316,218; and Corbina incurred losses from operations of $209,813, had a working capital deficiency of $214,257 and a stockholders' deficiency of $126,629. Moreover, during the six months ended June 30, 1997, the Company incurred losses from operations of $7,418,632 (including a one time charge of $5,250,000), had a working capital deficiency of $4,418,579 (including Corbina's deficiency of $395,605), a stockholders' deficiency of $3,538,728 and an accumulated deficit of $11,151,336; and Corbina incurred losses from operations of $78,111, had a working capital deficiency of $395,605 and a stockholders' deficiency of $204,740. Such factors 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 Officer, and Mr. Leibov, the Executive Vice President of the Company and Chief Executive Officer of Corbina, CompTel and Investelektro, 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 that Mr. Nathan must devote substantially all of his time (approximately 40 hours per week) to the Company as its Chief Executive Officer. The Company has also entered into an employment agreement with Mr. Leibov which provides for his rendition of services as Executive Vice President of the Company, and as Chief Executive Officer of Corbina, CompTel and Investelektro 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 12 16 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." MINORITY OWNERSHIP OF INVESTELEKTRO; ABSENCE OF CONTROL OF SUBSIDIARIES' OPERATIONS; DEPENDENCE ON MR. LEIBOV The Company's principal assets are its equity interests in Corbina, CompTel and Investelektro. Through its 75% ownership interest in Corbina and CompTel, and CompTel's 51% ownership interest in Investelektro, the Company controls the operations of each of the Subsidiaries. However, by reason of the fact that the Company's ownership interest in Investelektro is indirect (through its 75% ownership of CompTel), the Company actually owns only 38.25% of Investelektro, and only will be entitled to receive 38.25% of any profit distributions generated by Investelektro. Furthermore, the Company is completely dependent upon Mr. Leibov, who owns the remaining 25% of each of Corbina and CompTel, 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 any 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. The inability to replace Mr. Leibov in a reasonable period of time, or with a suitable replacement, would have a material adverse effect on the Company and its operations. GOVERNMENT REGULATION -- INVESTELEKTRO'S INABILITY TO CONDUCT OPERATIONS IF CONDITIONS OF LICENSE ARE NOT SATISFIED In February 1997, Investelektro received a license from the State Communications Committee authorizing it to construct and operate the proposed wireless local loop system in the Licensed Territory. It has received preliminary permission to utilize certain segments of the radio frequency spectrum in connection therewith, and it is awaiting receipt of final approval of such frequency assignments. The License requires Investelektro to commence providing wireless local loop operations no later than February 21, 1998, and to establish an installed customer base of not less than 20,000 lines by February 2002. In the event that Investelektro fails to satisfy any of such requirements, its License and/or frequency allocations would be subject to immediate suspension or revocation. Although the Company believes that Investelektro will receive final approval of its frequency assignments, and that Investelektro will not experience difficulties in satisfying the above-mentioned requirements, no assurance can be given in either regard. Furthermore, no assurance can be given that Investelektro will be able to maintain its License, that its terms will not be altered to Investelektro's disadvantage or that it will be renewed upon its expiration. The failure to receive final approval of frequency allocations, the non-renewal, or a suspension or revocation of such License and/or frequency allocations, would jeopardize the Company's entire investment in its proposed wireless local loop system, and would have a material adverse effect on the Company's financial condition and its ability to conduct the business it intends to undertake in the Russian Federation. See "Business -- Proposed Wireless Local Loop Operations -- Telecommunications License." USE OF SUBSTANTIAL PORTION OF OFFERING PROCEEDS TO REPAY INDEBTEDNESS The Company intends to use approximately $3,159,000 (34.8%) of the net proceeds of the Offering to repay indebtedness to investors, and approximately $150,000 of such proceeds to satisfy an obligation owed to Harvey Bloch, a former stockholder, in connection with the redemption of the shares of Common Stock that he formerly owned. As a result, such funds will not be available to fund the Company's proposed operations. See "Use of Proceeds;" "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources;" and "Certain Relationships and Related Transactions." 13 17 EFFECT OF MINORITY OWNERSHIP INTEREST UPON POTENTIAL REVENUES AND NET INCOME FROM SUBSIDIARIES By reason of the fact that the Company is the owner of 75% of the outstanding capital stock of each of Corbina and CompTel, and CompTel is the owner of 51% of the capital stock of Investelektro, the Company will only be entitled to report 75% of the revenues and net income, if any, and to receive 75% of any distributions thereof which each of Corbina and CompTel derives from the operation of its respective business. CompTel's revenues and net income will be primarily, if not completely, derived from its 51% ownership interest in Investelektro. Thus, the Company's net indirect share of Investelektro's revenues and net income will be 38.25%. In addition, the Company's employment agreement with Mr. Leibov contains certain performance based compensation provisions which provide, among other things, that, in the event that Corbina's operating income for any of its fiscal years ending during the five year term of the employment agreement shall be greater than $3,400,000, then, the Company shall transfer, subject to certain restrictions on transfer and a right of first refusal, such number of Corbina shares held by it equal to 10% of the total number of outstanding shares of Corbina, thereby reducing the Company's ownership of Corbina to 65%. In such event, the Company's ownership interest in Corbina, its right to report the revenues and net income derived from Corbina, and its right to receive any distributions thereof, would be reduced from 75% to 65%. See "Management -- Executive Employment Agreements." REPRESENTATIVE WILL NOT MAKE A MARKET IN THE COMPANY'S COMMON STOCK Pursuant to the terms of the Representative's Restriction Letter with the NASD, the Representative is prohibited from acting as a "market maker" in securities traded on the OTC Bulletin Board. As a result thereof, the Representative will not make a market in the shares of the Common Stock offered hereby. The Representative's inability to make such a market may have a material adverse effect on the liquidity of the Common Stock offered hereby, which could make it more difficult for investors in this Offering to purchase or sell such securities. The Representative, however, may execute buy and sell orders for its customers on an agency basis. Although no assurance can be given, the Representative may apply to the NASD, in the future, to have its Restriction Letter amended to allow it to make markets in OTC Bulletin Board securities. No assurances can be given when, if ever, the Representative will make such application, or if made, when, if ever, the NASD would approve such application. See "Underwriting." OTC ELECTRONIC BULLETIN BOARD; ABSENCE OF PRIOR PUBLIC MARKET; DETERMINATION OF OFFERING PRICE Although no assurances can be given, it is anticipated that the Company's Common Stock will be traded in the over-the-counter market and quoted on the OTC Bulletin Board, an NASD-sponsored and operated inter-dealer automated quotation system for equity securities not included in the NASDAQ SmallCap Market or NASDAQ National Market. Currently, securities traded on the OTC Bulletin Board experience less liquidity than securities traded on the New York or American Stock Exchanges, or on the NASDAQ National or SmallCap Markets. Accordingly, investors in this Offering may incur difficulties in purchasing or selling the Common Stock. Prior to this Offering, there has been no public trading market for the Common Stock, and there can be no assurance that an active public market for the Common Stock will develop or continue following the Offering. The initial public offering price of the Common Stock has been determined by negotiation between the Company and the Representative and may not necessarily bear any relationship to the Company's assets, book value, revenues or other established criteria of value, and should not be considered indicative of the price at which the Common Stock will trade after completion of the Offering. There can be no assurance that the market price of the Common Stock will not decline below the initial public offering price. See "Underwriting." NEED FOR ADDITIONAL CAPITAL; NO ASSURANCES OF ABILITY TO OBTAIN NEEDED ADDITIONAL CAPITAL The Company requires substantial capital to pursue its operating strategy. The Company does not intend to employ any portion of the net proceeds of this Offering in connection with the construction of wireless local 14 18 loop systems in the cities of St. Petersburg, Novosibirsk, Nizhny Novgorod or Ekaterinburg. The Company estimates that, in order to fulfill all of the obligations imposed upon Investelektro pursuant to the License, it will need an aggregate of approximately $3 million, in addition to the proceeds of this Offering, to build the basic wireless local loop networks in the cities other than the Moscow Region which comprise the Licensed Territory, and that it may need as much as $20 -- 30 million, in the aggregate, to build wireless local loop systems capable of handling all of the telecommunications traffic which could be generated by all of the potential subscribers for such services located throughout the Licensed Territory. The Company expects to obtain the capital necessary to undertake such activities from projected operating profits and/or from other financing sources. The Company's management believes that the net proceeds of the Offering will enable it to undertake its proposed business activities described herein during the 12 month period 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 projected operating costs and/or decrease the number of potential and actual subscribers for its Subsidiaries' services, which would decrease its projected available cash flow. Moreover, as of the date of this Prospectus, the Company has no commitment from any person or entity to provide additional capital to the Company following this Offering. 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, or that the Company will be able to obtain any other financing, 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 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;" and "Business -- Proposed Wireless Local Loop Operations -- Network Build-Out." 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 market-oriented 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 15 19 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 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. 16 20 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 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. 17 21 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 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 of 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, CompTel and Investelektro, three 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. CompTel is the owner and holder of 51% of the outstanding capital stock of Investelektro. The balance of the outstanding shares of capital stock of Corbina and CompTel 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 18 22 of the Company, spends the majority of his time outside of the United States. The balance of the outstanding shares of capital stock of Investelektro is owned by citizens of and entities organized under the laws of, the Russian Federation. 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, Mr. Leibov or such Russian citizens or entities, or to enforce in the United States or outside of the United States judgments obtained against the Company's Subsidiaries, Mr. Leibov or such Russian citizens or entities in the United States courts, or to enforce in the United States courts judgments obtained against the Company's Subsidiaries, Mr. Leibov or such Russian citizens or entities 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 "Enforcement of Civil Liabilities" and "Business -- Proposed Wireless Local Loop Operations -- Ownership of Investelektro." 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. 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% 19 23 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 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 Investelektro, 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 20 24 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 Moscow City Telephone Network ("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. Investelektro 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 Investelektro 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 Investelektro 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 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 -- 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 Investelektro's wireless local loop network involves a high degree of risk. Investelektro has completed the selection of the hardware and software components of the equipment which it intends to employ in connection with the construction of its network in the Moscow Region and it has determined the location of two of the three antenna sites that it intends to use for its proposed Moscow Region network. Investelektro intends to commence marketing efforts and launch commercial service in 1997 and expects to complete initial construction of its network in the Moscow Region by the end of 1998. There can be no assurance that Investelektro will be able to construct its network in accordance with its current construction plan and schedule. If Investelektro 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, Investelektro's anticipated subscriber growth may be limited. Failure to comply with the License's requirements could cause revocation or forfeiture of the License which has been issued to Investelektro by the State Communications Committee, or the imposition of fines upon Investelektro by the State Communications Committee. The construction of Investelektro'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 Investelektro's ability to construct its network in a timely manner. Location of Base Station Transmitter Equipment. The construction of Investelektro's wireless local loop network will depend, to a significant degree, on Investelektro'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 Investelektro's customers will be placing and receiving telecommunications transmissions, and/or re-transmit such signals directly to other buildings or locations within Investelektro's proposed network, or through the 21 25 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 Investelektro to obtain governmental approvals or permits. The Company expects that the site acquisition process will continue throughout the construction of Investelektro's network. Each stage of the process involves various risks and contingencies, many of which are not within the control of Investelektro 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 Investelektro 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 Investelektro'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, Investelektro 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, Investelektro believes that it will be able to negotiate agreements providing for favorable tariffs for interconnection fees and carrier charges with MGTS and such other telephone companies, no assurance can be given in this regard. If Investelektro 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 Investelektro's proposed business activities. See "Business -- 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. 22 26 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. 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 per share offering price of the Common Stock in this Offering, 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. Such charge 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;" and "Certain Relationships and Related Transactions." 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. See "Dividend Policy." 82% 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. 23 27 At an assumed initial public offering price of $7.00 per share, new investors will experience a dilution of $5.73 per share based upon a pro forma net tangible book value per share after the Offering. This represents a dilution of 82% 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." 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 ANY MARKET FROM POSSIBLE 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. See "Description of Securities -- Representative's Warrants." SALES OF SHARES BY THREE PRINCIPAL STOCKHOLDERS Each of Messrs. J.P. Downey, Ernest Ferrante and Paul Signoracci, none of whom has ever been an employee, officer or director of the Company, is the owner of 285,000 shares of Common Stock (855,000 shares, in the aggregate). All of such 855,000 shares are being registered for sale pursuant to the Registration Statement of which this Prospectus forms a part. The sale of all or a substantial portion of such shares could adversely affect the pricing of, and/or any market for, the Company's securities that may develop following the date hereof. See "Principal Security Holders" and "Concurrent Offering of 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, assuming no exercise of any outstanding warrants or options, 4,105,000 shares of Common Stock (4,352,500 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, 1,650,000 shares will be freely tradeable without restriction under the Securities Act, and 1,155,000 shares will be registered for sale pursuant to a separate prospectus under the Securities Act. However, 1,150,000 of said 1,155,000 shares will be restricted from sale pursuant to the lockup agreements described below. The remaining 1,300,000 shares of Common Stock held by existing shareholders are restricted securities within the meaning of Rule 144. In accordance with Rule 144, all 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 (a) each of the directors and officers of the Company and its Subsidiaries, (b) the holders of substantially all of said 1,155,000 shares and said 1,300,000 shares, as well as (c) the holders of substantially all of the warrants to purchase 2,462,515 shares of Common Stock issued in October 1994 and February 1996 in connection with the Company's second and third private placements, and the holder of an option to purchase 25,000 shares of Common Stock must execute written lockup agreements 24 28 providing that, for a period of 24 months from the date of this Prospectus, they shall not offer, 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. By reason of the registration rights which the Company conferred to the investors who purchased 750,000 warrants of Common Stock pursuant to the Company's first private placement of securities in June 1994, the Representative did not require any of such warrantholders to agree to lockup their securities. As of the date of this Prospectus, the holders of 1,150,000 of said 1,155,000 shares, the holders of 1,280,000 of said 1,300,000 shares, the holders of warrants to purchase 2,404,181 of said 2,462,515 shares, the holder of warrants issued in said first private placement to purchase 50,000 shares and the holder of said option have executed lockup agreements. In the event that the Representative fails to receive lockup agreements from all of the above-described holders of the Company's securities, but nevertheless agrees to proceed with the closing of this Offering, the ability of the holders of said securities to sell the shares of Common Stock which are being registered for sale by them pursuant to a separate prospectus to sell their respective shares could adversely affect the pricing of, and/or any market for, the Common Stock that may develop. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources," "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." REGISTRATION RIGHTS HELD BY THE HOLDERS OF THE FIRST PRIVATE PLACEMENT WARRANTS The holders of the First Private Placement Warrants have the right to demand on one occasion, that the Company file a registration statement with the SEC registering the First Private Placement Warrants and the Common Stock issuable upon exercise thereof for sale under the Securities Act. Such demand registration rights may be exercised at any time during the five year period commencing six months from the date of this Prospectus, 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 for public sale the First Private Placement Warrants and the Common Stock issuable upon the exercise thereof, and keep such registration statement effective for a period of nine months. The Company must bear all costs of such registration, except for filing fees, underwriter's discounts and commissions, stock transfer taxes and the fees and expenses of such holders' counsel. 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 such registration rights, or even the potential of such sales, could have an adverse effect on the market price of the securities offered hereby. See "Description of Securities -- Registration Rights." RISKS OF LOW-PRICED STOCKS; POSSIBLE ADVERSE EFFECTS OF "PENNY STOCK" RULES It is anticipated that the Common Stock will initially be traded in the over-the-counter market on the NASD's OTC Bulletin Board. As a consequence, an investor could find it more difficult to dispose of, or to obtain accurate quotations as to the price of, the Common Stock. The Securities Enforcement and Penny 25 29 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. In addition, if the Common Stock is not quoted on Nasdaq, or the Company does not have $2,000,000 in net tangible assets, trading in the Common Stock 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, by reason of the $7.00 offering price of the Common Stock, that such security will be outside the definitional scope of a penny stock. In the event the Company's Common Stock were subsequently to become characterized as a penny stock, 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 thus the ability of purchasers of the Common Stock to sell such securities in the secondary market would be adversely affected. 26 30 USE OF PROCEEDS The net proceeds to the Company from the sale of the 1,620,000 shares of Common Stock offered by the Company hereby at the assumed initial public offering price of $7.00 per share, are estimated to be $9,084,200 ($10,608,800 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 7.2% Purchase of switching hardware and software for connection of Investelektro's customers' telecommunication transmissions to the Moscow public switched telephone network and to Corbina's long distance carriers*............................................................... 2,400,000 26.4% Purchase of equipment (in-building network wiring components, wireless local loop transmitters and receivers and telephone handsets) to be employed by Investelektro with respect to the creation and expansion of its proposed wireless local loop network in the Moscow Region*.......... 500,000 5.5% Purchase of three antennas and ancillary equipment to be employed by Investelektro for interconnection of telecommunication transmissions throughout its proposed wireless local loop network*.................... 250,000 2.8% Payment of antenna site rents for three antenna sites in the Moscow Region during first year of Investelektro's operations*................. 60,000 0.7% Working capital to be employed by Investelektro during the period of approximately seven-twelve months following the closing of this Offering*............................................................... 650,000 7.1% 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 25.6% Retirement of Bridge Financing owed to three non-employee, non-director stockholders (including accrued interest) (See "Capitalization" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources")...................... 780,000 8.6% 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).................................... 125,000 1.4% Final payment due on agreement to cancel and rescind $100,000 investment made by Colonial Electric Consulting Corp. ("Colonial") pursuant to the Second Private Placement -- (See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources")..................................................... 50,000 0.6% Retirement of promissory note issued in connection with the redemption of Common Stock previously owned by Harvey Bloch, a former stockholder (see "Certain Relationships and Related Transactions").................. 150,000 1.7% Working capital(1)...................................................... 1,135,200 12.4% ----------- ----- $9,084,200 100.0% =========== =====
- --------------- (1) If the over-allotment option is exercised in full, the Company will realize additional net proceeds of approximately $1,524,600. All of such additional proceeds will be used for the following purposes: $400,000 will be used to purchase additional equipment to be employed by Investelektro with respect to the creation and expansion of its proposed wireless local loop network in the Moscow Region, $500,000 27 31 will be used to purchase switching hardware for connection of Investelektro's customers' telecommunication transmissions to the Moscow public switched telephone network and to Corbina's long distance carriers which possesses greater capacity than the switch which the Company will purchase in the absence of the exercise of the over-allotment option and the balance of such proceeds will be incorporated into the Company's working capital and used for general corporate purposes. The proceeds, if any, from the exercise of the Warrants and any outstanding warrants and options will be added to working capital and used for general corporate 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), will be sufficient to fund its operations, including the proposed expansion of Corbina's operations and the proposed build-out and operation of Investelektro's wireless local loop operations, during the 12 month period commencing on the date of this Prospectus. 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 Capital; Limited Sources of Liquidity;" and "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. 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. - --------------- * In the event that Investelektro failed, for any reason, to receive allocations from the State Communications Committee of the frequencies that it will need in order to construct and operate its proposed wireless local loop system, the Company, in lieu of using $4,460,000 of the net proceeds of this Offering to pay for the items marked above with an asterisk symbol, would use such proceeds to expand Corbina's long distance telecommunications operations in the Moscow Region and in the cities of St. Petersburg, Novosibirsk, Nizhny Novgorod and Ekaterinburg (the "Branch Office Cities"). In connection therewith, such proceeds would be used, as follows: upgrade of switching equipment for expansion of business in the Moscow Region -- $500,000; purchase of switching equipment, antennas, satellite uploading and downloading links and ancillary equipment for establishment of digitally based fiber-optic network facilities similar to the facilities employed by Corbina in its Moscow office in each of the Branch Office Cities -- $2,000,000; acquisition of office leases, and purchase of office equipment and furnishings in the Branch Office Cities -- $800,000; working capital for Corbina's Moscow office -- $400,000; and working capital to finance the start-up phase of Corbina's operations in the Branch Office Cities -- $760,000. 28 32 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 Warrants. The proforma net negative tangible book value of the Company, as of June 30, 1997 was approximately $(4,595,000) or $(1.85) per share of Common Stock, after giving effect to the cancellation of 500,000 shares of Common Stock returned by Mr. Nathan. After giving effect to the estimated net proceeds from the sale of the securities offered by the Company at the assumed initial public offering price of $7.00 per share, the proforma net tangible book value of the Company as of June 30, 1997 would have been approximately $5,226,000 or $1.27 per share of Common Stock. This represents an immediate increase in proforma tangible book value of $3.12 per share to existing common stockholders and an immediate dilution of $5.73 per share (or 82%) 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........ $(1.85) Increase per share attributable to new investors.................. 3.12 ------ Proforma net tangible book value per share after offering......... 1.27 ----- Proforma dilution per share to new investors...................... $5.73 =====
The following table summarizes on a pro forma basis as of June 30, 1997, 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).............. 2,485,000 60.5% $ 276,350 2.4% $0.11 New Investors......................... 1,620,000 39.5% 11,340,000 97.6% $7.00 --------- ----- ----------- ----- Total(1).............................. 4,105,000 100.0% $11,616,350 100.0% $2.83 ========= ===== =========== =====
- --------------- * 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, and the return and cancellation of 500,000 shares of Common Stock. 29 33 CAPITALIZATION The following table sets forth the capitalization of the Company as of June 30, 1997. The Proforma Offering information includes and accounts for the effects of the anticipated results of the completion of the sale of 1,620,000 shares of Common Stock offered hereby (not including 247,500 shares of Common Stock subject to the Underwriters' over-allotment option) at an assumed public offering price of $7.00 per share (after deduction of the estimated underwriting discounts and commissions, and expenses of the Offering).
OFFERING PROFORMA AS JUNE 30, 1997 ADJUSTMENTS ADJUSTED ------------- ----------- ------------ Notes Payable........................... $ 2,899,000 $(2,899,000) -- Long Term Debt.......................... 389,000 $ 389,000 Stockholders' Deficiency Common Stock -- $.01 par value, 29,850 11,200 41,050 authorized 15,000,000, issued and outstanding: 2,985,000 shares at June 30, 1997; 4,105,000 shares(1) -- Proforma Offering........ Preferred Stock -- $.01 par value, -- -- -- authorized 1,000,000 shares, issued and outstanding at June 30, 1997: 0... Additional Paid in Capital.............. 7,583,000 9,073,000 16,556,000 Accumulated Deficit..................... (11,151,000) -- (11,151,000) ------------- ----------- ------------ Total Stockholders' Equity (3,538,150) 9,084,200 5,546,050 (Deficiency).......................... ------------- ----------- ------------ Total Capitalization.................... $ 250,150 $ 6,185,200 $ 5,935,050 =========== ========== ===========
- --------------- (1) Reflects a 500,000 share reduction in outstanding Common Stock resulting from the cancellation of such shares upon the contribution thereof to the Company by Ronald G. Nathan, a director and Chief Executive Officer of the Company, on October 20, 1997. 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. 30 34 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 June 30, 1997. The operations in which the Company engaged prior to July 1, 1996 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. Since July 1, 1996, the Company has devoted its efforts to the development of its business operations in the Russian Federation. 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 June 30, 1997. Neither CompTel nor Investelektro engaged in anything other than de minimis activities between their respective dates of organization (November 21, 1996 and October 3, 1996, respectively) and June 30, 1997. Accordingly, no discussions of the financial condition or results of operations of either of those two Subsidiaries have been included herein. RESULTS OF OPERATIONS The Company YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1996 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 reposition 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 other countries which comprised the former Soviet Union, e.g., Georgia, Khazakstan and Azerbaijan. 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 31 35 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 $3,524,000 at December 31, 1996, resulted in net losses of $1,227,502 ($.34 per share) in 1995 and, $1,470,878 ($.67 per share) in 1996. Corbina PERIOD ENDED DECEMBER 1, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 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 thirteen month period which ended on December 31, 1996, the first five of which were primarily devoted to organizational and start-up activities, Corbina generated revenue of $1,011,914. During the 11 month period between May 1996 and March 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. During the year ended December 31, 1996, one customer accounted for 22% of Corbina's revenues, and that same customer accounted for 42% of Corbina's accounts receivable at December 31, 1996. 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 13 month period ended December 31, 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 $372,203, which was $187,518 greater than the $184,685 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 $200,574 and $209,813, respectively. SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1997 The Company The Company acquired its 75% ownership interest in Corbina in January 1997. In accordance with applicable accounting rules, by reason of the fact that the losses generated by Corbina exceeded the minority interest investment, the Company recorded 100% of Corbina's operations for the six months ended June 30, 1997. At such time when Corbina generates sufficient income from operations to offset prior losses, only 75% of Corbina's income and expenses will be taken into account on the Company's consolidated financial statements. During the first six months of 1996, the Company's sole revenues were commissions of $4,589 received from long distance telephone service providers for whom the Company acted as an agent. Inasmuch as the Company only engaged in minimal operations during 1996, the sources and amounts of such revenues were substantially different from the sources of revenues the Company began to generate in February 1997 and the amounts thereof which the Company expects to generate in the future from Corbina's and Investelektro's operations. Accordingly, there is no meaningful comparison that can be made from the data regarding the Company's revenues for the three month periods ended March 31, 1996 and 1997. Operating expenses amounted to $254,648 and $7,487,422 during the six months ended June 30, 1996 and 1997, respectively. Such expenses for the period ended June 30, 1997 consist of a combination of the Company's and Corbina's operating expenses during the six months ended June 30, 1997. The primary components of such expenses consisted of officers' salaries, amortization of deferred financing costs and selling, general and administrative expenses. In accordance with the accounting rules applicable to the merger of Russian Wireless with and into the Company, the 750,000 shares of the Company's Common Stock which were issued in exchange for all of the outstanding shares of Russian Wireless' common stock were valued at the $7.00 initial public offering price of the Common Stock. A one time, non-recurring charge in the $5,250,000 aggregate amount thereof was made to officers' salaries. The officers' salaries component of operating expenses increased, excluding such one time charge, by a factor of 1.5 from $54,166 during the first 32 36 six months of 1996 to $85,000 during the comparable period of 1997 as a result of the fact that the Company only paid Mr. Nathan's salary during the former period, and paid both his and Mr. Leibov's salaries during the latter period. The twelve fold increase in amortization of deferred financing costs reflects the significant increase in the costs incurred by the Company with respect to its financing activities during the first half of 1997 when compared to the same period of 1996. Selling, general and administrative expenses increased by a factor of seven from $63,368 during the first six months of 1996 to $472,422 during the comparable period of 1997. As discussed above, the comparatively low amount recorded as selling, general and administrative expenses during the first six months of 1996 resulted from the low level of business activity engaged in by the Company during that period as it undertook to explore opportunities involving the delivery of various categories of telecommunications products and services in the Russian Federation and other countries which comprised the former Soviet Union. The major components of the much higher expenditures incurred during the first six months of 1997 were: Corbina's operating expenses during that period ($150,582); the commission paid by the Company with respect to the Bridge Financing ($75,000), travel and entertainment expenses ($8,000); office rents and utility expenses ($19,000) and employee compensation expenses ($67,000). By reason of the significant charges to income with respect to amortization of the Company's financing costs, and the high level of general and administrative expenses incurred by the Company in comparison to its revenues during both six month periods ended June 30, 1996 and 1997, the Company incurred operating losses of $250,059 and $7,418,632, respectively, during such periods. Such operating losses, when coupled with the interest expense incurred by the Company in connection with its outstanding principal indebtedness, resulted in net losses of $539,719 ($.18 per share) and, $7,835,118 ($2.78 per share), respectively, during the six months ended June 30, 1996 and 1997. Corbina During the six months ended June 30, 1997, Corbina incurred a net loss from operations of $78,111 on revenues of $1,265,435, as compared to the net loss of $71,144 which it incurred on revenues of $155,984 during the comparable period of 1996. As indicated above, Corbina's efforts during the first three months of 1996 were primarily devoted to organizational and start-up activities. Accordingly, its revenues, and the loss incurred during that period, reflected the fact that Corbina was not then focusing its efforts on revenue generation activities. By contrast, management believes that the revenues generated by Corbina during the six months ended June 30, 1997 signify that Corbina has reached a point in the process of its maturation as a business where it is almost breaking even. Management further believes that, the application of those portions of the proceeds of this Offering which have been allocated to the expansion of Corbina's business, will enable Corbina to increase its customer base, and concomitantly increase the volume of telephone traffic purchased by such customers to a point where it will be able to generate profits from its operations within the next 12 months. However, by reason of the facts that management can not state with certainty that such increases in Corbina's customer base and/or revenues will continue at the rates heretofore experienced, or at all, or that Corbina will not incur increases in its operating costs from unforeseen increases in the telecommunications services that it purchases for resale to its customers, or otherwise, no assurances can be given in that regard. 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. Management further 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. 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 33 37 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 June, 1997, all but one of the investors in the Second Private Placement agreed to extend the maturity of said notes from June 19, 1997 to October 31, 1997, or the date of closing of this Offering, whichever first occurs. The Company agreed with Colonial, the investor which did not agree to such extension, to rescind Colonial's original $100,000 investment, pursuant to an agreement providing for the payment of four monthly installments of $25,000 each on the 15th day of each month during the period between February and May, 1997. As a result thereof, the Company's $98,000 Second Private Placement Note payable to Colonial, and a 50,000 share Second Private Placement warrant which had been issued to Colonial were canceled. After paying $50,000 of the $100,000 due and owing to Colonial pursuant to said agreement, the Company, in order to conserve cash, requested Colonial to modify the provisions of the agreement to provide for payment of the $50,000 balance due thereunder on the closing date of this Offering. In consideration for Colonial's agreement to such modification, the Company reissued a Second Private Placement warrant to Colonial entitling it to purchase 12,500 shares of Common Stock, the provisions of which were identical in all respects to Colonial's original Second Private Placement warrant. The Company intends to use a portion of the proceeds of this Offering to pay its indebtedness under the notes issued in the Second Private Placement and to Colonial. 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 on October 31, 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 issued 150,000 shares of Common Stock to each of them, for no additional consideration. The Company paid a 10% commission ($75,000) to a registered representative of the Representative in connection with the Bridge Financing. 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 Investelektro's proposed wireless local loop network in the Moscow Region. BASIS OF PRESENTATION OF FINANCIAL RESULTS Corbina, CompTel and Investelektro 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, CompTel's or Investelektro's Russian accounting records, which are appropriate to present the financial position, results of operations and cash flows in 34 38 accordance with U.S. GAAP. The principal 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 and Investelektro 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. 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 2.0%. The devaluation of the rouble in recent years has not kept pace with inflation. Corbina prices its services, and Investelektro 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 Investelektro 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, CompTel and Investelektro 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 Investelektro'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 Investelektro, 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 nonmonetary 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, CompTel and Investelektro 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 or Investelektro 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." 35 39 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." In October 1996, Messrs. Nathan and Leibov Incorporated Russian Wireless Telephone Company, Inc., a Delaware corporation ("Russian Wireless"), to engage in business separately from TelCom Group by providing wireless local loop telecommunications services to business customers in the Moscow Region. Subsequent to TelCom Group's acquisition of its ownership interest in Corbina, the managements of TelCom Group and Russian Wireless determined that their ability to succeed in business would be enhanced by providing long distance and wireless local loop telecommunications services in the Russian Federation through one parent entity. Accordingly, on February 10, 1997, Russian Wireless merged with and into the Company. In connection therewith, the Company changed its name from TelCom Group USA, Inc. to Russian Wireless Telephone Company, Inc. 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 36 40 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 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. According to the State Communications Committee, 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 State Communications Committee, 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. PROPOSED WIRELESS LOCAL LOOP OPERATIONS The Company intends to construct and operate, through Investelektro, a state-of-the-art wireless local loop telecommunications system in the Moscow Region. 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 37 41 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 Investelektro's technical expertise 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 Investelektro 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. OWNERSHIP OF INVESTELEKTRO CompTel, ZAO Kortek ("Kortek"), a private joint stock company organized under the laws of the Russian Federation, OOO Evrial ("Evrial"), a limited liability company organized under the laws of the Russian Federation and Mr. Igor Nikolenko own, respectively, 51%, 20%, 24% and 5% of Investelektro's outstanding capital stock. Kortek is directly engaged in business as a provider of telecommunications services in the Moscow Region. Through an agreement that Corbina has maintained with Kortek, Corbina has acquired access to TelMos' long distance telecommunications facilities in consideration for which Corbina has permitted Kortek to route portions of its telecommunications traffic through Corbina's telecommunications facilities and has agreed to pay Kortek 0.1% of the revenues generated by Corbina on telecommunications traffic routed over TelMos' facilities. See "-- Corbina's Long Distance Telecommunications Operations." Evrial and Mr. Nikolenko are engaged in business as consultants to the telecommunications industry in the Russian Federation. The Company believes that Mr. Vladimir Veronin and Ms. Elena Basina are the principal owners of Evrial and Kortek, respectively. Messrs. Veronin and Nikolenko, and Ms. Basina, none of whom is an officer, director or employee of the Company or the Subsidiaries (or a stockholder of the Company or either of the other two Subsidiaries), are citizens of, and reside in, the Russian Federation. See "Enforcement of Civil Liabilities" and "Risk Factors -- Legal Risks." TELECOMMUNICATIONS LICENSE On February 21, 1997, the State Communications Committee issued the License to Investelektro granting it permission to construct and operate wireless local loop telecommunications systems in the Licensed Territory. The License requires Investelektro to commence providing wireless local loop operations no later than February 21, 1998. During the term of the License, which, in the absence of its renewal, will expire on February 21, 2002, Investelektro must establish an installed customer base of not less than 20,000 lines. The allocation of such lines among the various geographic subdivisions comprising the Licensed Territory are, as follows: Moscow, 10,000 lines, St. Petersburg, 2,000 lines, Novosibirsk, 2,000 lines, Nizhny Novgorod, 2,000 lines, Ekaterinburg, 2,000 lines and the suburban environs of Moscow, 2,000 lines. In addition to the foregoing, the License authorizes Investelektro to operate its wireless local loop system on designated radio frequencies in the 330 megahertz band, subject to issuance by the State Communications Committee of final approval of the allocation of such frequencies. In the event that Investelektro fails to satisfy any of the above-described requirements, its License and/or frequency allocations would be subject to immediate suspension or revocation. Although the Company believes that Investelektro will not experience any difficulties in receiving final approval of its frequency allocations, or in satisfying the above-mentioned requirements, no assurance can 38 42 be given in either regard. Furthermore, no assurance can be given that Investelektro will be able to maintain its License, that its terms will not be altered to Investelektro's disadvantage or that it will be renewed upon its expiration. The non-renewal, or a suspension or revocation of such License and/or frequency allocations, would jeopardize the Company's entire investment in its proposed wireless local loop system, and would have a material adverse effect on the Company's financial condition and its ability to conduct the business it intends to undertake in the Russian Federation. See "Risk Factors -- Government Regulation -- Investelektro's Inability to Conduct Operations if Conditions of License are Not Satisfied." NETWORK BUILD-OUT Investelektro currently anticipates commencing the initial build-out of its wireless local loop network in the Moscow Region during the second half 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 Investelektro will complete its Moscow Region build-out by the last calendar quarter of 1998 or the first quarter of 1999. The Company anticipates that Investelektro will be able to provide full wireless local loop service to as many as 3,000 customers within the Moscow Region by the end of 2000. However, no assurances can be given that the build-out will be completed within such time frame, or that Investelektro will be able to attract and maintain as many customers as it is planning to service. Investelektro 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 Investelektro's network will involve systems design (the initial stages of which, i.e., the selection of the hardware and software components of the equipment which it intends to employ in connection with the construction of its network in the Moscow Region, have been completed by Investelektro), acquisition of antenna sites (two of the three sites needed for Investelektro's proposed wireless local loop operations in the Moscow Region have been identified), equipment procurement (negotiations regarding the purchase of operating hardware and software have resulted in the receipt of a written contract proposal from Tadiran), 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 Investelektro's network based on the marketing and product requirements necessary to meet the Company's targets for consistency, uniformity and reliability. Investelektro's proposed equipment vendor, Tadiran will, in conjunction with Investelektro's management, oversee the deployment of the network. It is anticipated that a final contract, based upon the negotiations which Mr. Leibov has already undertaken with, and the above-mentioned written proposal that he has already received from, Tadiran, will be executed during the first 30 days following the closing of this Offering. It is further anticipated that delivery and installation of such equipment will take place within 30-60 days after execution of such contract. The initial coverage of the network will include a major metropolitan area within the Moscow Region. Investelektro expects to complete the initial build-out 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. The Company intends, in the future, to expand its wireless local loop operations to the other areas in the Licensed Territory by constructing and operating, through Investelektro, additional state-of-the-art wireless local loop telecommunications systems in the cities of St. Petersburg, Novosibirsk, Nizhny Novgorod and Ekaterinburg. Such expansion plans, however, are contingent upon the Company's receipt of substantial additional financing following completion of this Offering. The Company estimates that, in order to fulfill all of the obligations imposed upon Investelektro pursuant to the License, it will need an aggregate of approximately 39 43 $3 million, in addition to the proceeds of this Offering, to build the basic wireless local loop networks in the cities other than the Moscow Region which comprise the Licensed Territory, and that it may need as much as $20-30 million, in the aggregate, to build wireless local loop systems capable of handling all of the telecommunications traffic which could be generated by all of the potential subscribers for such services located throughout the Licensed Territory. Although management of the Company has undertaken discussions with several international banks, to date, the Company has not obtained any commitment from any person or entity to provide additional capital to the Company following this Offering, and no assurances can be given that it will ever be able to obtain any such additional financing on terms acceptable to the Company, if at all. 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, or that the Company will be able to obtain any other financing which will permit it to expand its proposed wireless local loop operations, there can not be any assurance that the Company will be able to undertake or complete any expansion of its proposed wireless local loop operations beyond the Moscow Region. In the event that the Company fails to secure the necessary capital to complete the buildout of its proposed wireless local loop network in accordance with the terms of the License, such License may be canceled, or renewal thereof may be denied. If either of such events were to occur, the Company's business and financial condition would be substantially and materially impaired as a result thereof. See "Risk Factors -- Need for Additional Capital; No Assurances of Ability to Obtain Needed Additional Capital;" "-- Wireless Local Loop Network Construction and Operational Risks;" and "-- Government Regulation -- Investelektro's Inability to Conduct Operations if Conditions of License are Not Satisfied." See also "Business -- Proposed Wireless Local Loop Operations -- Telecommunications License." PRODUCTS AND SERVICES Investelektro intends to provide to its customers (i) direct dial local, i.e., within the cities comprising the Licensed Territory, telecommunications services utilizing wireless local loop technology; (ii) direct dial interzonal, i.e.. between the cities comprising the Licensed Territory, and international long distance services (utilizing, the Company's 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. Investelektro intends to provide wireless local loop telecommunications services initially to customers in the Moscow Region, and as and when additional financing becomes available, or profits from its operations permit, it intends to extend such services to customers in the cities of St. Petersburg, Novosibirsk, Nizhny Novgorod and Ekaterinburg. Once "connected," an Investelektro customer will have complete access to any other telephone -- whether or not on the Investelektro network -- as Investelektro will, in accordance with the provisions of its license, connect with the local public network for transmission and termination of local and/or long distance calls, as the case may be, in each of the geographic areas comprising the Licensed Territory. Long Distance Services. Investelektro intends to provide its customers both interzonal and international long distance services through the Company's Corbina subsidiary as well as through primary long distance carriers. The telecommunications traffic of Investelektro'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. Investelektro 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. Investelektro 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 Investelektro'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 Investelektro's customers a wide range of telecommunications equipment as a means 40 44 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. BILLING, TARIFFS AND INTERCONNECTION CHARGES Billing. Investelektro intends to provide monthly and/or semimonthly 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. 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 nonresident 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), Investelektro 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 Investelektro for its various proposed product and service offerings. Investelektro will set its tariffs taking into account those rates charged by MGTS (and long distance providers) and competitive pressures in the marketplace. Investelektro 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. Investelektro's proposed network in the Moscow Region will connect to the Moscow public switched telephone network, (MGTS). Such interconnection is required to facilitate originating and terminating traffic between Investelektro's facilities and both MGTS and long distance carriers. In accordance with its License, Investelektro must connect its customers located in the cities of St. Petersburg, Novosibirsk, Nizhny Novgorod and Ekaterinburg through the public switched telephone networks operated in those cities by the Petersburg Telephone Network Company, the City of Novosibirsk Telephone Network Company, Svyazinform Company and the City of Ekaterinburg Telephone Network Company, respectively. Investelektro is negotiating, or intends to negotiate, interconnection agreements with each of such telephone companies. Investelektro believes, based upon the tariff structures that other telephone service providers have been able to negotiate with MGTS, management believes that Investelektro also 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 or any of the other above-mentioned telephone companies would have a material adverse effect on the Company's business, in general, and Investelektro's proposed business operations, in particular. See "Risk Factors -- Dependence on Interconnect Parties." MARKETING, SALES AND DISTRIBUTION The Company's marketing objective is to create demand for Investelektro's services by clearly differentiating its service offerings from those of other providers of similar services. It is anticipated that Investelektro 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. Investelektro also plans to create marketing programs for particular customer segments. For each targeted segment Investelektro intends to create a specific marketing program including a service package, pricing plan, promotional strategy and distinctive distribution channels. Initially, Investelektro 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. 41 45 Investelektro 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. 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, based upon Mr. Leibov's experience, 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, Investelektro intends to initially build and operate its business in a highly competitive Moscow Region environment, as MGTS is an entrenched provider. Investelektro 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 Investelektro 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 Investelektro and have significantly greater financial and other resources. MGTS and Investelektro must be regarded as competitors inasmuch as MGTS can offer its customers the same core local services as Investelektro intends to offer to its customers. Although Investelektro 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" As and when Investelektro undertakes to commence wireless local loop operations in the other geographic subdivisions of the Licensed Territory it will face competition from Petersburg Telephone Network Company, the City of Novosibirsk Telephone Network Company, Svyazinform Company and the City of Ekaterinburg Telephone Network Company, the main providers of basic telephony services in each of such cities. Other local and long distance competitors to Investelektro 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 Investelektro 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. 42 46 CORBINA'S LONG DISTANCE TELECOMMUNICATIONS OPERATIONS 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 agreements entered into with long distance companies, primarily Rustelnet and Global One, through which it offers long distance service via its private telecommunications network. Corbina also operates over the long distance service facilities of TelMos through an agreement that Corbina has maintained with Kortek, which, among other things, is engaged in business as a reseller of long distance telecommunications services provided by TelMos. Pursuant to such agreement, Kortek has provided Corbina with access to TelMos' facilities in consideration for which Corbina has permitted Kortek to route portions of its telecommunications traffic through Corbina's telecommunications facilities, and has agreed to pay Kortek a commission equal to 0.1% of the revenues generated by Corbina on telecommunications traffic routed over TelMos' facilities. 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 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. RUSSIAN LONG DISTANCE TELECOMMUNICATIONS -- INDUSTRY BACKGROUND The Company believes, based upon Mr. Leibov's experience and observations, 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 data published by the State Communications Committee, has grown significantly, with international and long distance services accounting 43 47 for approximately 57% of the estimated $4.5 billion market which currently exists for telecommunications services throughout the Russian Federation. The Company also believes, based upon Mr. Leibov's experience and observations, 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. 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 March 31, 1997, foreign businesses represented approximately 52% 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." 44 48 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 April 30, 1997, 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 April 30, 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. 45 49 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 rerouted 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 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, manage- 46 50 ment 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 three months ended March 31, 1997, 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 47 51 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, 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 25 full time employees, including Mr. Leibov, CompTel had three full time employees, including Mr. Leibov and Investelektro had three employees, including Mr. Leibov. As Investelektro'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. 48 52 FACILITIES In May, 1996, the Company began occupying approximately 2,000 square feet of space at 780 Third Avenue, Suite 1600, New York, New York, pursuant to a lease which provided for a term expiring on April 30, 2001 and an annual rent of approximately $76,000 per year. Upon concluding that the Company did not have a need for office facilities as large as such premises, management undertook to vacate such premises, to negotiate a cancellation of said lease and to find smaller premises to serve as the Company's administrative offices. In order to effectuate such lease cancellation, the Company has agreed to pay to its former landlord the sum of $20,000 and relinquish its right to the return of a $19,000 security deposit. The Company presently occupies premises located at Suite 410, 575 Lexington Avenue, New York, New York, consisting of an office comprising approximately 200 square feet, plus a conference room and reception area, on a month to month basis without a lease, at a rent of $1,000 per month. 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 occupies, as a tenant at will, approximately 182 square meters of space on a different floor of the same building which houses Corbina's offices in Moscow at a rental cost of approximately $3,100 per month. Investelektro has entered into a lease for approximately 40 square meters of space on a different floor of the same building which houses Corbina's and CompTel's offices in Moscow. Such lease obligates Investelektro to pay rent of approximately $27,000 per year during the term of 34 months ending on December 31, 1999. LITIGATION Neither the Company nor any of its Subsidiaries is involved in any legal or administrative proceedings. 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 preexisting regulations do not contradict the newly enacted law. There is no indication that the State Communications Committee 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. Prior to March 17, 1997, the MOC and the Federal Agency of Governmental Communications and Information under the President of the Russian Federation ("FAPSI") were the federal organizations possessing executive power over the telecommunications industry. On said date, President Yeltsin signed Presidential Decree No. 249 "On the Restructuring of the System of Federal Organs of Executive Power" which, among other things, renamed the MOC as the State Communications Committee. Such restructuring has resulted in a downgrading of the status of the former MOC (unlike the government minister who headed the MOC, the head of the State Communications Committee is not a minister). The State Communications Committee 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 49 53 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 State Communications Committee. 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 State Communications Committee on the basis of a decision by the Licensing Commission of the State Communications Committee. No new licensing regulations have been issued since the enactment of the Communications Law and in practice the State Communications Committee 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. 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 State Communications Committee and verification by appropriate government authorities that the licensee has conducted its activities in accordance with the licenses. Officials of the State Communications Committee 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 State Communications Committee 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 about the communication services rendered to consumers; and - refusal to provide documents requested by the State Communications Committee. 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; 50 54 - 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 intercity 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 State Communications Committee 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 State Communications Committee. Investelektro has received a license for its proposed wireless local loop activities, which also includes 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 State Communications Committee which has for this purpose established the State Commission on Radio Frequencies within the State Communications Committee. A frequency allocation by the State Commission on Radio Frequencies is a preliminary condition to receiving a license for providing radio telephone communication services. Investelektro has received preliminary allocations of the frequencies it will require for operation of its proposed wireless local loop operations, and is awaiting receipt of final approval of such allocations from the State Commission on Radio Frequencies. The failure to receive final approval of frequency allocations, the non-renewal, or a suspension or revocation of the License and/or frequency allocations, would jeopardize the Company's entire investment in its proposed wireless local loop system, and would have a material adverse effect on the Company's financial condition and its ability to conduct the business it intends to undertake in the Russian Federation. See "-- Proposed Wireless Local Loop Operations -- Telecommunications License" and "Risk Factors -- Government Regulation -- Investelektro's Inability to Conduct Operations if Conditions of License are Not Satisfied." 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. 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 State Communications Committee on the basis of a decision by the Department of Certification. Certificates of Compliance have been issued by the State Communications Committee 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 51 55 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. 52 56 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS The Board of Directors presently consists of four members. The Company intends to add Mr. Leibov to the Board upon completion of the Offering. The Company also intends, upon completion of the Offering, to commence a search for up to two additional directors. The search will focus on persons of high repute who possess substantial knowledge and experience regarding the operation of commercial enterprises, in general, and telecommunications businesses, in particular, in the Russian Federation. The executive officers and directors of the Company are as follows:
NAME AGE POSITION - ------------------------------ --- ---------------------------------------------- Jack W. Buechner.............. 57 Chairman of the Board Ronald G. Nathan.............. 52 Director and President, Chief Executive Officer, Treasurer and Chief Financial Officer Mikhail Leibov................ 47 Executive Vice President and Chief Operating Officer Richard N. Holwill............ 52 Director Steven D. Dreyer.............. 51 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 Hawthorn 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 Atchison, Kansas in 1962, and a J.D. from St. Louis University in 1965. Mr. Buechner is a member of the Audit and Compensation Committees of the Board. 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. Mikhail Leibov is the Managing Director and Chief Executive Officer of Corbina, CompTel and Investelektro, and since June 16, 1997, the Company's Executive Vice President and Chief Operating Officer. 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 53 57 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. 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 postgraduate 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. Holwill is a member of the Audit and Compensation Committees of the Board. 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 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. 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, and must devote substantially all of his time (approximately 40 hours per week) 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. The Company has entered into an employment agreement with Mr. Leibov, pursuant to which he agreed to serve as chief executive officer of Corbina and CompTel during the five year term which commenced on February 1, 1997. The agreement was amended on June 16, 1997 to provide that Mr. Leibov shall also serve as the Company's Executive Vice President and Chief Operating Officer during the balance of the term thereof. 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- 54 58 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 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 $100,000 during such periods. During said three year period, the Company did not grant any restricted stock awards, options, or pay compensation that would qualify as "All Other Compensation" and it did not make payments to any executive officer which may be categorized as "LTIP Payouts." SUMMARY COMPENSATION TABLE
SECURITIES OTHER RESTRICTED UNDERLYING ANNUAL STOCK OPTIONS/ NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) COMPENSATION($) 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 55 59 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 during the three year period 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 Bylaws 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 Bylaws 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. 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. On October 20, 1997. 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 56 60 $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. In accordance with the accounting rules applicable to the merger of Russian Wireless with and into the Company, the 750,000 shares of the Company's Common Stock which were issued in exchange for the same number of shares of Russian Wireless' common stock were valued at the $7.00 initial public offering price of the Common Stock. A one time, non-recurring charge in the $5,250,000 aggregate amount thereof was made to officers' salaries which resulted in an equivalent charge to the Company's earnings for the six month period ended June 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." On October 20, 1997, the Company cancelled 500,000 shares of Common Stock which were contributed to the capital of the Company by Mr. Nathan at the request of the Representative. As a result thereof, Mr. Nathan's Common Stock ownership has been reduced to 300,000 shares. 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. 57 61 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 ---------------------------------------------------- NUMBER OF SHARES PERCENT OWNED PERCENT OWNED BENEFICIALLY PRIOR TO AFTER NAME OF BENEFICIAL OWNER OWNED OFFERING(1) OFFERING(2) - ------------------------------------------------ ---------------- ------------- ------------- Ronald G. Nathan(3)............................. 300,000 12.1% 7.3% Mikhail Leibov(4)............................... 500,000 20.1% 12.2% Paul Signoracci(5).............................. 285,000 11.5% 6.9%(6) J. P. Downey(7)................................. 285,000 11.5% 6.9%(6) Ernest Ferrante(8).............................. 285,000 11.5% 6.9%(6) Howard M. Pack(9)............................... 160,000 6.4% 3.9% Royal Bank of Scotland International Ltd.(10)... 150,000 6.0% 3.7% James Condakes(11).............................. 150,000 6.0% 3.7% L. W. Cave(12).................................. 150,000 6.0% 3.7% Jack W. Buechner(3)............................. 25,000(13) * * All Directors and Executive Officers as a Group (4 Persons)................................... 825,000(13) 35.2% 20.1%
- --------------- * Represents less than one percent (1) Based on 2,485,000 shares of Common Stock outstanding as of the date of this Prospectus. (2) Based upon 4,105,000 shares of Common Stock outstanding after the Offering. Does not include up to 5,370,015 shares of Common Stock issuable in the events that (i) all of the 750,000 First Private Placement Warrants, the 462,500 Second Private Placement Warrants and the 2,000,015 Third Private Placement Warrants are fully exercised; (ii) the Company issues 247,500 shares of Common Stock upon full exercise of the Underwriters' over-allotment option; (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) the Company issues 165,000 shares of Common Stock upon exercise of the Representative's Warrant; and (v) the 25,000 shares of Common Stock underlying the Buechner Option are issued. See "Management;" and "Underwriting." (3) The address of Messrs. Nathan and Buechner is 575 Lexington Ave, Suite 410, 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 a separate prospectus in connection with an offering to be made on a delayed, non-underwritten basis by the Selling Securityholders. However, pursuant to lock-up agreements which each of such shareholders has delivered to the Representative, they cannot sell their respective shares of Common Stock for a period of two years without the Representative's prior written consent. See "Shares Eligible for Future Sale" and "Concurrent Registration of Securities." (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. In connection with the Company's application to list its securities on the SmallCap Market, the Company and the Representative have agreed not to consent to a termination of the two year lock-up period applicable to 150,000 of these shares prior to the first anniversary of the Effective Date. See "Shares Eligible for Future Sale." 58 62 (10) The address of the Royal Bank of Scotland International Ltd. is c/o Ryder Capital Limited, 102 The Chambers, London SW10 OXF, England. (11) The address of Mr. Condakes is 100 Everette Avenue, Chelsea, MA. In connection with the Company's application to list its securities on the SmallCap Market, the Company and the Representative have agreed not to consent to a termination of the two year lock-up period applicable to these shares prior to the first anniversary of the Effective Date. See "Shares Eligible for Future Sale." (12) The address of Mr. Cave is 3800 Airport Boulevard, Suite 201, Mobile, AL. In connection with the Company's application to list its securities on the SmallCap Market, the Company and the Representative have agreed not to consent to a termination of the two year lock-up period applicable to these shares prior to the first anniversary of the Effective Date. See "Shares Eligible for Future Sale." (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." SELLING STOCKHOLDER The Cam Neely Foundation, the Selling Stockholder, is, as of the date immediately preceding the date of this Prospectus, the beneficial and record holder of 30,000 shares of Common Stock, all of which are being offered for sale by the Selling Stockholder. Upon completion of the offering of such shares, the Selling Stockholder will not own any shares of the Company's Common Stock. Neither the Selling Stockholder, nor any employee or director thereof, 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." CONCURRENT REGISTRATION OF SECURITIES Concurrently with this Offering, 2,462,515 Warrants (and the shares of Common Stock issuable upon exercise thereof), and 1,180,000 shares of Common Stock, 25,000 of which are issuable upon exercise of the Buechner Option, 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 the 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 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 59 63 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 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, and pursuant to the Underwriting Agreement, the Company is prohibited from issuing any of its preferred stock for a period of two (2) years from the date hereof without the Representative's express written consent. 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 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 14, 1998 (the "First Private Placement Warrants"). The First Private Placement Warrants contain protections against dilution affecting both the exercise price of, and number of shares of Common Stock purchasable under, such warrants upon the occurrence of certain events, including a stock split of, a stock dividend on or a subdivision, combination or recapitalization of, the Common Stock. The holders of the First Private Placement 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 First Private Placement 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. 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, but such registration statement does not include any warrants to be issued to the public, then upon the declaration of effectiveness of such registration statement, the exercise price of any unexercised First Private Placement Warrants would be automatically increased to 110% of the per share of offering price to the public of the Company's Common Stock. By reason of the facts that the Company is not selling any public warrants in this Offering, and none of the 750,000 First Private Placement Warrants has been exercised as of the date of this Prospectus, the exercise price of all of such warrants is deemed to have been automatically increased to $7.70 per share. However, all other terms of the First Private Placement Warrants, including the December 14, 1998 expiration date thereof, remain in effect. None of such warrants is being registered for sale by the holders thereof. See, "Registration Rights." Second Private Placement In October 1994, the Company successfully completed a $1,000,000 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 April 18, 1999 (the "Second Private Placement Warrants"). Pursuant to a cancellation and rescission agreement, which the Company executed with Colonial, one of the Second Private Placement investors, the number of outstanding Second Private Placement Warrants has been reduced to 462,500 warrants. The Company has paid $50,000 of the $100,000 60 64 which it owes to Colonial pursuant to such agreement. The Company intends to use $50,000 of the proceeds of this Offering to pay the balance of its obligation to Colonial. The holders of the Second Private Placement 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 Second Private Placement 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. In accordance with the provisions of the Second 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 Second Private Placement Warrants, but such registration statement does not include any warrant to be issued to the public, then upon the declaration of effectiveness of such registration statement, the exercise price of any unexercised Second Private Placement Warrants would be automatically increased to 110% of the per share of offering price to the public of the Company's Common Stock. By reason of the facts that the Company is not selling any public warrants in this Offering, and none of the 462,500 Second Private Placement Warrants has been exercised as of the date of this Prospectus, the exercise price of all such warrants is deemed to have been automatically increased to $7.70 per share. However, all other terms of the Second Private Placement Warrants including the April 18, 1999 expiration date thereof, remain in effect. All of the Second Private Placement 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 "Use of Proceeds;" "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources;" and "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 Third Private Placement Warrants contain protections against dilution affecting both the exercise price of, and number of shares of Common Stock purchasable under, such warrants upon the occurrence of certain events, including a stock split of, a stock dividend on or a subdivision, combination or recapitalization of, the Common Stock. The holders of the Third Private Placement 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 Third Private Placement 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. In accordance with the provisions of the Third 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 Third Private Placement Warrants, but such registration statement does not include any warrants to be issued to the public, the terms and provisions of the Third Private Placement Warrants, including the five year term commencing on the date of this Prospectus, remain unchanged. All of the Third Private Placement 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 "Use of Proceeds;" "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources;" and "Concurrent Registration of Securities." REGISTRATION RIGHTS The Representative's Warrant confers certain registration rights upon the holders thereof. See "Underwriting." 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 shares of Common Stock issuable upon exercise of the First Private Placement Warrants. However, such registration rights were subject to the right of the Representative to exclude such shares from the Offering, subject to the proviso that an election by 61 65 the Representative to effect such exclusion would thereupon confer upon the holders of the First Private Placement Warrants to demand on one occasion that the Company file a registration statement with the SEC registering such warrants and the shares of Common Stock issuable upon exercise thereof 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 First Private Placement Warrants, 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 First Private Placement Warrants of the electing holders and the Common Stock issuable upon exercise thereof, 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 First Private Placement Warrants. 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 462,500 Second Private Placement Warrants, and the shares of Common Stock issuable upon exercise of such warrants; and (ii) the 2,000,015 Third Private Placement Warrants, 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, 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 Warrants. SHARES ELIGIBLE FOR FUTURE SALE Upon completion of this Offering, the Company will have outstanding 4,105,000 shares of Common Stock (4,352,500 shares if the Underwriters' over-allotment option is exercised in full). Of these shares, 1,650,000 shares will be freely tradeable without restriction under the Securities Act, and 1,155,000 shares will be registered for sale pursuant to a separate prospectus under the Securities Act, but restricted from sale pursuant to the lockup agreements hereinbelow described. The remaining 1,300,000 shares of Common Stock held by existing shareholders are restricted securities within the meaning of Rule 144. In accordance with Rule 144, all of said 1,300,000 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 one year, but less than two 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 41,050 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 62 66 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 two 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 Representative has required, as a condition to the closing of the Offering, that (a) each of the directors and officers of the Company and its Subsidiaries, (b) the holders of substantially all of said 1,155,000 shares and said 1,300,000 shares, as well as (c) the holders of substantially all of the warrants to purchase 2,462,515 shares of Common Stock issued in the Second Private Placement and the Third Private Placement, and the holder of the Buechner Option to purchase 25,000 shares of 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, 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. However, pursuant to lock-up agreements delivered by three Selling Securityholders, they may not sell their aggregate holdings of 855,000 shares of Common Stock for a period of two years from the Effective Date, notwithstanding the Registration thereof under the Securities Act, without the Representative's prior consent, the Company and the Representative have agreed not to consent to the termination of the two year lock-up period applicable to an aggregate of 450,000 shares of Common Stock held by three other Selling Securityholders prior to the first anniversary of the Effective Date. See "Principal Security Holders." By reason of the registration rights which the Company conferred to the investors who purchased 750,000 warrants of Common Stock pursuant to the First Private Placement, the Representative did not require any of such warrantholders to agree to lockup their securities. As of the date of this Prospectus, the holders of 1,150,000 of said 1,155,000 shares, the holders of 1,280,000 of said 1,300,000 shares, the holders of warrants to purchase 2,404,181 of said 2,462,515 shares, the holder of warrants issued in the First Private Placement to purchase 50,000 shares and the holder of the Buechner Option have executed lock-up agreements. Except for the possibility that the Representative might, in the exercise of its sole discretion, grant a request for relief from the provisions of the lock-up agreement, the Company is not aware of any circumstance under which the Representative would permit any of the existing stockholders or warrantholders who have executed lock-up agreements to sell his respective securities prior to the end of the lock-up period. In determining whether or not to grant such a request, the Representative's primary concern will be the potential adverse effects on the markets for the Common Stock and Warrants that may result from an increase in the amount of the pool of publicly tradeable securities of the Company. In the event that the Representative does modify, shorten or waive any of the restrictions imposed pursuant to the lock-up agreements, the Company will file a post-effective amendment to the Registration Statement of which this Prospectus forms a part if such action by the Representative affects 10% or more of the Selling Securityholders' securities, or it will add a sticker to this Prospectus if such action by the Representative affects more than 5%, but less than 10% of the Selling Securityholders' securities. The lock-up 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, and there can be no assurance a significant, if any, public market for such securities will develop or be sustained after the offering. Sales of substantial amounts of Common Stock in the public market could adversely affect the market price of the Common Stock. 63 67 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 Stockholder, and the Company and the Selling Stockholder have agreed to sell to the Underwriters, the respective numbers of shares of Common Stock set forth opposite each Underwriter's name below:
NUMBER OF UNDERWRITERS SHARES -------------------------------------------------------------------------- --------- J.W. Barclay & Co., Inc. ................................................. --------- Total........................................................... 1,650,000 =========
The Company and the Selling Stockholder are obligated to sell, and the Underwriters are obligated to purchase, all of the shares of Common Stock offered hereby through the Representative, if any are purchased. The Company and the Selling Stockholder have been advised by the Representative that, the Underwriters propose initially to offer the Common Stock to the public on the terms set forth on the cover page of this Prospectus. The Underwriters may allow concessions of not more than $[ ] per share of Common Stock, to selected dealers and certain other dealers. After the consummation of the Offering, the concessions to selected dealers and to other dealers may be changed by the Underwriters. The Common Stock is 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 247,500 additional shares of Common Stock 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. See "Shares Eligible For Future Sale" for a description of certain lockup agreements. The Company and the Selling Stockholder 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 Stockholder have agreed to pay the Underwriters a non-accountable expense allowance equal to 3% of the aggregate offering price of the Common Stock to be sold in the Offering. The Company has paid the Representative a $25,000 advance with respect to its expense allowance obligation. 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 165,000 shares of Common Stock of the Company. The Representative's Warrants will be exercisable at a price of $11.55 per share for a period of four years commencing one year from the date of this Prospectus, and may not be sold, assigned, transferred, pledged or hypothecated for a period of one year from the date of this Prospectus, except to an officer or partner of an Underwriter or members of the selling group or their respective officers or partners. 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 "piggyback" registration rights for the holders of the Representative's Warrants and the underlying securities. Such piggyback registration rights will expire seven years from the date of this Prospectus. 64 68 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 offered hereby. It has been agreed that for a period of two (2) years from the date hereof neither the Company, its current or future subsidiaries, if any, nor any of its officers, directors and principal stockholders, or their respective affiliates, will, without the express written consent of the Representative, sell or transfer (directly or indirectly) any of their respective securities including but not limited to preferred stock of the Company. 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. Pursuant to the terms of the Representative's Restriction Letter with the NASD, the Representative is prohibited from acting as a "market maker" in securities traded on the OTC Bulletin board. As a result thereof, the Representative will be prohibited from making a market in the shares of Common Stock offered hereby. The Representative's inability to make such a market may materially affect the liquidity of the Common Stock offered hereby, which could make it more difficult for investors in this Offering to purchase or sell their shares of Common Stock. The Representative, however, may execute buy and sell orders for its customers in the Common Stock offered hereby on an agency basis. Although no assurance can be given, the Representative may apply to the NASD, in the future, to have its Restriction Letter amended to allow it to make markets in OTC Bulletin board securities. No assurances can be given when, if ever, the Representative will make such application, or if made, when, if ever, the NASD would approve such application. See "Risk Factors -- Representative Will Not Make a Market in the Company's Common Stock." The Company has agreed to enter into a financial consulting agreement with the Representative providing that, during the three year period commencing on the date of closing of this Offering, it will pay the Representative the aggregate amount of $125,000, all of which shall be paid at such closing. The foregoing is a summary of the principal terms of the Underwriting Agreement, in which all material terms have been disclosed, 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." LEGAL MATTERS The validity of the Common Stock and 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 V. 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 65 69 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 December 31, 1996, and for the period December 1, 1995 (inception) through December 31, 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. 66 70 INDEX TO FINANCIAL STATEMENTS RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) AUDITED FINANCIAL STATEMENTS
PAGE ----------- Report of Independent Auditors.................................................. F-2 Balance Sheet at December 31, 1996.............................................. F-3 Statement of Operations for the years ended December 31, 1996 and 1995.......... F-4 Statement of Shareholders' Deficiency for the years ended December 31, 1996 and 1995.......................................................................... F-5 Statement of Cash Flows for the years ended December 31, 1996 and 1995.......... F-6 Notes to Financial Statements................................................... F-8
UNAUDITED FINANCIAL STATEMENTS Balance Sheet at June 30, 1997.................................................. F-17 Statement of Operations for the six months ended June 30, 1997 and 1996......... F-18 Statement of Shareholders' Deficiency for the period January 1, 1997 to June 30, 1997.......................................................................... F-19 Statement of Cash Flows for the six months ended June 30, 1997 and 1996......... F-20 Notes to Financial Statements................................................... F-21
CORBINA TELECOMMUNICATIONS AUDITED FINANCIAL STATEMENTS Report of Independent Auditors.................................................. F-27 Balance Sheet at December 31, 1996.............................................. F-28 Statement of Operations for the period December 1, 1995 through December 31, 1996.......................................................................... F-29 Statement of Shareholders' Deficiency for the period December 1, 1995 through December 31, 1996............................................................. F-30 Statement of Cash Flows for the period December 1, 1995 through December 31, 1996.......................................................................... F-31 Notes to Financial Statements................................................... F-32
UNAUDITED CONDENSED FINANCIAL STATEMENTS Balance Sheets at December 31, 1996 and at June 30, 1997........................ F-37 Statements of Operations for the six months ended June 30, 1997 and 1996........ F-38 Statements of Cash Flows for the six month periods ended June 30, 1997 and 1996.......................................................................... F-39 Notes to Financial Statements................................................... F-40
F-1 71 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 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 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 72 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................................................ 2,340,258 Accumulated deficit....................................................... (3,316,218) ----------- Total shareholders' deficiency................................................. (953,610) ----------- Total liabilities and shareholders' deficiency................................. $ 2,533,866 ===========
See accompanying notes. F-3 73 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............................................ (784,848) (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 74 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 75 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 76 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 77 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 Azerbaijan. 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 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. Accordingly, the above acquisition will be accounted for under the purchase method of accounting. The goodwill of approximately $330,000 will be amortized on the straight line method over a five year period. The following unaudited proforma information presents the results of operations of Telcom as though the aforementioned acquisition had occurred as of the beginning of 1996. Proforma revenue........................................ $ 1,012,000 Proforma net loss....................................... $(1,850,000) Proforma net loss per share............................. $ (.84)
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. 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"). The shareholders of Russian Wireless exchanged all of the issued and outstanding shares for 750,000 shares of Telcom's common stock valued at $7.00 per share (the projected IPO price (see Note 10)). Accordingly, on February 10, 1997, the Company recorded an expense of $5,250,000. Russian Wireless has had minimal activity from the date of inception (October 21, 1996) through December 31, 1996. At December 31, 1996 F-8 78 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 1. ORGANIZATION -- (CONTINUED) 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
In October 1996, Comptel Ltd. (Comptel) a closed joint stock company organized under the laws of the Russian Federation was formed by the sole shareholder of Corbina to operate a wireless local loop network in the Russian Federation. In March 1997, the Company acquired for approximately $34,000 a 75% interest in Comptel. This acquisition will be accounted for by the purchase method of accounting. Comptel had no business activity for the period since inception through June 30, 1997. At December 31, 1996, total assets, and stockholders' equity were immaterial to the consolidated financial statements. In October 1996, Investelektrosvyaz, a private joint stock company organized under the laws of the Russian Federation was formed for approximately $34,000 by Comptel and three unrelated parties to construct and operate a wireless local loop telecommunications systems. Comptel owns 51% of Investelektrosvyaz. Investelektrosvyaz had no business activity since inception through June 30, 1997. At December 31, 1996, total assets and stockholders' equity were immaterial to the consolidated financial statements. 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, 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 F-9 79 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 1. ORGANIZATION -- (CONTINUED) 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 finances 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. 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. F-10 80 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) 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. Impairment of long-term assets Management periodically evaluates the carrying amount of its long-term assets, including, goodwill, by estimating the future cash flows against the carrying value of these assets. 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. 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. F-11 81 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 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) October 31, 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. 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 October 31, 1997, the promissory notes F-12 82 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 5. NOTES PAYABLE -- (CONTINUED) (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. 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. 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 Directors Plan has 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. F-13 83 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 7. STOCK OPTIONS AND WARRANTS -- (CONTINUED) 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. 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 ============ ============
F-14 84 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 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 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. Such amounts, if any, will be expensed when incurred based on the fair value of the shares at that time. 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 ========
F-15 85 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) DECEMBER 31, 1996 9. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) 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-16 86 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) BALANCE SHEET (UNAUDITED) JUNE 30, 1997 ASSETS Current assets: Cash and cash equivalents................................................ $ 25,312 Accounts receivable, net................................................. 514,607 Prepaid expenses and other current assets................................ 283,786 ------------ Total current assets.......................................................... 823,705 Equipment, net of accumulated depreciation of $46,088......................... 209,337 Goodwill in Corbina, net of accumulated amortization of $32,738............... 294,642 Deferred registration fees.................................................... 762,302 Organization costs, net of accumulated amortization of $3,684................. 2,451 ------------ Total assets.................................................................. $ 2,092,437 ============ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Notes payable............................................................ $ 2,899,000 Accrued interest payable................................................. 494,453 Accounts payable and accrued expenses.................................... 1,848,831 ------------ Total current liabilities..................................................... 5,242,284 Long-term debt, net of discount of $211,119................................... 388,881 Commitments and contingencies Stockholders' 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; 2,985,000 shares issued and outstanding........................................... 29,850 Additional paid-in capital............................................... 7,582,758 Accumulated deficit...................................................... (11,151,336) ------------ Total stockholders' deficiency................................................ (3,538,728) ------------ Total liabilities and stockholders' deficiency................................ $ 2,092,437 ============
See accompanying notes. F-17 87 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) STATEMENTS OF OPERATIONS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, -------------------------- 1997 1996 ----------- ---------- Revenues........................................................... $ 1,265,435 $ 4,589 Cost of services................................................... 1,196,645 -- ----------- ---------- Gross profit....................................................... 68,790 4,589 Operating expenses: Officers' salaries............................................ 5,335,000 54,166 Selling, general and administrative........................... 472,422 63,368 Amortization of deferred financing costs...................... 1,680,000 137,114 ----------- ---------- Total operating expenses........................................... 7,487,422 254,648 ----------- ---------- Operating loss..................................................... (7,418,632) (250,059) Interest, including $300,881 ($186,019 in 1996) of amortization of discount on notes payable, and financing expenses, net........... 420,167 289,660 Foreign exchange gain.............................................. 3,681 -- ----------- ---------- Net loss........................................................... $(7,835,118) $ (539,719) =========== ========== Net loss per common share.......................................... $ (2.78) $ (.32) =========== ========== Weighted average number of shares outstanding...................... 2,815,110 1,685,000 =========== ==========
See accompanying notes. F-18 88 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) STATEMENTS OF STOCKHOLDERS' DEFICIENCY
COMMON STOCK ADDITIONAL ------------------- PAID-IN ACCUMULATED SHARES AMOUNT CAPITAL DEFICIT TOTAL --------- ------- ---------- ------------ ------------ Balance at December 31, 1994........ 1,873,000 $18,730 $ 59,878 $ (617,838) $ (539,230) 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) Issuance of common stock in connection with merger (unaudited).................... 750,000 7,500 5,242,500 -- 5,250,000 Net loss for the six months ended June 30, 1997 (unaudited)...... -- -- -- (7,835,118) (7,835,118) ---------- ------- ---------- ------------ ------------ Balance at June 30, 1997............ 2,985,000 $29,850 $7,582,758 $(11,151,336) $(13,538,728) ========== ======= ========== ============ ============
See accompanying notes. F-19 89 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) STATEMENTS OF CASH FLOWS (UNAUDITED)
SIX MONTHS ENDED JUNE 30, ------------------------------- 1997 1996 ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss.................................................... $(7,835,118) $ (539,719) Adjustments to reconcile net loss to net cash used in operating activities: Compensation charge.................................... 5,250,000 -- Depreciation........................................... 14,995 2,362 Amortization of organization costs..................... 614 614 Amortization of deferred financing costs............... 1,680,000 -- Amortization of discount on notes payable.............. 300,881 186,019 Amortization of Goodwill............................... 32,738 -- Changes in operating assets and liabilities: Accounts receivable............................... (170,126) -- Prepaid expenses and other current assets......... (94,321) (25,316) Security deposits................................. 18,988 (12,828) Accounts payable and accrued expenses............. 354,276 (226,822) Accrued interest payable.......................... 153,640 92,230 ----------- ----------- Net cash used in operating activities....................... (293,433) (523,454) ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Loan receivable............................................. 190,000 -- Payments made for acquisition of subsidiary................. (195,000) -- Acquisition of property and equipment....................... (101,298) (13,956) Deferred registration fees.................................. (37,302) (25,000) ----------- ----------- Net cash used in investing activities....................... (143,600) (38,956) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from notes payable................................. -- 1,050,000 Repayment of notes payable.................................. (50,000) (200,000) ----------- ----------- Net cash (used in) provided by financing activities......... (50,000) 850,000 ----------- ----------- Net increase (decrease) in cash and cash equivalents........ (487,033) 287,590 Cash and cash equivalent acquired........................... 24,573 -- Cash and cash equivalents at beginning of year.............. 487,772 11,456 ----------- ----------- Cash and cash equivalents at end of year.................... $ 25,312 $ 299,046 ----------- ----------- SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES Net liabilities assumed at acquisition...................... $ 132,380 $ -- =========== =========== Discount recorded on notes payable.......................... $ -- $ 648,000 =========== =========== Accrued deferred registration fees.......................... $ 700,000 $ -- =========== ===========
See accompanying notes. F-20 90 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) JUNE 30, 1997 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 Azerbaijan. 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 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. Accordingly, the above acquisition will be accounted for under the purchase method of accounting. The goodwill of approximately $330,000 will be amortized on the straight line method over a five year period. The following unaudited proforma information presents the results of operations of Telcom as though the aforementioned acquisition had occurred as of the beginning of 1997. Proforma revenue................................................ $ 1,265,000 Proforma net loss............................................... $(7,887,000) Proforma net loss per share..................................... $ (2.80)
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. 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"). The shareholders of Russian Wireless exchanged all of the issued and outstanding shares for 750,000 shares of Telcom's common stock valued at $7.00 per share (the projected IPO price). Accordingly, on February 10, 1997, the Company recorded an expense of $5,250,000. 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 F-21 91 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) JUNE 30, 1997 1. ORGANIZATION -- (CONTINUED) 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
In October 1996, Comptel Ltd. (Comptel) a closed joint stock company organized under the laws of the Russian Federation was formed by the sole shareholder of Corbina to operate a wireless local loop network in the Russian Federation. In March 1997, the Company acquired for approximately $34,000 a 75% interest in Comptel. This acquisition was accounted for by the purchase method of accounting. Comptel had no business activity for the period since inception through June 30, 1997. At December 31, 1996, total assets, and stockholders' equity were immaterial to the consolidated financial statements. In October 1996, Investelektrosvyaz, a private joint stock company organized under the laws of the Russian Federation was formed for approximately $34,000 by Comptel and three unrelated parties to construct and operate a wireless local loop telecommunications systems. Comptel owns 51% of Investelektrosvyaz. Investelektrosvyaz had no business activity since inception through June 30, 1997. At December 31, 1996, total assets and stockholders' equity were immaterial to the consolidated financial statements. Basis of Presentation During the six months ended June 30, 1997 and 1996, the Company's incurred losses from operations aggregating $7,835,118 and $539,720, respectively, and had a working capital deficiency and stockholders' deficiency of $4,418,579 and $3,538,728 respectively, at June 30, 1997. 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 June 30, 1997, 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 June 30, 1997 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 from 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 Ltd., must successfully construct and then operate profitably the wireless local loop telecommunications network which it proposes to establish in the Moscow metropolitan area, and F-22 92 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) JUNE 30, 1997 1. ORGANIZATION -- (CONTINUED) (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 finances necessary for them to achieve the requisite levels of operations through the date of consummation of an IPO transaction which it has commenced during the first calendar quarter of 1997. The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the United States Securities and Exchange Commission and should be read in conjunction with the Company's 1996 unaudited financial statements. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of the financial statements have been included. Operating results for the six month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Consolidation Policy The Company's Unaudited Financial Statements for the six month period ended June 30, 1997 has been consolidated with the Condensed Financial Statements of Corbina for the six month period ended June 30, 1997. No allowance has been made for a minority interest, with respect to Corbina, as Corbina maintains a shareholders' deficiency at June 30, 1997. 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. 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. F-23 93 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) JUNE 30, 1997 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) 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 June 30, 1997, 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. Impairment of long-term assets Management periodically evaluates the carrying amount of its long-term assets, including, goodwill, by estimating the future cash flows against the carrying value of these assets. 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 basis of assets and liabilities, using currently-enacted income tax rates and regulations. F-24 94 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) JUNE 30, 1997 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. In February 1997 the Financial Accounting Standards Board issued statement No. 128, Earnings Per Share, which is required to be adopted on December 31, 1997. Under the new requirements for calculating primary earnings per share, the dilutive effect of stock options will be excluded. Statement 128 will not have a material impact on Pro forma net income per share for the six months ended June 30, 1996 and 1997. 3. 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 upon 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 of 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 Directors 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 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 F-25 95 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. (FORMERLY TELCOM GROUP USA, INC.) NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED) JUNE 30, 1997 3. COMMITMENTS AND CONTINGENCIES -- (CONTINUED) Company will transfer 10% of the outstanding shares of Corbina to the Chief Executive Officer, which will be charged as compensation expensed based on the fair market value of the shares at the time of transfer. 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, which will be charged to compensation expense based on the fair market value of the shares at the time of transfer. Shares of the Company's stock issued to the Chief Executive Officer will be limited to 250,000 shares. Such amounts, if any, will be expensed when incurred based on the fair value of the shares at that time. The Company leases office space for its operations on a month by month basis at a rate of $1,000 per month. The Company negotiated, subsequent to June 30, 1997, a termination of a lease for office premises that it previously occupied. In consideration for its former landlord's agreement to cancel such lease, the Company has agreed to forego repayment of the $19,000 security deposit it made pursuant to the lease, and to pay the landlord an additional $20,000. Total rent expense incurred for the six months ended June 30, 1997 and 1996 amounted to approximately $32,000 and $13,000, respectively. F-26 96 REPORT OF INDEPENDENT AUDITORS The Board of Directors and Shareholders Corbina Telecommunications We have audited the accompanying balance sheet of Corbina Telecommunications as of December 31, 1996, and the related statements of operations, shareholder's deficiency, and cash flows for the period December 1, 1995 (inception) through December 31, 1996. These financial statements are the responsibility of Corbina'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 December 31, 1996, and the results of its operations and its cash flows for the period December 1, 1995 (inception) through December 31, 1996 in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that Corbina will continue as a going concern. As discussed in Note 1 to the financial statements, Corbina experienced a net loss of $209,813, has a working capital deficiency of $214,257 and has a shareholder's deficiency of $126,629. These matters raise substantial doubt about Corbina'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-27 97 CORBINA TELECOMMUNICATIONS BALANCE SHEET DECEMBER 31, 1996 (US DOLLARS) ASSETS Current assets: Cash....................................................................... $ 22,487 Accounts receivable, net of allowance for doubtful accounts of $65,400..... 193,295 Prepaid expenses and other current assets.................................. 88,433 --------- Total current assets............................................................ 304,215 Property and equipment, net................................................... 87,628 --------- TOTAL ASSETS.................................................................... $ 391,843 ========= LIABILITIES AND SHAREHOLDER'S DEFICIENCY Current liabilities: Trade payables............................................................. $ 323,230 Other liabilities.......................................................... 195,242 --------- Total current liabilities....................................................... 518,472 Shareholder's deficiency: Common stock, one million roubles par value, 140 shares authorized, issued and outstanding........................................................... 30,568 Additional paid-in capital................................................. 52,616 Accumulated deficit........................................................ (209,813) --------- TOTAL SHAREHOLDER'S DEFICIENCY.................................................. (126,629) --------- TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIENCY.................................. $ 391,843 =========
See accompanying notes. F-28 98 CORBINA TELECOMMUNICATIONS STATEMENT OF OPERATIONS FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 (US DOLLARS) Revenues....................................................................... $1,011,914 Cost of services............................................................... 827,229 ---------- Gross profit................................................................... 184,685 Selling, general and administrative expenses................................... 372,203 Foreign exchange translation loss on net monetary items........................ 13,056 ---------- Loss before provision for income taxes......................................... 200,574 Provision for income taxes..................................................... 9,239 ---------- Net loss....................................................................... $ 209,813 ========== Loss per share................................................................. $ 1,499 ========== Weighted average shares outstanding............................................ 140 ==========
See accompanying notes. F-29 99 CORBINA TELECOMMUNICATIONS STATEMENT OF SHAREHOLDER'S DEFICIENCY FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 (US DOLLARS)
COMMON STOCK ADDITIONAL ---------------- PAID- ACCUMULATED SHARES AMOUNT IN CAPITAL DEFICIT TOTAL ------ ------- ---------- --------- --------- Capital contribution December 1, 1995.......... 140 $30,568 $ 30,568 Capital contributions.......................... $ 52,616 52,616 Net loss....................................... $(209,813) (209,813) --- ------- ------- --------- --------- Balance at December 31, 1996................... 140 $30,568 $ 52,616 $(209,813) $(126,629) === ======= ======= ========= =========
See accompanying notes. F-30 100 CORBINA TELECOMMUNICATIONS STATEMENT OF CASH FLOWS FOR THE PERIOD DECEMBER 1, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 (US DOLLARS) OPERATING ACTIVITIES Net loss....................................................................... $(209,813) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation.............................................................. 14,533 Provision for doubtful accounts........................................... 65,400 Write-down of equipment................................................... 40,000 Foreign exchange loss..................................................... 13,056 Changes in operating assets and liabilities: Accounts receivable....................................................... (271,751) Prepaid expenses and other assets......................................... (88,433) Trade payables............................................................ 323,230 Accrued taxes and other liabilities....................................... 195,242 --------- NET CASH PROVIDED BY OPERATING ACTIVITIES...................................... 81,464 INVESTING ACTIVITIES -- Purchases and advances for property and equipment...... (111,593) FINANCING ACTIVITIES -- Capital contributions.................................. 52,616 --------- Net increase in cash........................................................... 22,487 Cash at beginning of period.................................................... -- --------- Cash at end of period.......................................................... $ 22,487 =========
See accompanying notes. F-31 101 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD DECEMBER 31, 1995 (INCEPTION) THROUGH DECEMBER 31, 1996 (IN US DOLLARS UNLESS OTHERWISE INDICATED) 1. DESCRIPTION OF BUSINESS Corbina Telecommunications ("Corbina"), a Russian legal entity registered as a closed joint stock company, was founded on December 1, 1995. Corbina is engaged primarily as a provider of long distance telecommunications services to commercial customers in the Moscow metropolitan area. Corbina operates on the basis of 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 March 1996, commencement of operations, through December 31, 1996, Corbina incurred losses aggregating $209,813, and as of December 31, 1996, its current liabilities exceeded its current assets by $214,257 and its total liabilities exceeded total assets by $126,629. These matters raise substantial doubt about its ability to continue as a going concern. These financial statements have been prepared assuming Corbina will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. In order for Corbina to strengthen its financial condition and to operate profitably in future periods, it will need to expand its customer base and continue to increase the telecommunications traffic purchased by its customers. Such increases are largely dependent upon Corbina's ability to expand its existing customer base. Corbina intends to achieve these increases through an enhancement of the product and service offerings made available to its existing and prospective customers, and through marketing efforts. In order to acquire the capital needed to be able to provide such enhanced products and services and to engage in such advertising and marketing activities, Corbina's original shareholder has entered into an agreement with Russian Wireless Telephone Company, Inc. ("Russian Wireless"). The agreement provides, in part, that upon completion of an initial public offering transaction which Russian Wireless intends to effect during 1997, Russian Wireless will contribute $655,000 to Corbina's capital. In January 1997, TelCom Group USA, Inc., an American corporation registered in the state of Delaware, exercised an option to purchase 75% of the outstanding capital stock of Corbina which had been granted to it by Corbina's shareholder in July 1996. In February 1997, TelCom Group USA, Inc. changed its name to Russian Wireless Telephone Company, Inc. In October 1996, CompTel Ltd., a closed joint stock company organized under the laws of the Russian Federation, was formed by Corbina's original shareholder to obtain and manage the use of telecommunications licenses in the Russian Federation as well as to construct and operate wireless telecommunications systems in the Russian Federation. Toward this end, in October 1996, a 51%-owned subsidiary of CompTel Ltd., Investelectrosvyaz, a closed joint stock company organized under the laws of the Russian Federation, was formed in order to exploit the licenses, including those used by Corbina, and to provide telecommunications services. In March 1997, Russian Wireless Telephone Company, Inc. acquired a 75% interest in CompTel Ltd. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation Corbina maintains its records and prepares its statutory financial statements in accordance with Russian accounting and tax legislation. The accompanying financial statements have been prepared from the Russian accounting records for presentation in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The accompanying financial statements differ from the financial F-32 102 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) statements used for statutory purposes in Russia in that they reflect certain adjustments, not recorded in Corbina's books, which are appropriate to present the financial position, results of operations and cash flows in accordance with US GAAP. The principal adjustments relate primarily to foreign currency translation, revenue and expense recognition, deferred income taxes, valuation allowances for unrecoverable assets and depreciation and valuation of property and equipment. Foreign Currency Translation Corbina reports to the Russian tax authorities in Russian rubles ("RUR") and the accounting records are maintained in that currency. The accompanying financial statements have been prepared in US dollars. Transactions and balances not already measured in US dollars (primarily Russian rubles) have been remeasured into US dollars in accordance with the relevant provisions of US Financial Accounting Standard ("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 US dollars are credited or charged to operations. The exchange rates used on ruble denominated transactions and balances for translation purposes as of December 31, 1996 for one US dollar was RUR 5,560. At April 18, 1997, the rate had changed to RUR 5,753. The effect of this devaluation of the ruble on monetary assets and liabilities has not been determined. The ruble 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 did occasionally diverge from market rates, they were generally considered to be a reasonable approximation. Beginning May 17, 1996, official exchange rates have been determined daily by the Central Bank of the Russian Federation and have been generally considered to be a reasonable approximation of market rates. The translation of ruble 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. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Property and Equipment Property and equipment are recorded at historical cost. Depreciation is provided on the straight-line basis over the following estimated useful lives: Network equipment........................................... 7 years Computers................................................... 5 years Office furniture and equipment.............................. 5 years
F-33 103 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) Revenue Recognition and Taxes on Revenue Revenue from telecommunications traffic is recognized in the period in which the traffic occurs. Revenues are stated net of any value-added taxes 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 was determined by dividing net income by the weighted average number of shares outstanding. Average common equivalent shares outstanding have not been included, as the computation would not be dilutive. Income Taxes Corbina computes and records income tax in accordance with FAS No. 109, "Accounting for Income Taxes". Government Pension Funds Corbina contributes to the Russian Federation state pension, medical insurance, social and employment funds on behalf of its employees. Corbina's contribution was 38.5% of the employees' salaries and was expensed as incurred. Concentration of Credit Risk and Major Customers Accounts receivable consist of amounts due from customers for services rendered. Financial instruments that potentially subject Corbina to credit risk consist primarily of accounts receivable. Corbina's revenue and accounts receivable are derived from a variety of international and Russian business customers. During 1996, one customer accounted for 22% of revenues in 1996 and 42% of accounts receivable at December 31, 1996. As of December 31, 1996, Corbina had no other significant concentrations of credit risk. Corbina deposits its available cash with a Russian financial institution, which management constantly monitors. Fair Value of Financial Instruments The fair market values of financial instruments, consisting of cash, accounts receivable and accounts payable, which are included in current assets and liabilities, are considered to be the carrying values. 3. PROPERTY AND EQUIPMENT Property and Equipment consisted of the following at December 31, 1996: Network equipment......................................... $ 51,837 Computers................................................. 47,152 Office furniture and equipment............................ 3,172 -------- 102,161 Accumulated depreciation.................................. (14,533) -------- $ 87,628 ========
F-34 104 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 4. INCOME TAXES The provision for income taxes consisted of the following: Current..................................................... $9,239 Deferred.................................................... -- ------ Total....................................................... $9,239 ======
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 expense (benefit) at statutory rate................... $(70,200) Non-deductible expenses, net.............................. 23,628 Deferred tax valuation allowance.......................... 55,811 -------- Provision for income taxes................................ $ 9,239 ========
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. Corbina's deferred tax balance consists of a deferred tax asset resulting from accruals and reserves recorded for financial reporting purposes, but not deductible in the current period for income tax purposes. A valuation allowance has been provided to reduce the asset to a net zero balance. 5. COMMON STOCK Corbina's common stock was issued in exchange for a contribution of equipment. All items were new at the time of contribution and were valued at their invoiced costs. Additional paid-in capital represents amounts paid by Corbina's shareholder to fund the operations of the business. No dividends have been declared or paid. 6. COMMITMENTS Corbina has a non-cancelable 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 -------- $12,586 ========
Total rent expense for the period was $33,400. 7. CONTINGENCIES Legislation and regulations regarding foreign currency transactions and taxation in the Russian Federation is constantly evolving as the central government manages the transformation from a command to a market oriented economy. The various legislation and regulations are not always clearly written and their interpretation is subject to the opinions of the local tax inspectors, Central Bank officials and the Ministry of Finance. Instances of inconsistent opinions between local, regional and national tax authorities and between the Central Bank and Ministry of Finance are not unusual. Corbina believes that it has paid or accrued all taxes that are applicable. Where practice concerning the provision of taxes is unclear, Corbina has accrued tax liabilities based on management's best estimate. F-35 105 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. CONTINGENCIES -- (CONTINUED) 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. In addition, the authorities have the right to seize bank accounts and detain individuals for known or suspected violations. Corbina'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 tax as well as penalties and interest, if any, assessed may be in excess of the amount expensed to date and accrued at December 31, 1996. Although such future assessments are possible and may be material, it is the opinion of Corbina's management that such amounts, if any, will not have a material effect on the financial condition of Corbina. Corbina'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. Corbina does not believe that these contingencies, as related to its operations, are any more significant than those of similar enterprises in Russia. F-36 106 CORBINA TELECOMMUNICATIONS CONDENSED BALANCE SHEETS
JUNE 30, 1997 (UNAUDITED) --------------- (IN US DOLLARS) ASSETS Current assets: Cash.................................................................... $ 17,408 Accounts receivable, net................................................ 514,607 Accrued VAT, net........................................................ 133,523 Prepaid expense and other current assets................................ 66,163 ---------- Total current assets......................................................... 731,701 Property and equipment, net.................................................. 190,865 ---------- Total assets................................................................. $ 922,566 ========== LIABILITIES AND SHAREHOLDERS' DEFICIENCY Current liabilities: Trade payables.......................................................... $ 915,209 Accrued Taxes and other liabilities..................................... 212,097 ---------- Total current liabilities.................................................... 1,127,306 Shareholders' deficiency..................................................... (204,740) ---------- Total liabilities and shareholders' deficiency............................... $ 922,566 ==========
See accompanying notes. F-37 107 CORBINA TELECOMMUNICATIONS UNAUDITED CONDENSED STATEMENTS OF INCOME
SIX MONTHS ENDED JUNE 30, --------------------------- 1996 1997 -------- ---------- (IN US DOLLARS) Revenues....................................................... $155,984 $1,265,435 Cost of services............................................... 135,785 1,196,645 -------- ---------- Gross profit................................................... 20,199 68,790 Selling, general and administrative expenses................... 90,810 150,582 Foreign exchange translation loss (gain)....................... 533 (3,681) -------- ---------- Net loss....................................................... $(71,144) $ (78,111) ======== ========== Loss per share................................................. $ (508) $ (558) ======== ========== Weighted average shares outstanding............................ 140 140 ======== ==========
See accompanying notes. F-38 108 CORBINA TELECOMMUNICATIONS UNAUDITED CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, ---------------------- 1996 1997 -------- --------- (IN US DOLLARS) NET CASH PROVIDED BY OPERATING ACTIVITIES............................. $ 49,637 $ 109,437 INVESTING ACTIVITIES -- Purchases and advances for property and equipment........................................................... (78,000) (114,516) FINANCING ACTIVITIES -- Capital contributions......................... 30,668 -- -------- --------- Net increase (decrease) in cash and cash equivalents.................. 2,305 (5,079) Cash and cash equivalents at beginning of period...................... -- 22,487 -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD............................ $ 2,305 $ 17,408 ======== =========
See accompanying notes. F-39 109 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED) 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES 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 telecommunications 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 January 1, 1997 through June 30, 1997, Corbina incurred losses of $78,111, and as of June 30, 1997, its current liabilities exceeded its current assets by $395,605 and its total liabilities exceeded total assets by $204,740. These financial statements have been prepared assuming Corbina will continue as a going concern and do not include any adjustments that may result from the outcome of this uncertainty. In order for Corbina 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 Corbina's ability to expand its existing customer base. Corbina intends to achieve these increases through an enhancement of the product and service offerings made available to its existing and prospective customers, and through marketing efforts. Basis of Presentation The accompanying unaudited condensed financial statements have been prepared from the Russian accounting records in accordance with accounting principles generally accepted in the United States of America ("US GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X as issued by the United States Securities and Exchange Commission and should be read in conjunction with Corbina's 1996 audited financial statements. Accordingly, they do not include all of the information and footnotes required by US GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation of the financial statements have been included. Operating results for the six-month period ended June 30, 1997 are not necessarily indicative of the results that may be expected for the year ended December 31, 1997. The balance sheet at December 31, 1996 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by US GAAP for complete financial statements. Foreign Currency Translation The Company reports to the Russian tax authorities in rubles ("RUR") and the accounting records are maintained in that currency. The accompanying condensed financial statements have been prepared in US dollars. Transactions and balances not already measured in US dollars (primarily Russian rubles) have been remeasured into US dollars in accordance with the relevant provisions of US Financial Accounting Standard ("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 US dollars are credited or charged to operations. The exchange rate used on ruble denominated transactions and balances for translation purposes is the rate set by the Central Bank of the Russian Federation. The rates at June 30, 1996, December 31, 1996, and F-40 110 CORBINA TELECOMMUNICATIONS NOTES TO FINANCIAL STATEMENTS -- (UNAUDITED) -- (CONTINUED) 1. ORGANIZATION, BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED) June 30, 1997 for one US dollar were RUR 5,083, RUR 5,560, and RUR 5,782 respectively. At August 8, 1997, the exchange rate had changed to RUR 5,802. The effect of this devaluation of the ruble on monetary assets and liabilities has not been determined. The ruble 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 did occasionally diverge from market rates, they were generally considered to be a reasonable approximation. Beginning May 17, 1996, official exchange rates are determined daily by the Central Bank of the Russian Federation and are generally considered to be a reasonable approximation of market rates. The translation of ruble 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. Reclassifications Certain amounts in the prior period have been reclassified to conform to current period presentation. 2. INCOME TAXES The provision for income taxes varies from expected income tax expense calculated at the statutory rate of 35% due primarily to valuation allowances applied to deferred tax assets which are less likely than not to be realized as well as to certain tax exemptions applicable under Russian tax legislation and to the non-deductibility of certain expenses recorded under US GAAP. F-41 111 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 loop network. Common Carriers: Companies which own or operate transmission facilities and offer telecommunication services to the general public on a nondiscriminatory 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 discrete, 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 its 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. A-1 112 Switch: A switch is equipment that routes local and long distance telephone calls over communications paths between geographic points, opens or closes 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. A-2 113 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 bicameral parliament. The lower house of parliament, called the State Duma, comprises 450 deputies, half of B-1 114 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. Anatoly Chubais and Boris Nemtsov, Mr. Yeltsin's former chief of staff, and the Governor of Nizhny Novgorod, respectively, have been appointed as First Vice Prime Ministers. Mr. Nemtsov is considered to be one of the strongest and most promising young politicians in the Russian Federation, possessing substantial influence with regard to matters of economic reform. 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 24% 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 7% during the third quarter of 1996 as compared to the comparable period of 1995. Form their peak in April 1996, real interest rates more than halved to reach levels below 40% by the end of November 1996. Although certain economic indicators improved, other aspects of the economy have remained stagnant or worsened over the same period. According to the Russian State Statistical Committee ("Goskomstat"), reported unemployment rose to 9.2% by the end of 1996 from 8.2% a year earlier. However, real official monthly wages increased by 17% by the end of the third quarter of 1996 as compared to the comparable period of 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 B-2 115 effectively replaced the daily MICEX exchange rate with a new daily fixing, known as the Central Bank mid-market rate. On April 30, 1997, the MICEX rate was 5,700 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 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. In November 1996, the Russian Federation made its Eurobond debut with a successful placement of a five year $1 billion bond offering bearing interest at the rate of 9.25% per annum. 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 State Communications Committee, 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. During the first six months of 1996, foreign investment totalled $2 billion. 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 B-3 116 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 (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. On January 1, 1996, an import passport was introduced which now extends to exports as well. Such "passport" must be obtained from the importer's bank for payments based upon import contracts. The importer has 180 days either to document the entry of the goods with the Russian Customs Service or to return the hard currency issued in payment for the goods. 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). B-4 117 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. An excise tax is levied on nearly all goods considered to be in a "luxury" bracket, such as cars, jewelry, alcohol and cigarettes. In March 1995, this tax was dramatically increased to between 35% and $250%. 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 Goskomstat, the City of Moscow has a population of nearly 8,717,400, with a further 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-5 118 ====================================================== 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................. 2 Prospectus Summary.................... 3 Risk Factors.......................... 12 Use of Proceeds....................... 27 Dilution.............................. 29 Capitalization........................ 30 Dividend Policy....................... 30 Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 31 Business.............................. 36 Management............................ 53 Certain Relationships and Related Transactions........................ 56 Principal Security Holders............ 58 Selling Stockholders.................. 59 Concurrent Registration of Securities.......................... 59 Description of Securities............. 59 Shares Eligible for Future Sale....... 62 Underwriting.......................... 64 Legal Matters......................... 65 Experts............................... 65 Financial Statements.................. F-1 Appendix A............................ A-1 Appendix B............................ B-1
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. 1,650,000 SHARES OF COMMON STOCK ------------------------- PROSPECTUS ------------------------- J. W. BARCLAY & CO., INC. , 1997 ====================================================== 119 [Alternate Prospectus -- Cover Page] PROSPECTUS RUSSIAN WIRELESS TELEPHONE COMPANY, INC. 1,155,000 SHARES OF COMMON STOCK 462,500 FOUR YEAR WARRANTS, 2,000,015 FIVE YEAR WARRANTS AND 2,462,515 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS 25,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF AN OPTION OFFERED BY CERTAIN SELLING SECURITYHOLDERS This Prospectus relates to 1,155,000 shares of the Common Stock, $.01 par value (the "Common Stock"), of Russian Wireless Telephone Company, Inc., a Delaware corporation (the "Company"), 462,500 warrants issued by the Company in connection with its second private placement of securities, each of which entitles the holder thereof to purchase one share of Common Stock at an exercise price of $7.70 per share during the three year period ending on April 18, 1999 (the "Second Private Placement Warrants"), 2,000,015 warrants issued by the Company in connection with its third private placement of securities, each of which entitles the holder thereof to purchase one share of Common Stock at an exercise price of $5.75 per share during the five year period ending on the fifth anniversary of the date of this Prospectus (the "Third Private Placement Warrants" which, together with the Second Private Placement Warrants, are sometimes hereinafter collectively referred to as the "Warrants"), 2,462,515 shares of Common Stock issuable upon exercise of the Warrants, as well as 25,000 shares of Common Stock issuable upon exercise of a three year common stock purchase option held by Jack W. Buechner, the Chairman of the Company's Board of Directors (the "Buechner 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. Prior to this offering, there has been no market for either the Common Stock 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 14 AND "DILUTION". The Warrants will not be listed or traded on any established market. Although it is anticipated that the Common Stock will be traded in the over-the-counter market on the OTC Bulletin Board maintained by the National Association of Securities Dealers, Inc. (the "OTC Bulletin Board"), there can be no assurance that such a market will develop, or if one does develop, that it will be maintained, after the completion of this Offering. See "Risk Factors" and "Underwriting." In addition to (i) the 1,155,000 shares of Common Stock, 2,450,015 Warrants (and the shares of Common Stock issuable upon exercise thereof), as well as the 25,000 shares of Common Stock issuable upon exercise of the Buechner Option which are being offered by the Selling Securityholders, the Registration Statement of which this Prospectus is a part also covers up to 1,867,500 shares of Common Stock which are being offered by the Company; and 30,000 shares of Common Stock being offered by a selling stockholder. 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 , 1997 120 [Alternate Prospectus Page] THE OFFERING Securities offered by The Selling Securityholders....... 1,155,000 shares of Common Stock; 462,500 Second Private Placement Warrants, 2,000,015 Third Private Placement Warrants; 2,462,575 shares of Common Stock issuable upon exercise of the Warrants, and 25,000 shares of Common Stock, subject to issuance upon exercise of the Buechner Option Offering Price per share of Common Stock......... $[ ] per 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)............ 2,485,000 shares Common Stock to be Outstanding After the Offering(2)................... 4,105,000 shares Exercise Terms...................... Each Second Private Placement Warrant entitles the holder thereof to purchase one share of Common Stock at an exercise price of $7.70 per share during the three year period ending on April 18, 1999. Each Third Private Placement Warrant entitles the holder thereof to purchase one share of Common Stock at an exercise price of $5.75 (subject to adjustment in certain circumstances) during the five year period ending on the fifth anniversary of the date of this Prospectus. OTC Bulletin Board Symbol: Common Stock(3)................... RWTC CONCURRENT OFFERING BY THE COMPANY Securities offered by the Company:............................ 1,620,000 shares of Common Stock Offering price per share............ $7.00 Net Proceeds to the Company......... $9,084,200 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 Investelektro's customers to the Moscow public telephone system, to purchase equipment and to acquire antenna sites to be used in 121 [Alternate Prospectus Page] connection with the development and construction of Investelektro's proposed wireless local loop telecommunications system in the Moscow Region, to repay $3,309,000 of indebtedness and for working capital. See "Use of Proceeds;" and "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources." 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 14. - --------------- (1) Does not include up to 4,237,515 shares of Common Stock consisting of (i) 750,000 shares issuable upon exercise of common stock purchase warrants issued to investors in the Company's first private placement of securities (the "First Private Placement Warrants"); (ii) 462,500 shares issuable upon exercise of 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; (iii) 2,000,015 shares issuable upon exercise of 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; (iv) 25,000 shares issuable upon exercise of an option issued to Jack W. Buechner, the Chairman of the Company's Board of Directors (the "Buechner Option"); and (v) 1,000,000 shares reserved for issuance under the Company's Omnibus Stock Option Plan (including 250,000 shares thereof issuable to Mr. Leibov pursuant to his employment agreement with the Company upon the occurrence of certain events. See "Description of Securities;" "Management;" and "Concurrent Registration of Securities." (2) Does not include up to 4,650,015 shares of Common Stock issuable in the events that (i) all of the 750,000 First Private Placement Warrants, the 462,500 Second Private Placement Warrants and the 2,000,015 Third Private Placement Warrants are fully exercised; (ii) the Company issues 165,000 shares of Common Stock upon exercise of the Representative's Warrant; (iii) the Company issues 247,500 shares of Common Stock upon full exercise of the Underwriters' over-allotment option; (iv) 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 (including up to 250,000 shares of Common Stock issuable to Mr. Leibov pursuant to his employment agreement); and (v) the 25,000 shares of Common Stock 122 [Alternate Prospectus Page] underlying the Buechner Option are issued. See "Management;" "Description of Securities;" and "Underwriting." (3) The Warrants will not be listed or traded on any market or exchange. The Company anticipates that the Common Stock will be quoted on the OTC Bulletin Board. An OTC Bulletin Board quotation listing does not imply that a liquid and active market will develop or be sustained for the securities upon completion of the Offering. 123 [ALTERNATE PROSPECTUS PAGE] CONCURRENT OFFERING BY THE COMPANY Concurrently with this Offering, the Company is offering, pursuant to a separate prospectus included in the Registration Statement of which this Prospectus forms a part, 1,620,000 shares of Common Stock (subject to an option granted to the Underwriters to purchase an additional 247,500 shares of Common Stock to cover over-allotments). 124 [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, 462,500 Second Private Placement Warrants and 2,000,015 Third Private Placement Warrants for sale by the Selling Securityholders identified below. The Company has also registered for sale, pursuant to this Prospectus, 880,000 shares of Common Stock, 855,000 shares of which are being offered for sale by three of the Company's principal stockholders and 25,000 shares of 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 "Buechner Option"). The Buechner 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 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 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 warrants that each Selling Securityholder beneficially owned directly or indirectly on the date of this Prospectus.
SECURITIES OWNED AND OFFERED BY EACH SELLING SECURITYHOLDER -------------------------- NAME COMMON STOCK WARRANTS - ---------------------------------------------------------------------------- ------------ --------- J.P. Downey................................................................. 285,000 Ernest Ferrante............................................................. 285,000 Paul Signoracci............................................................. 285,000 Royal Bank of Scotland...................................................... 150,000 1,000,005(2) Per Eric Dahl............................................................... 350,000(3) Jerome and Ann Coppola...................................................... 40,000 266,668(2) Harold Singer............................................................... 30,000 200,001(2) Jack W. Buechner(1)......................................................... 25,000 Dale Bertling............................................................... 10,000 66,667(2) Kenneth Delonge............................................................. 10,000 66,667(2) Howard M. Pack.............................................................. 10,000 66,667(2) Michael Ciasulli............................................................ 50,000(3) Wayne and Louella Adams..................................................... 5,000 33,334(2) Christopher Cirillo......................................................... 5,000 33,334(2) Boyd Corliss................................................................ 5,000 33,334(2) Richard David............................................................... 5,000 33,334(2) Leon Feldan................................................................. 5,000 33,334(2) David Hanos, Jr............................................................. 5,000 33,334(2) Bernard Kolkana............................................................. 5,000 33,334(2) Charles Leithauser.......................................................... 5,000 33,334(2) E. Dale Miller.............................................................. 5,000 33,334(2) Thomas Zenick............................................................... 5,000 33,334(2) Lawrence Dunn............................................................... 25,000(3) Slate Daiagi Realty......................................................... 25,000(3) Colonial Electric Consulting Corp........................................... 12,500(3) --------- --------- 1,180,000 2,462,515 ========= =========
- --------------- (1) As of the date of this Prospectus, Mr. Buechner does not own, but does possess, pursuant to the Buechner 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 Buechner Option. (2) Third Private Placement Warrants. (3) Second Private Placement Warrants. 125 [ALTERNATE PROSPECTUS PAGE] PLAN OF DISTRIBUTION The Selling Securityholders have advised the Company that sales of their Common Stock and 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 their Common Stock and warrants directly to purchasers 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 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). Such compensation may necessitate a filing with the NASD pursuant to Notice to Members 88-101. The Selling Securityholders and any broker-dealer that acts in connection with the sale of the Selling Securityholders' Common Stock and/or 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 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. 126 ====================================================== 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....................... Dilution.............................. Capitalization........................ Dividend Policy....................... Management's Discussion and Analysis of Financial Condition and Results of Operations....................... Business.............................. Management............................ Certain Relationships and Related Transactions........................ Principal Security Holders............ Selling Securityholders............... Plan of Distribution.................. Description of Securities............. Shares Eligible for Future Sale....... Concurrent Offering by the Company.... Legal Matters......................... Experts............................... Financial Statements..................
====================================================== [ALTERNATE PROSPECTUS BACK COVER PAGE] ====================================================== 1,155,000 SHARES OF COMMON STOCK 462,500 FOUR YEAR WARRANTS 2,000,015 FIVE YEAR WARRANTS 2,462,515 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF SUCH WARRANTS 25,000 SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF AN OPTION OFFERED BY CERTAIN SELLING SECURITYHOLDERS OF RUSSIAN WIRELESS TELEPHONE COMPANY, INC. -------------------- PROSPECTUS -------------------- , 1997 ====================================================== 127 PART II -- INFORMATION NOT REQUIRED IN PROSPECTUS 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 and the NASD fee.
AMOUNT TO BE PAID --------- SEC Registration fee.............................................. $ 11,632 NASD Filing fee................................................... 4,338 Printing expenses................................................. 170,000 Legal fees and expenses........................................... 300,000 Accounting fees and expenses...................................... 300,000 Blue sky fees and expenses........................................ 95,000 Stock certificates................................................ 5,000 Miscellaneous..................................................... 34,030 -------- Total................................................... $920,000 ========
II-1 128 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 Rule 506 of Regulation D promulgated under the Securities Act ("Rule 506"). Mr. Nathan was considered to be an accredited investor, as such term is defined by Rule 501 of Regulation D promulgated under the Securities Act (an "Accredited Investor"), at the time when such transaction was consummated. June 15, 1994 -- issuance of 488,000 shares of Common Stock to Harvey Block 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 Rule 506. Mr. Bloch was considered to be an Accredited Investor at the time when such transaction was consummated. 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 Rule 506. Each of such investors was considered to be an Accredited Investor at the time of issuance of such securities. 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 OF NUMBER 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 Mulgeier............................................... 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 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 Rule 506. Each of such investors was considered to be an Accredited Investor at the time of issuance of such securities. The Registrant's obligations pursuant to such notes shall become due and payable on the earlier to occur of (i) the date of closing of its initial public offering of securities, or (ii) October 31, 1997. 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. II-2 129
NAME NUMBER OF UNITS NUMBER OF WARRANTS --------------------------------------------------- --------------- ------------------ Slate Daiagi Realty................................ 1/2 25,000 Lawrence T. Dunn III............................... 1/2 25,000 Michael Ciasulli................................... 1 50,000 Lehman Brothers.................................... 7 350,000 Colonial Electric Consultant Corp.................. 1 50,000 -- ------- Total.................................... 10 500,000
December 15, 1994 -- issuance of 600,000 shares of Common Stock to Ronald G. Nathan in consideration for Registrant in the amount of $180,000. Exempt from registration pursuant to Rule 506. Mr. Nathan was considered to be an Accredited Investor at the time when such transaction was consummated. December 19, 1994 -- issuance of 285,000 shares of Common Stock to J.P. Downey in consideration for services rendered to the Registrant in the amount of $1,850. Exempt from registration pursuant to Rule 506. Mr. Downey was considered to be an Accredited Investor at the time when such transaction was consummated. December 19, 1994 -- issuance of 285,000 shares of Common Stock to Ernest Ferrante in consideration for services rendered to the Registrant in the amount of $1,850. Exempt from registration pursuant to Rule 506. Mr. Ferrante was considered to be an Accredited Investor at the time when such transaction was consummated. December 19, 1994 -- issuance of 285,000 shares of Common Stock to Paul Signoracci in consideration for services rendered to the Registrant in the amount of $1,850. Exempt from registration pursuant to Rule 506. Mr. Signoracci was considered to be an Accredited Investor at the time when such transaction was consummated. 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 Rule 506. Said investor was considered to be an Accredited Investor at the time when such transaction was consummated. December 23, 1994 -- issuance of 25,000 shares of Common Stock to Solomon Klotz in consideration for payment in the amount of $50.00. Exempt from registration pursuant to Rule 506. Mr. Klotz was considered to be an Accredited Investor at the time when such transaction was consummated. 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 Rule 506. Mr. Staff was considered to be an Accredited Investor at the time when such transaction was consummated. 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 Rule 506. Mr. Tenure was considered to be an Accredited Investor at the time when such transaction was consummated. 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 Rule 506. Each of such investors was considered to be an Accredited Investor at the time of issuance of such securities. The Registrant's obligations pursuant to such notes shall become due and payable on the earlier to occur of (i) the date of closing of its initial public offering of securities, or (ii) October 31, 1997. 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. II-3 130
NAME NO. OF UNITS NO. OF SHARES NO. OF 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 David....................................... 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 the 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. The Registrant paid a commission of $75,000 to a registered representative of J.W. Barclay & Co., Inc., on behalf of said firm, in connection with consummation of such financings. Such transactions were exempt from registration pursuant to Rule 506. Said investors were considered to be Accredited Investors at the time when such transactions were consummated. 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 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 Rule 506. Messrs. Nathan and Leibov were considered to be Accredited Investors at the time when such transaction was consummated. 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 Form of Second Private Placement Warrant. 4.4 Form of Third Private Placement Warrant.
II-4 131
EXHIBIT NO. DESCRIPTION - ------- ----------------------------------------------------------------------------------- 4.5 Form of Lockup Agreement.** 4.6 Form of Representative's Warrant. 4.7 Custodial Agreement and Power of Attorney. 5 Opinion of Hall Dickler Kent Friedman & Wood, regarding the legality of the Common Stock and the 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 Public Joint Stock Company PKB Proyektenergomash and Investelektrosvyaz.** 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 Bloch.** 10.12 Distributor Agreement between Corbina Telecommunications ("Corbina") and Rustelnet.** 10.13 International value added services distributor agreement between Sprint Networks and Corbina Telecommunications.** 10.14 Service Agreement between Macomnet and Corbina.** 10.15 Amendment dated June 16, 1997 to employment agreement between the Company and Ronald G. Nathan.** 10.16 Amendment dated June 16, 1997 to employment agreement between the Company and Mikhail Leibov.** 10.17 Redemption Agreement and promissory note between the Company and Inversiones Santa Catalina, N.V.** 10.18 Amendment dated as of August 1, 1997, by and between the Company and Wayne Adams and Lovella Adams to Promissory Note and Warrant dated February 2, 1996.*** 10.19 Amendment dated as of August 1, 1997, by and between the Company and Dale Bertling to Promissory Note and Warrant dated February 2, 1996.*** 10.20 Rescission Agreement dated as of February 6, 1997, between the Company and Colonial Electric Consulting Corp.** 10.21 Amendment dated June 18, 1997 to Rescission Agreement between the Company and Colonial Electric Consulting Corp.** 10.22 Agreement dated March 15, 1996 between Corbina and ZAO Rustelnet.** 10.23 Agreement dated December 21, 1995 Between Corbina and MACOMNET.** 10.24 Agreement between Sprint Networks and Corbina.** 10.25 Amendment No. 3 dated as of June 19, 1997 between the Company and Michael Ciasulli to that certain Promissory Note dated November 3, 1994.**
II-5 132
EXHIBIT NO. DESCRIPTION - ------- ----------------------------------------------------------------------------------- 10.26 Amendment No. 3 dated as of June 19, 1997 between the Company and Per Eric Dahl to that certain Promissory Note dated November 3, 1994.** 10.27 Amendment No. 3 dated as of June 19, 1997 between the Company and Larry Dunn to that certain Promissory Note dated November 3, 1994.** 10.28 Amendment No. 3 dated as of June 19, 1997 between the Company and Slate Daiagi Realty, Inc. to that certain Promissory Note dated November 3, 1994.** 10.29 License issued to ZAO Investelektrosvyaz by the Ministry of Communications of the Russian Federation.** 10.30 Agreement between Corbina and ZAO Kortek.** 10.31 Amendment dated as of August 1, 1997, by and between the Company and Christopher Cirillo to Promissory Note and Warrant dated February 2, 1996.*** 10.32 Amendment dated as of August 1, 1997, by and between the Company and Jerome and Ann Coppola to Promissory Note and Warrant dated February 2, 1996.*** 10.33 Amendment dated as of August 1, 1997, by and between the Company and Boyd Corliss to Promissory Note and Warrant dated February 2, 1996.*** 10.34 Amendment dated as of August 1, 1997, by and between the Company and Richard David to Promissory Note and Warrant dated August 5, 1997.*** 10.35 Amendment dated as of August 1, 1997, by and between the Company and Kenneth A. DeLonge to Promissory Note and Warrant dated May 5, 1997.*** 10.36 Amendment dated as of August 1, 1997, by and between the Company and Leon Feldan to Promissory Note and Warrant dated February 2, 1996.*** 10.37 Amendment dated as of August 1, 1997, by and between the Company and David Hanos, Jr. to Promissory Note and Warrant dated February 2, 1996.*** 10.38 Amendment dated as of August 1, 1997, by and between the Company and Bernard Kolkana to Promissory Note and Warrant dated February 2, 1996.*** 10.39 Amendment dated as of August 1, 1997, by and between the Company and Charles Leithauser to Promissory Note and Warrant dated February 2, 1996.*** 10.40 Amendment dated as of August 1, 1997, by and between the Company and E. Dale Miller to Promissory Note and Warrant dated February 2, 1996.*** 10.41 Amendment dated as of August 1, 1997, by and between the Company and Howard Pack to Promissory Notes and Warrant dated February 2, 1996.*** 10.42 Amendment dated as of August 1, 1997, by and between the Company and The Royal Bank of Scotland International Limited to Promissory Note and Warrant dated May 5, 1997.*** 10.43 Amendment dated as of August 1, 1997, by and between the Company and Harold H. Singer to Promissory Note and Warrant dated February 2, 1996.*** 10.44 Amendment dated as of August 1, 1997, by and between the Company and Thomas Zenick to Promissory Note and Warrant dated February 2, 1996.*** 11 Computations of Earnings (Loss) Per Share.*** 21 Subsidiaries of the Company.*** 23.1 Consent of Independent Auditors (See Part II, Page 10). 23.2 Consent of Independent Auditors (See Part II, Page 10). 23.3 Consent of Counsel (See Part II, Page 10).
II-6 133
EXHIBIT NO. DESCRIPTION - ------- ----------------------------------------------------------------------------------- 23.4 Consent of Counsel (See Part II, Page 10). 24 Power of Attorney.*
- --------------- * Filed on March 28, 1997 as an exhibit to the Company's Registration Statement on Form SB-2 (Reg. No. 333-24177). ** Filed on July 3, 1997 as an exhibit to Amendment No. 1 to the Company's Registration Statement on Form SB-2. *** Filed on September 16, 1997 as an Exhibit to Amendment No. 2 to the Company's Registration Statement on Form SB-2. 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. II-7 134 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 (Section 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. II-8 135 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 amendment to its registration statement to be signed on its behalf by the undersigned, in the City, County and State of New York on the 29th day of October, 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 Amendment to the Registration Statement was signed by the following persons in the capacities and on the dates stated.
SIGNATURE TITLE DATE - --------------------------------------------- ------------------------------ ----------------- /s/ JACK W. BUECHNER Director, Chairman of the October 29, 1997 - --------------------------------------------- Board Jack W. Buechner /s/ RONALD G. NATHAN Director, President, Treasurer October 29, 1997 - --------------------------------------------- (Principal Executive and Ronald G. Nathan Principal Financial and Accounting Officer) /s/ RICHARD N. HOLWILL Director October 29, 1997 - --------------------------------------------- Richard N. Holwill /s/ STEVEN D. DREYER Director, Secretary October 29, 1997 - --------------------------------------------- Steven D. Dreyer
II-9 136 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 Amendment No. 3 to the Registration Statement (Form SB-2, No. 333-24177) and related prospectus of Russian Wireless Telephone Company, Inc. dated October 29, 1997. ERNST & YOUNG LLP New York, New York October 29, 1997 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 Amendment No. 3 to the Registration Statement (Form SB-2, No. 333-24177) and related prospectus of Russian Wireless Telephone Company, Inc. dated October 29, 1997. ERNST & YOUNG (CIS) LIMITED Moscow, Russian Federation October 29, 1997 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 amendment to the Registration Statement. HALL DICKLER KENT FRIEDMAN & WOOD LLP New York, New York October 29, 1997 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 amendment to the Registration Statement. IRINA IGITOVA Moscow, Russian Federation October 29, 1997 II-10 137 EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION - ------- -------------------------------------------------------------------------------- 1.1 -- Form of Underwriting Agreement. 1.2 -- Form of Agreement Among Underwriters. 1.3 -- Form of Selected Dealers Agreement. 4.3 -- Form of Second Private Placement Warrant. 4.4 -- Form of Third Private Placement Warrant. 4.6 -- Form of Representative's Warrant. 4.7 -- Custodial Agreement and Power of Attorney. 5 -- Opinion of Hall Dickler Kent Freidman & Wood, regarding the legality of the Common Stock. 23.1 -- Consent of Independent Auditors (See Part II, Page 10). 23.2 -- Consent of Independent Auditors (See Part II, Page 10). 23.3 -- Consent of Counsel (See Part II, Page 10). 23.4 -- Consent of Counsel (See Part II, Page 10).
EX-1.1 2 UNDERWRITING AGREEMENT 1 EXHIBIT 1.1 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. 1,650,000 Shares of Common Stock UNDERWRITING AGREEMENT __________ ___, 1997 J.W. Barclay & Co., Inc. As Representative of the several Underwriters One Battery Park Plaza New York, New York 10004 Dear Sirs: Russian Wireless Telephone Company, Inc., a Delaware corporation (the "Company"), and the stockholder listed in Schedule A (the "Selling Stockholder") of this Underwriting Agreement (the "Agreement") hereby confirm their agreement with the Underwriters named in Schedule B of the Agreement (the "Underwriters"), for whom you are acting as representative (the "Representative"), as follows: 1. Description of Stock. The Company proposes to issue and sell and the Selling Stockholder proposes to sell to the Underwriters an aggregate of 1,650,000 shares (the "Stock") of common stock, $.01 par value per share (the "Common Stock") of the Company, of which 1,620,000 shares are being sold by the Company and 30,000 shares by the Selling Stockholder. In addition, the Company proposes to grant to the Underwriters (or to the Representative, individually) an option to purchase up to 247,500 additional shares of Common Stock (the "Additional Stock"). The offering of Stock and Additional Stock contemplated hereby may sometimes be referred to as the "Offering." (a) Representative's Warrants. The Company will sell to the Representative, for $10, a warrant to purchase one share of Common Stock for each ten shares of Common Stock sold in this Offering excluding the Additional Stock (a maximum of 165,000 shares of Common Stock) at a price equal to $11.55 per share of Common Stock (the "Representative's Warrants," and collectively with the Common 2 Stock underlying the Representative's Warrants, the "Representative's Securities"). The Representative's Securities shall be non-exercisable and non-transferrable (other than to (i) officers of the Underwriters, and (ii) members of the selling group and their offices or partners) for a period of 12 months following the Effective Date. Thereafter, they are exercisable and transferrable for a period of four years. The Representative's Securities shall be registered for sale to the public and shall be included in the Registration Statement filed in connection with the Offering. 2. Representations and Warranties of the Company. A. The Company represents and warrants to the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission"), a registration statement on Form SB-2 (File No. 333-24177), including any related preliminary prospectus ("Preliminary Prospectus"), for the registration of the Securities under the Securities Act of 1933 (the "Act"). The Company will file further amendments to said registration statement in the form to be delivered to you and will not, before the registration statement becomes effective, file any other amendment thereto to which you shall have objected in writing after having been furnished with a copy thereof. Except as the context may otherwise require, such registration statement, as amended, on file with the Commission at the time the registration statement becomes effective (including the prospectus, financial statements, exhibits and all other documents filed as a part thereof or incorporated therein), is hereinafter called the "Registration Statement" and the prospectus, in the form filed with the Commission pursuant to Rule 424(b) of the General Rules and Regulations of the Commission under the Act (the "Regulations") or, if no such filing is made, the definitive prospectus used in the Offering, is hereinafter called the "Prospectus." The Company has delivered to you copies of each Preliminary Prospectus as filed with the Commission and has consented to the use of such copies for purposes permitted by the Act. (b) The Commission has not issued any orders preventing or suspending the use of any Preliminary Prospectus, and each Preliminary Prospectus has conformed in all material respects with the requirements of the Act and has not included any untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, subject to the provisions set forth below and except as such untrue statement or omission has been cured in the a subsequent preliminary prospectus or in the final prospectus. (c) When the Registration Statement becomes effective under the Act and at all times subsequent thereto including the Closing Date (hereinafter defined) and the Option Closing Date (hereinafter defined) and for such longer periods as in the opinion of counsel for the Underwriters, a Prospectus is required to be delivered in connection with the sale of the Securities by the Underwriters, the Registration Statement and Prospectus, and any amendment thereof or supplement thereto, will contain all material statements which are required to be stated therein in accordance with the Act and the Regulations, and will in all material respects conform -2- 3 to the requirements of the Act and the Regulations, and neither the Registration Statement nor the Prospectus, nor any amendment or supplement thereto, will contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that this representation and warranty does not apply to statements or omissions made in reliance upon and in conformity with written information furnished to the Company by you, for use in connection with the preparation of the Registration Statement or Prospectus, or in any amendment thereof or supplement thereto. It is understood that the statements set forth under the heading "Underwriting" in the Prospectus with respect to (i) the amounts of the selling concession and reallowance; (ii) the identity of counsel to the Underwriters under the heading "Legal Matters;" and (iii) the information concerning the NASD affiliation of the Underwriters constitute for purposes of this Section the only information furnished in writing by or on behalf of the Underwriters for inclusion in the Registration Statement and Prospectus, as the case may be. (d) The Company and each of its subsidiaries (each a "Subsidiary") are, and at the Closing Date and the Option Closing Date will be, corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of their incorporation. The Company and each of its Subsidiaries are duly qualified or licensed and in good standing as foreign corporations in each jurisdiction in which their ownership or leasing of any properties or the character of their operations requires such qualification or licensing, except those jurisdictions in which the failure to so qualify would not have a material adverse effect. The Company and each of its Subsidiaries have all requisite corporate powers and authority, and, except as set forth in the Registration Statement, the Company and each of its Subsidiaries and their employees' have all material and necessary authorizations, approvals, orders, licenses, certificates and permits of and from all governmental regulatory officials and bodies to own or lease their properties and conduct their businesses as described in the Prospectus, and the Company and each of its Subsidiaries are doing business and have been doing business during the period described in the Registration Statement in compliance with all such material authorizations, approvals, orders, licenses, certificates and permits and all material federal, state and local laws, rules and regulations concerning the businesses in which the Company or its Subsidiaries are engaged. The disclosures in the Registration Statement concerning the effects of federal, state and local regulation on the Company's or its Subsidiaries' businesses as currently conducted and as contemplated are correct in all material respects and do not omit to state a material fact. The Company has all corporate power and authority to enter into this Agreement and carry out the provisions and conditions hereof, and all consents, authorizations, approvals and orders required in connection therewith have been obtained or will have been obtained prior to the Closing Date. (e) This Agreement has been duly and validly authorized and executed by the Company. The Stock, the Representative's Warrants to be issued and sold by the Company pursuant to this Agreement and the Common Stock issuable upon exercise of the Representative's Warrants (the "Representative's Warrant Shares") and payment therefor, have been duly authorized (and, in the case of the Representative's Warrant Shares, have been duly -3- 4 reserved for issuance) and, when issued and paid for in accordance with this Agreement, will be validly issued, fully paid and non-assessable the Common Stock, Representative's Warrants, Additional Common Stock and Representative's Warrant Shares are not and will not be subject to the preemptive rights of any stockholder of the Company and conform and at all times up to and including their issuance will conform in all material respects to all statements with regard thereto contained in the Registration Statement and Prospectus; and all corporate action required to be taken for the authorization, issuance and sale of the Common Stock and Representative's Warrants has been taken, and this Agreement constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, to issue and sell, upon exercise in accordance with the terms thereof, the number and kind of securities called for thereby. (f) The consummation of the transactions contemplated by this Agreement and the fulfillment of the terms hereof will not result in a breach or violation of any of the terms or provisions of, or constitute a default under, the Certificate of Incorporation, as amended, or Bylaws of the Company or any of its Subsidiaries or of any evidence of indebtedness, lease, contract or other agreement or instrument to which the Company or any of its Subsidiaries is a party or by which the Company or any of its Subsidiaries or any of their properties is bound, or under any applicable law, rule, regulation, judgment, order or decree of any government, professional advisory body, administrative agency or court, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or their properties, or result in the creation or imposition of any lien, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries; and no consent, approval, authorization or order of any court or governmental or other regulatory agency or body is required for the consummation by the Company or any of its Subsidiaries of the transactions on their part herein contemplated, except such as may be required under the Act or under state securities or blue sky laws, except where a breach, violation or failure to obtain such consent would not have a material adverse effect upon the business or operation of the Company or its Subsidiaries. (g) Subsequent to the date hereof, and prior to the Closing Date and the Option Closing Date, the Company will not issue or acquire any equity securities except that the Company may make short-term investments as contemplated in the "Use of Proceeds" section of the Prospectus. Except as described in the Registration Statement, the Company does not have, and at the Closing Date and at the Option Closing Date will not have, outstanding any options to purchase or rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its Preferred Stock, Common Stock or any such options, warrants, convertible securities or obligations. (h) The financial statements and notes thereto included in the Registration Statement and the Prospectus fairly present the financial position and the results of operations of the Company at the respective dates and for the respective periods to which they apply; and such financial statements have been prepared in conformity with generally accepted accounting principles, consistently applied throughout the periods involved. -4- 5 (i) Except as set forth in the Registration Statement, the Company and each Subsidiary are not, and at the Closing Date and at the Option Closing Date will not be, in violation or breach of, or default in, the due performance and observance of any term, covenant or condition of any indenture, mortgage, deed of trust, note, loan or credit agreement, or any other agreement or instrument evidencing an obligation for borrowed money, or any other agreement or instrument to which the Company or any of its Subsidiaries are a party or by which the Company or any of its Subsidiaries may be bound or to which any of the property or assets of the Company or any of its Subsidiaries are subject, which violations, breaches, default or defaults, singularly or in the aggregate, would have a material adverse effect on the Company or any of its Subsidiaries. The Company and each of its Subsidiaries have not and will not have taken any action in material violation of the provisions of the Certificate of Incorporation, as amended, or the Bylaws of the Company or its Subsidiaries or any statute or any order, rule or regulation of any court or regulatory authority or governmental body having jurisdiction over or application to the Company or its Subsidiaries, their businesses or properties. (j) The Company and each of its Subsidiaries have, and at the Closing Date and at the Option Closing Date will have, good and marketable title to all properties and assets described in the Prospectus as owned by them, free and clear of all liens, charges, encumbrances, claims, security interests, restrictions and defects of any material nature whatsoever, except such as are described or referred to in the Prospectus and liens for taxes not yet due and payable. All of the material leases and subleases under which the Company or any of its Subsidiaries are the lessor or sublessor of properties or assets or under which the Company or any of its Subsidiaries hold properties or assets as lessee as described in the Prospectus are, and will on the Closing Date and the Option Closing Date be, in full force and effect, and except as described in the Prospectus, the Company and its Subsidiaries are not and will not be in default in respect to any of the terms or provisions of any of such leases or subleases (which would have a material adverse effect on the business, business prospects or operations of the Company or any of its Subsidiaries taken as a whole), and no claim has been asserted by anyone adverse to rights of the Company or any of its Subsidiaries as lessor, sublessor, lessee or sublessee under any of the leases or subleases mentioned above, or affecting or questioning the right of the Company or any of its Subsidiaries to continue possession of the leased or subleased premises or assets under any such lease or sublease except as described or referred to in the Prospectus, and the Company and each of its Subsidiaries owns or leases all such properties as are necessary to its operations as now conducted and, except as otherwise stated in the Prospectus, as proposed to be conducted set forth in the Prospectus (which would have a material adverse effect on the business, business prospects or operations of the Company or any of its Subsidiaries taken as a whole). (k) The authorized, issued and outstanding capital stock of the Company as of June 30, 1997 is as set forth in the Prospectus under "Capitalization"; the shares of issued and outstanding capital stock of the Company set forth thereunder have been duly authorized, validly issued and are fully paid and non-assessable; except as set forth in the Prospectus, no options, warrants or other rights to purchase, agreements or other obligations to issue, or agreements or other rights to convert any obligation into, any shares of capital stock of the -5- 6 Company have been granted or entered into by the Company; and the Common Stock, the Warrants and all such options and warrants conform in all material respects, to all statements relating thereto contained in the Registration Statement and Prospectus. (l) Except as described in the Prospectus, the Company does not own or control any capital stock or securities of, or have any proprietary interest in, or otherwise participate in any other corporation, partnership, joint venture, firm, association or business organization; provided, however, that this provision shall not be applicable to the investment, if any, of the net proceeds from the sale of the Securities sold by the Company in certificates of deposits, savings deposits, short-term obligations of the United States Government, money market instruments or other short-term investments. (m) Ernst & Young LLP, and Ernst & Young (CIS) Limited, who have given their reports on certain financial statements filed and to be filed with the Commission as a part of the Registration Statement, which are incorporated in the Prospectus, are with respect to the Company, independent public accountants as required by the Act and the Rules and Regulations. (n) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, and except as may otherwise be indicated or contemplated herein or therein, the Company has not (i) issued any securities or incurred any liability or obligation, direct or contingent, for borrowed money; or (ii) entered into any transaction other than in the ordinary course of business; or (iii) declared or paid any dividend or made any other distribution on or in respect to its capital stock. (o) There is no litigation or governmental proceeding pending or to the knowledge of the Company or any Subsidiary threatened against, or involving the properties or business of the Company or any Subsidiary which might materially adversely affect the value, assets or the operation of the properties or the business of the Company or any Subsidiary, except as referred to in the Prospectus. Further, except as referred to in the Prospectus, there are no pending actions, suits or proceedings related to environmental matters or related to discrimination on the basis of age, sex, religion or race, nor is the Company or any Subsidiary charged with or, to its knowledge, under investigation with respect to any violation of any statutes or regulations of any regulatory authority having jurisdiction over its business or operations, and no labor disturbances by the employees of the Company or any Subsidiary exist or, to the knowledge of the Company or any Subsidiary, have been threatened. (p) The Company has, and at the Closing Date and at the Option Closing Date will have, filed all necessary federal, state and foreign income and franchise tax returns or has requested extensions thereof (except in any case where the failure to so file would not have a material adverse effect on the Company), and has paid all taxes which it believes in good faith were required to be paid by it except for any such tax that currently is being contested in good faith or as described in the Prospectus. -6- 7 (q) The Company has not at any time (i) made any contribution to any candidate for political office, or failed to disclose fully any such contribution, in violation of law, or (ii) made any payment to any state, federal, foreign governmental or professional regulatory agency, officer or official or other person charged with similar public, quasi-public or professional regulatory duties, other than payments or contributions required or allowed by applicable law. (r) Except as set forth in the Registration Statement, to the knowledge of the Company, neither the Company nor any officer, director, employee or agent of the Company has made any payment or transfer of any funds or assets of the Company or conferred any personal benefit by use of the Company's assets or received any funds, assets or personal benefit in violation of any law, rule or regulation, which is required to be stated in the Registration Statement or necessary to make the statements therein not misleading. (s) On the Closing Date and on the Option Closing Date, all transfer or other taxes, if any (other than income tax) which are required to be paid, and are due and payable, in connection with the sale and transfer of the Stock by the Company to the Underwriters will have been fully paid or provided for by the Company as the case may be, and all laws imposing such taxes will have been fully complied with in all material respects. (t) There are no contracts or other documents of the Company which are of a character required to be described in the Registration Statement or Prospectus or filed as exhibits to the Registration Statement which have not been so described or filed. (u) The Company will apply the net proceeds from the sale of the Stock sold by it for the purposes and in the manner set forth in the Registration Statement and Prospectus under the heading "Use of Proceeds." (v) The Company maintains a system of internal accounting controls sufficient to provide reasonable assurance that (1) transactions are executed in accordance with management's general or specified authorizations; (2) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (3) access to assets is permitted only in accordance with management's general or specific authorizations; and (4) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (w) Except as set forth in the Prospectus, no holder of any securities of the Company has the right to require registration of any securities because of the filing or effectiveness of the Registration Statement. (x) The Company has not taken and at the Closing Date will not have taken, directly or indirectly, any action designed to cause or result in, or which has constituted or -7- 8 which might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock or the Warrants to facilitate the sale or resale of such securities. (y) To the Company's knowledge, there are no claims for services in the nature of a finder's origination fee with respect to the sale of the Securities hereunder, except as set forth in the Prospectus. (z) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to Underwriters was, when made, or as of the Closing Date or as of the Option Closing Date will be materially inaccurate, untrue or incorrect. B. The Selling Stockholder represents and warrants to the Underwriters that: (a) It (1) has the full right, power and authority to execute and deliver this Agreement, the Power of Attorney, and the Custody Agreement, hereinafter referred to, (2) is, and on the Closing Date will be, the owner of the Selling Stockholder's Common Stock ("Stock") to be sold pursuant to the terms hereof, free and clear of all liens, charges, encumbrances and restrictions, (3) has paid the full purchase price required to be paid for such Stock, (4) on the Closing Date will have paid or provided for all stock transfer or other taxes (other than income taxes) required to be paid by such Selling Stockholder in connection with the sale and transfer of such Selling Stockholder's Stock and all laws imposing such taxes will have been fully complied with, and (5) has, and on the Closing Date will have, the full legal right, power and authority to sell, transfer and deliver such Selling Stockholder's Stock hereunder and covey good and marketable title to such Selling Stockholder's Stock, free and clear of all liens, charges, encumbrances, equities, claims and restrictions, whatsoever. (b) This Agreement, the Power of Attorney and the Custody Agreement have been duly authorized, executed and delivered by the Selling Stockholder. This Agreement, the Power of Attorney and the Custody Agreement constitute the valid and binding agreements of the Selling Stockholder enforceable in accordance with their terms. (c) Neither the execution and delivery of this Agreement, the Power of Attorney, nor the Custody Agreement nor the consummation of the transactions herein or therein contemplated nor the compliance with the terms hereof or thereof by the Selling Stockholder will conflict with, or result in a breach of any of the terms or provisions of, or constitute a default under, any indenture, mortgage, deed of trust, purchase agreement or other agreement or instrument to which the Selling Stockholder is a party or by which the Selling Stockholder is bound and no consent, approval, authorization or order of any court or governmental agency or body is required for the consummation by the Selling Stockholder of the transactions on the Selling Stockholder's part herein contemplated, except such as may be required under the Act or under state securities or blue sky laws. -8- 9 (d) The Selling Stockholder has not, and at the Closing Date will not have, taken, and agrees that it will not take, directly or indirectly, any action to cause or result in, or which has constituted, or might reasonably be expected to constitute, the stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of any of the Stock. Other than as permitted by the Act and the rules and regulations thereunder, the Selling Stockholder has not distributed and will not distribute any Preliminary Prospectus, the Prospectus or any other offering material in connection with the offering and sale of the Stock. (e) Certificates in negotiable form representing the Selling Stockholder's Stock to be sold by it have been placed in custody under the Custody Agreement, in the form heretofore furnished to the Selling Stockholder, duly executed and delivered by the Selling Stockholder to Hall Dickler Kent Friedman & Wood, LLP (the "Custodian"), and the Selling Stockholder has duly executed and delivered a Power of Attorney, in the form heretofore furnished to you, appointing Steven D. Dreyer as the Selling Stockholder's attorney-in-fact (the "Attorney-in-Fact") with authority to execute and deliver this Agreement on behalf of the Selling Stockholder, to authorize the delivery of the Selling Stockholder's Stock to be sold by the Selling Stockholder hereunder and otherwise to act on behalf of the Selling Stockholder in connection with the transactions contemplated by this Agreement and the Custody Agreement. (f) The Selling Stockholder's Stock represented by the certificates held in custody for the Selling Stockholder under the Custody Agreement are subject to the interests of the Underwriters hereunder, and the arrangements made by the Selling Stockholder for such custody, as well as the appointment by the Selling Stockholder of the Attorney-in-Fact, are, to that extent, irrevocable. The Selling Stockholder specifically agrees that its obligations hereunder shall not be terminated by operation of law, whether by the death or incapacity of such Selling Stockholder or by the occurrence of any other event. 3. Covenants of the Company. The Company covenants and agrees that: (a) It will deliver to the Representative, without charge, two conformed copies of each Registration Statement and of each amendment or supplement thereto, including all financial statements and exhibits. (b) The Company has delivered to each of the Underwriters, and each of the Selected Dealers (as hereinafter defined) without charge, as many copies as have been requested of each Preliminary Prospectus heretofore filed with the Commission in accordance with and pursuant to the Commission's Rule 430 under the Act and will deliver to the Underwriters and to others whose names and addresses are furnished by the Underwriters or a Selected Dealer, without charge, on the Effective Date of the Registration Statement, and thereafter from time to time during such reasonable period as you may request if, in the opinion of counsel for the Underwriters, the Prospectus is required by law to be delivered in connection with sales by the Underwriters or a dealer, as many copies of the Prospectus (and, in the event of any amendment -9- 10 of or supplement to the Prospectus, of such amended or supplemented Prospectus) as the Underwriters may request for the purposes contemplated by the Act. The Company will take all necessary actions to furnish to whomever directed by the Underwriters, when and as requested by the Underwriters, all necessary documents, exhibits, information, applications, instruments and papers as may be reasonably required or, in the opinion of counsel to the Underwriters desirable, in order to permit or facilitate the sale of the Securities. (c) The Company has authorized the Underwriters to use, and make available for use by prospective dealers, the Preliminary Prospectus, and authorizes the Underwriters, all dealers selected by you in connection with the distribution of the Securities (the "Selected Dealers") to be purchased by the Underwriters and all dealers to whom any of such Securities may be sold by the Underwriters or by any Selected Dealer, to use the Prospectus, as from time to time amended or supplemented, in connection with the sale of the Securities in accordance with the applicable provisions of the Act, the applicable Regulations and applicable state law, until completion of the distribution of the Securities and for such longer period as you may request if the Prospectus is required under the Act, the applicable Regulations or applicable state law to be delivered in connection with sales of the Securities by the Underwriters or the Selected Dealers. (d) The Company will use its best efforts to cause the Registration Statement to become effective and will notify the Representative immediately, and confirm the notice in writing: (i) when the Registration Statement or any post-effective amendment thereto becomes effective; (ii) of the issuance by the Commission of any stop order or of the initiation, or to the best of the Company's knowledge, the threatening, of any proceedings for that purpose; (iii) the suspension of the qualification of the Securities and the Representative's Warrants, or underlying securities, for offering or sale in any jurisdiction or of the initiating, or to the best of the Company's knowledge the threatening, of any proceeding for that purpose; and (iv) of the receipt of any comments from the Commission. If the Commission shall enter a stop order at any time, the Company will make every reasonable effort to obtain the lifting of such order at the earliest possible moment. (e) During the time when a prospectus is required to be delivered under the Act, the Company will comply with all requirements imposed upon it by the Act and the Securities Exchange Act of 1934 (the "Exchange Act"), as now and hereafter amended and by the Regulations, as from time to time in force, as necessary to permit the continuance of sales of or dealings in the Securities in accordance with the provisions hereof and the Prospectus. If at any time when a prospectus relating to the Securities is required to be delivered under the Act, any event shall have occurred as a result of which, in the opinion of counsel for the Company or counsel for the Underwriters, the Prospectus as then amended or supplemented includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it is necessary at any time to amend the Prospectus to comply with the Act, the Company will notify you promptly and prepare and file with the -10- 11 Commission an appropriate amendment or supplement in accordance with Section 10 of the Act and will furnish to you copies thereof. (f) The Company will endeavor in good faith, in cooperation with you, at or prior to the time the Registration Statement becomes effective, to qualify the Securities for offering and sale under the securities laws or blue sky laws of such jurisdictions as you may reasonably designate. In each jurisdiction where such qualification shall be effected, the Company will, unless you agree that such action is not at the time necessary or advisable, file and make such statements or reports at such times as are or may reasonably be required by the laws of such jurisdiction. (g) The Company will make generally available to its security holders, as soon as practicable, but in no event later than the first day of the fifteenth full calendar month following the Effective Date of the Registration Statement, an earnings statement of the Company, which will be in reasonable detail but which need not be audited, covering a period of at least twelve months beginning after the Effective Date of the Registration Statement, which earnings statements shall satisfy the requirements of Section 11(a) of the Act and the Regulations as then in effect. The Company may discharge this obligation in accordance with Rule 158 of the Regulations. (h) During the period of five years commencing on the Effective Date of the Registration Statement, the Company will furnish to its stockholders an annual report (including financial statements audited by its independent public accountants), in reasonable detail, and, at its expense, furnish each of the Underwriters (i) within 90 days after the end of each fiscal year of the Company, a consolidated balance sheet of the Company and its consolidated subsidiaries and a separate balance sheet of each subsidiary of the Company the accounts of which are not included in such consolidated balance sheet as of the end of such fiscal year, and consolidated statements of operations, stockholders' equity and cash flows of the Company and its consolidated subsidiaries and separate statements of operations, stockholders' equity and cash flows of each of the subsidiaries of the Company the accounts of which are not included in such consolidated statements, for the fiscal year then ended all in reasonable detail and all certified by independent accountants (within the meaning of the Act and the Regulations), (ii) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, similar balance sheets as of the end of such fiscal quarter and similar statements of operations, stockholders' equity and cash flows for the fiscal quarter then ended, all in reasonable detail, and subject to year end adjustment, all certified by the Company's principal financial officer or the Company's principal accounting officer as having been prepared in accordance with generally accepted accounting principles applied on a consistent basis, (iii) as soon as available, each report furnished to or filed with the Commission or any securities exchange and each report and financial statement furnished to the Company's shareholders generally and (iv) as soon as available, such other material as the Representative may from time to time reasonably request regarding the financial condition and operations of the Company. -11- 12 (i) For a period of eighteen months from the Closing Date, the Company, at its expense, shall cause its regularly engaged independent certified public accountants to review (but not audit), the Company's financial statements for each of the first three quarters prior to the announcement of quarterly financial information, the filing of the Company's 10-Q quarterly report and the mailing of quarterly financial information to stockholders. (j) Prior to the Closing Date or the Option Closing Date, the Company will not issue, directly or indirectly, without your prior written consent and that of counsel for the Representative, any press release or other public announcement or hold any press conference with respect to the Company or its activities with respect to this Offering. (k) The Company will deliver to you prior to filing, any amendment or supplement to the Registration Statement or Prospectus proposed to be filed after the Effective Date of the Registration Statement and will not file any such amendment or supplement to which you shall reasonably object after being furnished such copy. (l) During the period of 120 days commencing on the date hereof, the Company will not at any time take, directly or indirectly, any action designed to, or which will constitute or which might reasonably be expected to cause or result in stabilization or manipulation of the price of the Securities to facilitate the sale or resale of any of the Securities. (m) The Company will apply the net proceeds from the Offering received by it in the manner set forth under "Use of Proceeds" in the Prospectus. (n) Counsel for the Company, the Company's accountants, and the officers and directors of the Company will, respectively, furnish the opinions, the letters and the certificates referred to in subsections of Paragraph 9 hereof, and, in the event that the Company shall file any amendment to the Registration Statement relating to the offering of the Securities or any amendment or supplement to the Prospectus relating to the offering of the Securities subsequent to the Effective Date of the Registration Statement, such counsel, such accountants, such officers and directors, respectively, will, at the time of such filing or at such subsequent time as you shall specify, so long as securities being registered by such amendment or supplement are being underwritten by the Underwriters, furnish to you such opinions, letters and certificates, each dated the date of its delivery, of the same nature as the opinions, the letters and the certificates referred to in said Paragraph 9, as you may reasonably request, or, if any such opinion or letter or certificate cannot be furnished by reason of the fact that such counsel or such accountants or any such officer or director believes that the same would be inaccurate, such counsel or such accountants or such officer or director will furnish an accurate opinion or letter or certificate with respect to the same subject matter. (o) The Company will comply with all of the provisions of any undertakings contained in the Registration Statement in all material respects. -12- 13 (p) The Company will reserve and keep available for issuance that maximum number of its authorized but unissued shares of Common Stock which are issuable upon exercise of the Representative's Warrants outstanding from time to time. (q) So long as any of the Warrants remain outstanding, the Company shall continue to employ the services of a firm of independent certified public accountants reasonably acceptable to the Representative in connection with the preparation of the financial statements to be included in any registration statement to be filed by the Company hereunder, or any amendment or supplement thereto (it being understood that Ernst & Young, LLP is acceptable to the Representative). During the same period, the Company shall employ the services of a law firm(s) acceptable to the Representative in connection with all legal work of the Company, including the preparation of any registration statement to be filed by the Company hereunder, or any amendment or supplement thereto (it being understood that Hall Dickler Kent Friedman & Wood, LLP is acceptable to the Representative). (r) The Company agrees that it will, upon the Closing Date, for a period of no less than five (5) years, engage a designee of the Representative as an advisor (the "Advisor") to its Board of Directors where such Advisor shall attend meetings of the Board, receive all notices and other correspondence and communications sent by the Company to members of its Board of Directors and shall be entitled to receive compensation therefor equal to the entitlement of all non-employee directors. Such Advisor shall also be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings including, but not limited to, food, lodging, and transportation. The Company further agrees that during said five (5) year period, it shall schedule no less than four (4) formal and "in person" meetings of its Board of Directors in each such year and fifteen (15) days advance notice of such meetings shall be given to the Advisor. Further, during such five (5) year period, the Company shall give notice to the Representative with respect to any proposed acquisitions, mergers, reorganizations or other similar transactions. In lieu of the Representative's right to designate an Advisor, the -13- 14 Representative shall have the right during such five-year period, in its sole discretion, to designate one person for election as a Director of the Company and the Company will utilize its best efforts to obtain the election of such person who shall be entitled to receive the same compensation, expense reimbursements and other benefits set forth above. The Company agrees to indemnify and hold the Underwriters and such Advisor or Director harmless against any and all claims, actions, damages, costs and expenses, and judgments arising solely out of the attendance and participation of your designee at any such meeting described herein. In the event the Company maintains a liability insurance policy affording coverage for the acts of its of officers and directors, it agrees, if possible, to include the Representative's designee as an insured under such policy. (s) Upon the Closing Date, the Company shall have entered into an agreement with the Representative in form reasonably satisfactory to the Representative (the "Consulting Agreement"), pursuant to which the Representative will be retained as a management and financial consultant and will be paid a fee of $125,000, all of which shall be paid upon the Closing Date. (t) The Company's Common Stock shall be listed on the OTC Electronic Bulletin Board not later than the Effective Date, at which time at least two (2) broker-dealers shall be approved pursuant to Rule 15c2-11 of the Exchange Act to make a market in the Stock. The Company shall thereafter use its best efforts to expeditiously list its Common Stock on the Nasdaq SmallCap Market ("Nasdaq"), and upon listing on Nasdaq, maintain such listing for at least five years from the date of this Agreement. (u) The Company will apply for listing in Standard and Poors Corporation Reports or Moodys OTC Guide and shall use its best efforts to have the Company included in such publications for at least five years from the Closing Date. (v) For a period of twenty-four (24) months from the Closing Date, no officer, director or holder of any securities of the Company (other than shares that are currently publicly traded, in the case of stockholders who are not officers, directors or 5% or greater stockholders) prior to the Offering will, directly or indirectly, offer, sell (including any short sale), grant any option for the sale of, acquire any option to dispose of, or otherwise dispose of any shares of Common Stock, including shares of Common Stock issuable upon exercise of options, warrants or any convertible securities of the Company, without the prior written consent of the Representative, other than as set forth in the Registration Statement. In order to enforce this covenant, the Company shall impose stop-transfer instructions with respect to the securities owned by every stockholder prior to the Offering until the end of such period (subject to any exceptions to such limitation on transferability set forth in the Registration Statement). If necessary to comply with any applicable Blue-sky Law, the shares held by such stockholders will be escrowed with counsel for the Company or otherwise as required. -14- 15 (w) Except for the issuance of shares of capital stock by the Company in connection with a dividend, recapitalization, reorganization or similar transactions or as result of the exercise of warrants or options disclosed in or issued or granted pursuant to plans disclosed in the Registration Statement, the Company shall not, for a period of twenty-four (24) months following the Closing Date, directly or indirectly, offer, sell, issue or transfer any shares of its capital stock, or any security exchangeable or exercisable for, or convertible into, shares of the capital stock or register any of its capital stock (under any form of registration statement, including Form S-8), without the prior written consent of the Representative. Options granted pursuant to plans must be exercisable at the fair market value on the date of grant. (x) For a period of three years from the Effective Date, the Company shall maintain key person life insurance payable to the Company on each of the lives of Ronald G. Nathan, its Chief Executive, and Mikhail Leibov, the Chief Executive of Corbina Telecommunications and Comptel Ltd., the Company's subsidiaries, each in the amount of $1,000,000, unless his employment with the Company is earlier terminated. In such event, the Company will obtain a comparable policy on the life of his successor for the balance of such period. (y) The Company will use its best efforts to obtain, as soon after the Closing Date as is reasonably possible, liability insurance covering its officers and directors. (z) The Company agrees that any conflict of interest arising between a member of the Company's Board of Directors and the Company in connection with such Director's dealing with, or obligations to, the Company, shall be resolved by a vote of the majority of the independent members of the Board of Directors. (aa) The Company agrees that it will employ the services of a financial public relations firm acceptable to the Representative for a period of at least twelve months following the Effective Date. (bb) The Company shall deliver to the Representative, no later than December 31, 1997, audited financial statements of the Company as of and for the eleven (11) months ended November 30, 1997. 4. Sale, Purchase and Delivery of Stock: Closing Date. (a) The Company and the Selling Stockholder agree to sell to the Underwriters, and the Underwriters, on the basis of the warranties, representations and agreements of the Company and the Selling Stockholder herein, and subject to the terms and conditions herein, agree to purchase the Stock from the Company and the Selling Stockholder, as the case may be, at a price of $7.00 per share, less an underwriting discount of nine percent (9%) of the offering price. The Underwriters may allow a concession not exceeding $__________ per share of Common Stock to Selected Dealers who are members of the National Association of Securities Dealers, Inc ("NASD"), and to certain foreign dealers. -15- 16 (b) Delivery of the Stock and payment therefor shall be made at 10:00 A.M., New York time on the Closing Date, as hereinafter defined, at the offices of the Representative or such other location as may be agreed upon by you and the Company. Delivery of certificates for the Common Stock (in definitive form and registered in such names and in such denominations as you shall request by written notice to the Company delivered at least two business days prior to the Closing Date), shall be made to you for the account of the Underwriters against payment of the purchase price therefor by certified or bank check or wire transfer payable in New York Clearing House funds to the order of the Company. The Company will make such certificates available for inspection at least two business days prior to the Closing Date at such place as you shall designate. (c) The "Closing Date" shall be __________ __, 1997, or such other date not later than the fourth business day following the effective date of the Registration Statement as you shall determine and advise the Company by at least three full business days' notice, confirmed in writing. (d) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Stock by the Company to the Underwriters shall be borne by the Company. The Company will pay and hold the Underwriters, and any subsequent holder of the Stock, harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to the Underwriters of the Stock or any portions thereof. 5. Sale, Purchase and Delivery of Additional Stock: Option Closing Date. (a) The Company agrees to sell to the Underwriters, and upon the basis of the representations, warranties and agreements of the Company herein contained, subject to the satisfaction of all the terms and conditions of this Agreement, the Underwriters shall have the option (the "Option") to purchase the Additional Stock from the Company, at the same price per Stock as set forth in Paragraph 4(a) above. Additional Stock may be purchased solely for the purpose of covering over-allotments made in connection with the distribution and sale of the Securities. (b) The Option to purchase all or part of the Additional Stock covered thereby is exercisable by you at any time and from time to time before the expiration of a period of 45 calendar days from the Effective Date of the Registration Statement (the "Option Period") by written notice to the Company setting forth the number of shares of Additional Stock for which the Option is being exercised, the name or names in which the certificates for such shares of Additional Stock are to be registered and the denominations of such certificates. Upon each exercise of the Option, the Company shall sell to the Underwriters the aggregate number of shares of Additional Stock specified in the notice exercising such Option. -16- 17 (c) Delivery of the Additional Stock with respect to which Options shall have been exercised and payment therefor shall be made at 10:00 A.M., New York time on the Option Closing Date, as hereinafter defined, at the offices of the Representative or at such other locations as may be agreed upon by you and the Company. Delivery of certificates for shares of Additional Stock shall be made to you for the account of the Underwriters against payment of the purchase price therefor by certified or bank check or wire transfer in New York Clearing House Funds to the order of the Company. The Company will make certificates for shares of Additional Stock to be purchased at the Option Closing Date available for inspection at least two business days prior to such Option Closing Date at such place as you shall designate. (d) The "Option Closing Date" shall be the date not later than five business days after the end of the Option Period as you shall determine and advise the Company by at least three full business days' notice, unless some other time is agreed upon between you and the Company. (e) The obligations of the Underwriters to purchase and pay for Additional Stock at such Option Closing Date shall be subject to compliance as of such date with all the conditions specified in Paragraph 2 herein and the delivery to you of opinions, certificates and letters, each dated such Option Closing Date, substantially similar in scope to those specified in Paragraph 9 herein. (f) The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Additional Stock by the Company to the Underwriters shall be borne by the Company. The Company will pay and hold the Underwriters, and any subsequent holder of Additional Securities, harmless from any and all liabilities with respect to or resulting from any failure or delay in paying federal and state stamp taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to the Underwriters of the Additional Stock or any portion thereof. 6. Representations and Warranties of the Underwriters. The Underwriters represent and warrant to the Company that: (a) The Underwriters are each members in good standing of the National Association of Securities Dealers, Inc., and have complied with all NASD requirements concerning net capital and compensation to be received in connection with the Offering. (b) To the Underwriters' knowledge, there are no claims for services in the nature of a finder's origination fee with respect to the sale of the Securities hereunder to which the Company is, or may become, obligated to pay. -17- 18 7. Payment of Expenses. (a) The Company will pay and bear all costs, fees, taxes and expenses incident to and in connection with: (i) the issuance, offer, sale and delivery of the Securities, including all expenses and fees incident to the preparation, printing, filing and mailing (including the payment of postage with respect to such mailing) of the Registration Statement (including all exhibits thereto), each Preliminary Prospectus, the Prospectus, and amendments and post-effective amendments thereof and supplements thereto, and this Agreement and related documents, Preliminary and Final Blue Sky Memoranda, including the cost of preparing and copying all copies thereof in quantities deemed necessary by the Underwriters; (ii) the costs of preparing and printing all "Tombstone" and other appropriate advertisements; (iii) the printing, engraving, issuance and delivery of the Common Stock, Additional Common Stock, Representative's Warrants and Representative's Warrant Shares, including any transfer or other taxes payable thereon in connection with the original issuance thereof; (iv) the qualification of the Common Stock and Warrants under the state or foreign securities or "Blue Sky" laws selected by the Underwriters and the Company, and disbursements and reasonable fees of counsel for the Underwriters in connection therewith (not to exceed $50,000) plus the filing fees for such states; (v) a fee of $25,000 to be paid to counsel for the Underwriters for the preparation of a secondary trading memorandum; (vi) fees and disbursements of counsel and accountants for the Company; (vii) other expenses and disbursements incurred on behalf of the Company (viii) the filing fees payable to the Commission and the National Association of Securities Dealers, Inc. ("NASD"); and (ix) any listing of the Common Stock on a securities exchange, on Nasdaq or on the OTC Electronic Bulletin Board. (b) In addition to the expenses to be paid and borne by the Company referred to in Paragraph 7(a) above, the Company shall reimburse you at closing for expenses incurred by you in connection with the Offering (for which you need not make any accounting), in the amount of 3% of the price to the public of the Stock and Additional Stock sold in the Offering. This 3% non-accountable expense allowance shall cover the fees of your legal counsel, but shall not include any expenses for which the Company is responsible under Paragraph 7(a) above, including the reasonable fees and disbursements of your legal counsel with respect to Blue Sky matters. As of the date hereof, $25,000 has been advanced by the Company to the Underwriters with respect to such non-accountable expense allowance. Any unaccounted for portion of the $25,000 so advanced will be returned to the Company in the event the Offering is not consummated. (c) In the event that the Company does not or cannot, for any reason whatsoever other than a default by the Underwriters, expeditiously proceed with the Offering, or if any of the Company's representations, warranties or covenants contained in this Agreement are not materially correct or cannot be complied with by the Company, or business prospects or obligations of the Company are adversely affected and the Company does not commence or continue with the Offering at any time or terminates the proposed transaction prior to the Closing Date, the Company shall reimburse the Underwriters on an accountable basis for all out-of-pocket expenses actually incurred in connection with the Underwriting, this Agreement -18- 19 and all of the transactions hereby contemplated, including, without limitation, your legal fees and expenses, up to an aggregate total of $100,000 less such sums which have already been paid. 8. Conditions of Underwriters' Obligations. The obligations of the Underwriters to consummate the transactions contemplated by this Agreement shall be subject to the continuing accuracy of the representations and warranties of the Company contained herein as of the date hereof and as of the Closing Date, the accuracy of the statements of the Company and its officers and directors made pursuant to the provisions hereof, and to the performance by the Company of its covenants and agreements hereunder and under each certificate, opinion and document contemplated hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than 5:00 p.m., New York time, on the date following the date of this Agreement, or such later date and time as shall be consented to in writing by you and, on or prior to the Closing Date, no stop order suspending the effectiveness of the Registration Statement or the qualification or registration of the Stock under the securities laws of any jurisdiction shall have been issued and no proceedings for that purpose shall have been instituted or shall be pending or to your knowledge or the knowledge of the Company, shall be contemplated by the Commission or any such authorities of any jurisdiction and any request on the part of the Commission or any such authorities for additional information shall have been complied with to the reasonable satisfaction of the Commission or such authorities and counsel to the Underwriters and after the date hereof no amendment or supplement shall have been filed to the Registration Statement or Prospectus without your prior consent. (b) The Registration Statement or the Prospectus or any amendment thereof or supplement thereto shall not contain an untrue statement of a fact which is material, or omit to state a fact which is material and is required to be stated therein or is necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. (c) Between the time of the execution and delivery of this Agreement and the Closing Date, there shall be no litigation instituted against the Company or any of its officers or directors and between such dates there shall be no proceeding instituted or, to the Company's knowledge, threatened against the Company or any of its officers or directors before or by any federal, state or county commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would have a material adverse effect on the Company or its business, business prospects or properties, or have a material adverse effect on the financial condition or results of operation of the Company. (d) Each of the representations and warranties of the Company contained herein and each certificate and document contemplated under this Agreement to be delivered to -19- 20 you shall be true and correct at the Closing Date as if made at the Closing Date, and all covenants and agreements contained herein and in each such certificate and document to be performed on the part of the Company, and all conditions contained herein and in each such certificate and document to be fulfilled or complied with by the Company at or prior to the Closing Date shall be fulfilled or complied with. (e) At the Closing Date, you shall have received the opinion of Hall Dickler Kent Friedman & Wood, LLP, counsel to the Company, dated as of such Closing Date, addressed to the Underwriters and in form and substance satisfactory to counsel to the Underwriters, to the effect that: (i) The Company and each of its Subsidiaries are corporations duly organized, validly existing and in good standing under the laws of the jurisdiction of their incorporation with full corporate power and authority, and all licenses, permits, certifications, registrations, approvals, consents and franchises to own or lease and operate their properties and to conduct their businesses as described in the Registration Statement. The Company and each of its Subsidiaries are duly qualified to do business as foreign corporations and are in good standing in all jurisdictions wherein such qualification is necessary and failure so to qualify could have a material adverse effect on the financial condition, results of operations, business or properties of the Company and each of its Subsidiaries; (ii) The Company has full corporate power and authority to execute, deliver and perform the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants and to consummate the transactions contemplated thereby. The execution, delivery and performance of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants by the Company, the consummation by the Company of the transactions therein contemplated and the compliance by the Company with the terms of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants have been duly authorized by all necessary corporate action, and each of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants have been duly executed and delivered by the Company. Each of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants is a valid and binding obligation of the Company, enforceable in accordance with their respective terms, subject, as to enforcement of remedies, to applicable bankruptcy, insolvency, reorganization, moratorium and other laws affecting the rights of creditors generally and the discretion of courts in granting equitable remedies and except that enforceability of the indemnification provisions and the contribution provisions set forth in the Underwriting Agreement may be limited by the federal securities laws or public policy underlying such laws; (iii) The execution, delivery and performance of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants by the Company, the consummation by the Company of the transactions therein contemplated and the compliance by the Company with the terms of the Underwriting Agreement, the Consulting Agreement and the Representative's Warrants do not, and will not, with or without the giving of notice or the lapse -20- 21 of time, or both, (A) result in a violation of the Certificate of Incorporation, as the same may be amended, or Bylaws of the Company or any of its Subsidiaries, (B) to the best of our knowledge, result in a breach of, or conflict with, any terms or provisions of or constitute a default under, or result in the modification or termination of, or result in the creation or imposition of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any of its Subsidiaries pursuant to, any indenture, mortgage, note, contract, commitment or other material agreement or instrument to which the Company or any of its Subsidiaries are a party or by which the Company or any of its Subsidiaries or any of their properties or assets are or may be bound or affected, except where any of the foregoing would not result in a material adverse effect upon the Company's or any Subsidiaries business or operations; (C) to the best of our knowledge, violate any existing applicable law, rule or regulation or judgment, order or decree known to us of any governmental agency or court, domestic or foreign, having jurisdiction over the Company or any of its Subsidiaries or any of their properties or businesses; or (D) to the best of our knowledge, have any effect on any permit, certification, registration, approval, consent, license or franchise necessary for the Company or any of its Subsidiaries to own or lease and operate their properties and to conduct their business or the ability of the Company or any of its Subsidiaries to make use thereof; (iv) To the best of our knowledge, no authorization, approval, consent, order, registration, license or permit of any court or governmental agency or body (other than under the Act, the Regulations and applicable state securities or Blue Sky laws) is required for the valid authorization, issuance, sale and delivery of the Stock, the Additional Stock, or the Representative's Warrants, and the consummation by the Company of the transactions contemplated by the Underwriting Agreement, the Consulting Agreement or the Representative's Warrants; (v) The Registration Statement was declared effective under the Act on __________ ___, 1997; to the best of our knowledge, no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for that purpose have been instituted or are pending, threatened or contemplated under the Act or applicable state securities laws; (vi) The Registration Statement and the Prospectus, as of the Effective Date (except for the financial statements and other financial data included therein or omitted therefrom, as to which we express no opinion), comply as to form in all material respects with the requirements of the Act and Regulations and the conditions for use of a registration statement on Form SB-2 have been satisfied by the Company; (vii) The description in the Registration Statement and the Prospectus of statutes, regulations, contracts and other documents have been reviewed by us, and, based upon such review, are accurate in all material respects and present fairly the information required to be disclosed, and to the best of our knowledge, there are no material statutes or regulations, or, to the best of our knowledge, material contracts or documents, of a character required to be -21- 22 described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement, which are not so described or filed as required. To the best of our knowledge, none of the material provisions of the contracts or instruments described above violates any existing applicable law, rule or regulation or judgment, order or decree known to us of any United States governmental agency or court having jurisdiction over the Company or any of its assets or businesses; (viii) The outstanding Common Stock has been duly authorized and validly issued and is fully paid and nonassessable. To the best of our knowledge, none of the outstanding Common Stock has been issued in violation of the preemptive rights of any stockholder of the Company. None of the holders of the outstanding Common Stock is subject to personal liability solely by reason of being such a holder. The authorized Common Stock conforms to the description thereof contained in the Registration Statement and Prospectus. To the best of our knowledge, except as set forth in the Prospectus, no holders of any of the Company's securities has any rights, "demand," "piggyback" or otherwise, to have such securities registered under the Act; (ix) The issuance and sale of the Stock, the Additional Stock, the Representative's Warrants and the Representative's Warrant Shares have been duly authorized and when issued will be validly issued, fully paid and non-assessable, and the holders thereof will not be subject to personal liability solely by reason of being such holders. Neither the Stock nor the Additional Stock are subject to preemptive rights of any stockholders of the Company. The certificates representing the Stock are in proper legal form; (x) The issuance and sale of the Representative's Warrants and Representative's Warrant Shares have been duly authorized and, when paid for, issued and delivered pursuant to the terms of the Representative's Warrants, will constitute the valid and binding obligations of the Company, enforceable in accordance with their terms, to issue and sell the Representative's Warrants and the Representative's Warrant Shares. All corporate action required to be taken for the authorization, issuance and sale of the Stock has been duly, validly and sufficiently taken. The Representative's Warrants conform to the description thereof contained in the Registration Statement and Prospectus; (xi) The Underwriters have acquired good title to the Stock, free and clear of all liens, encumbrances, equities, security interests and claims, provided that the Underwriters are bona fide purchasers as defined in Section 8-302 of the Uniform Commercial Code; (xii) Assuming that the Underwriters exercise the over-allotment option to purchase the Additional Stock and make payments therefor in accordance with the terms of the Underwriting Agreement, upon delivery of the Additional Stock to the Underwriters thereunder, the Underwriters will acquire good title to the Additional Stock, free and clear of any liens, encumbrances, equities, security interests and claims, provided that the Underwriters are bona fide purchasers as defined in Section 8-302 of the Uniform Commercial Code; -22- 23 (xiii) To the best of our knowledge, there are no claims, actions, suits, proceedings, arbitrations, investigations or inquiries before any governmental agency, court or tribunal, foreign or domestic, or before any private arbitration tribunal, pending or threatened against the Company or any of its Subsidiaries or involving their properties or businesses, other than as described in the Prospectus, such description being accurate, and other than litigation incident to the kind of business conducted by the Company or any of its Subsidiaries which, individually and in the aggregate, is not material, and, except as otherwise disclosed in the Prospectus and the Registration Statement, the Company and its Subsidiaries have complied with all federal and state laws, statutes and regulations concerning its business; (xiv) All sales of the Company's securities have been made in compliance with or under an exemption from the registration requirements of the Act, and no purchaser of such securities in any such sale has a right of action against the Company for failure to comply with the registration or filing requirements of any state; and (xv) We have participated in reviews and discussions in connection with the preparation of the Registration Statement and the Prospectus. Although we are not passing upon and do not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement, no facts came to our attention which lead us to believe that (A) the Registration Statement (except as to the financial statements and other financial data contained therein, as to which we express no opinion), on the Effective Date, contained any untrue statement of a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, or that (B) the Prospectus (except as to the financial statements and other financial data contained therein, as to which we express no opinion) contains any untrue statement or a material fact or omits to state any material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; (f) At the Closing Date, you shall have received the opinion of Irina Igitova, Esq., special counsel to the Company with respect to the laws of the Russian Federation, dated as of such Closing Date, addressed to the Underwriters and in form and substance satisfactory to counsel to the Underwriters, to the effect that: (i) Corbina Telecommunications ("Corbina"), CompTel Ltd. ("CompTel") and Investelektrosvyaz ("Investelectro") (the "Russian Subsidiaries") have been duly organized and are validly existing as closed joint stock companies in good standing under the laws of the Russian Federation, and have full corporate power and authority to own their properties and conduct their businesses as described in the Registration Statement and Prospectus; (ii) The Russian Subsidiaries have obtained, or are in the process of obtaining, all licenses, permits and other governmental authorizations necessary to conduct their businesses as described in the Prospectus, and such licenses, permits and other governmental -23- 24 authorizations obtained are in full force and effect, and the Russian Subsidiaries are in all material respects complying therewith; (iii) The Company owns 75% of the issued and outstanding capital stock of each of Corbina and CompTel, and CompTel owns 51% of Investelectro; all of the Russian Subsidiaries' outstanding securities have been duly authorized, are validly issued, fully paid and non-assessable and have not been issued in violation of the preemptive rights of any security holder; (iv) Such counsel knows of no pending or threatened legal or governmental proceedings to which either or the Russian Subsidiaries are a party which could materially adversely affect the business, property, financial conduct or operations of either of the Russian Subsidiaries; (v) Such counsel is familiar with all contracts or other agreements entered into by the Russian Subsidiaries with other Russian companies, entities, banking institutions or individuals referred to in the Registration Statement and Prospectus (collectively, the "Russian Agreements"), and all such Russian Agreements are valid, binding and enforceable under Russian law, and to the knowledge of such counsel, neither of the Russian Subsidiaries is in default under any of the Russian Agreements; (vi) Neither of the Russian Subsidiaries is in violation of or in default under its Charter Documents or Bylaws, or to the knowledge of such counsel, in the performance or observance of any material obligation, agreement, covenant or condition contained in any bond, debenture, note or other evidence of indebtedness or in any contract, indenture, mortgage, loan agreement or instrument to which either Russian Subsidiary is are a party or by which it or any of its properties may be bound, or in violation of any material order, rule, regulation, writ, injunction or decree of any government or governmental instrumentality or court; and (vii) Pursuant to the laws of the Russian Federation, the minority stockholders of Corbina, CompTel and Investelectro will not be able to prevent the Company from carrying out the businesses of such Russian Subsidiaries or the Company, such as consummating material transactions or declaring dividends in cash or stock. (g) On or prior to the Closing Date, counsel for the Underwriters shall have been furnished such documents, certificates and opinions as they may reasonably require for the purpose of enabling them to review the matters referred to in subparagraphs (e) and (f) of this Paragraph 9, or in order to evidence the accuracy, completeness or satisfaction of any of the representations, warranties or conditions herein contained. -24- 25 (h) Prior to the Closing Date: (i) There shall have been no material adverse change in the condition or prospects or the business activities, financial or otherwise, of the Company from the latest dates as of which such condition is set forth in the Registration Statement and Prospectus; (ii) There shall have been no transaction, outside the ordinary course of business, entered into by the Company from the latest date as of which the financial condition of the Company is set forth in the Registration Statement and Prospectus which is material to the Company, which is either (x) required to be disclosed in the Prospectus or Registration Statement and is not so disclosed, or (y) likely to have material adverse effect on the Company's business or financial condition; (iii) The Company shall not be in default under any material provision of any instrument relating to any outstanding indebtedness, except as described in the Prospectus; (iv) No material amount of the assets of the Company shall have been pledged, mortgaged or otherwise encumbered, except as set forth in the Registration Statement and Prospectus; (v) No action, suit or proceeding, at law or in equity, shall have been pending or to its knowledge threatened against the Company or affecting any of its properties or businesses before or by any court or federal or state commission, board or other administrative agency wherein an unfavorable decision, ruling or finding would materially and adversely affect the business, operations, prospects or financial condition or income of the Company, taken as a whole, except as set forth in the Registration Statement and Prospectus; and (vi) No stop order shall have been issued under the Act and no proceedings therefor shall have been initiated or, to the Company's knowledge, threatened by the Commission. (vii) Each of the representations and warranties of the Company contained in this Agreement and in each certificate and document contemplated under this Agreement to be delivered to you was, when originally made and is at the time such certificate is dated, true and correct. (i) Concurrently with the execution and delivery of this Agreement and at the Closing Date, you shall have received a certificate of the Company signed by the Chief Executive Officer of the Company and the principal financial officer of the Company, dated as of the Closing Date, to the effect that the conditions set forth in subparagraph (h) above have been satisfied and that, as of the Closing Date, the representations and warranties of the Company set forth in Paragraph 2 herein and the statements in the Registration Statement and Prospectus were and are true and correct. Any certificate signed by any of officer of the -25- 26 Company and delivered to you or for counsel for the Underwriters shall be deemed a representation and warranty by the Company to the Underwriters as to the statements made therein. (j) At the time this Agreement is executed, and at the Closing Date, you shall have received "cold comfort" letters, addressed to the Underwriters and in form and substance satisfactory in all respects to you and counsel for the Underwriters, from Ernst & Young LLP and Ernst & Young (CIS) Limited, dated as of the date of this Agreement and as of the Closing Date. (k) All proceedings taken in connection with the authorization, issuance or sale of the Stock, Additional Stock, the Representative's Warrants and the Representative's Warrant Shares as herein contemplated shall be satisfactory in form and substance to you and to counsel to the Underwriters, and the Underwriters shall have received from such counsel an opinion, dated as the Closing Date with respect to such of these proceedings as you may reasonably require. (l) The Company shall have furnished to you such certificates, additional to those specifically mentioned herein, as you may have reasonably requested in a timely manner as to the accuracy and completeness, at the Closing Date, of any statement in the Registration Statement or the Prospectus, as to the accuracy, at the Closing Date, of the representations and warranties of the Company herein and in each certificate and document contemplated under this Agreement to be delivered to you, as to the performance by the Company of its obligations hereunder and under each such certificate and document or as to the fulfillment of the conditions concurrent and precedent to your obligations hereunder. (m) The obligation of the Underwriters to purchase Additional Stock hereunder is subject to the accuracy of the representations and warranties of the Company contained herein on and as of the Option Closing Date and to the satisfaction on and as of the Option Closing Date of the conditions set forth herein. (n) On the Closing Date there shall have been duly tendered to you for your account the appropriate number of shares of Common Stock constituting the Stock. (o) The Company's Common Stock shall be listed on the OTC Electronic Bulletin Board not later than the Effective Date, at which time at least two (2) broker-dealers shall be approved pursuant to Rule 15c2-11 of the Exchange Act to make a market in the Common Stock. (p) At the Closing Date, you shall have received the opinion of Hall Dickler Kent Friedman & Wood, LLP, counsel for the Selling Stockholder, dated as of such Closing Date, addressed to the Underwriters and in form and substance satisfactory to counsel for the Underwriters, to the effect that: -26- 27 (i) This Agreement has been validly executed and delivered by or on behalf of the Selling Stockholder and constitutes a valid and binding agreement of the Selling Stockholder; (ii) The Power of Attorney and Custodian Agreement have been validly executed and delivered by the Selling Stockholder and constitute valid and binding agreements of the Selling Stockholder; and (iii) Valid title to the Selling Stockholder's Stock sold by the Selling Stockholder shall be delivered on the Closing Date, free and clear of any liens, claims, encumbrances and perfected security interests whatsoever. 9. Indemnification and Contribution. (a) Subject to the conditions set forth below, the Company agrees to indemnify and hold harmless the Underwriters and each person, if any, who controls the Underwriters ("controlling person") within the meaning of either Section 15 of the Act or Section 20 of the Exchange Act, against any and all losses, liabilities, claims, damages, actions and expenses or liability, joint or several, whatsoever (including but not limited to any and all expense whatsoever reasonably incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever), joint or several, to which it or such controlling persons may become subject under the Act, the Exchange Act or under any other statute or at common law or otherwise or under the laws of foreign countries, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any Preliminary Prospectus or the Prospectus (as from time to time amended and supplemented); in any post-effective amendment or amendments or any new registration statement and prospectus in which is included the Representative's Warrant Shares upon exercise of the Representative's Warrants; or in any application or other document or written communication (in this Paragraph 9 collectively called "application") executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Stock, Additional Stock, Representative's Warrants and Representative's Warrant Shares under the securities laws thereof or filed with the Commission or any securities exchange; or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading (in the case of the Prospectus, in the light of the circumstances under which they were made), unless such statement or omission was made in reliance upon or in conformity with written information furnished to the Company with respect to the Underwriters by or on behalf of the Underwriters expressly for use in any Preliminary Prospectus, the Registration Statement or Prospectus, or any amendment or supplement thereof, or in application, as the case may be. Notwithstanding the foregoing, the Company shall have no liability under this Paragraph 10(a) if any such untrue statement or omission made in a Preliminary Prospectus, is cured in the Prospectus and the Underwriters failed to deliver to the person or persons alleging the liability upon which indemnification is being sought, at or prior to the written confirmation of such sale, a copy of the Prospectus. This indemnity will be in addition to any liability which the Company may otherwise have. -27- 28 (b) The Underwriters agree to indemnify and hold harmless the Company and each of the officers and directors of the Company who have signed the Registration Statement and each other person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, to the same extent as the foregoing indemnity from the Company to the Underwriters in Paragraph 9(a), but only with respect to any untrue statement or alleged untrue statement of any material fact contained in or any omission or alleged omission to state a material fact required to be stated in any Preliminary Prospectus, the Registration Statement or Prospectus or any amendment or supplement thereof or necessary to make the statements therein not misleading or in any application made solely in reliance upon, and in conformity with, written information furnished to the Company by you specifically expressly for use in the preparation of such Preliminary Prospectus, the Registration Statement or Prospectus directly relating to the transactions effected by the Underwriters in connection with this Offering. This indemnity agreement will be in addition to any liability which the Underwriters may otherwise have. Notwithstanding the foregoing, the Underwriters shall have no liability under this Paragraph 9(b) if any such untrue statement or omission made in a Preliminary Prospectus is cured in the Prospectus, and the Prospectus is delivered to the person or persons alleging the liability upon which indemnification is being sought. (c) If any action is brought against any indemnified party (the "Indemnitee") in respect of which indemnity may be sought against another party pursuant to the foregoing (the "Indemnitor"), the Indemnitor shall assume the defense of the action, including the employment and fees of counsel (reasonably satisfactory to the Indemnitee) and payment of expenses. Any Indemnitee shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such Indemnitee unless the employment of such counsel shall have been authorized in writing by the Indemnitor in connection with the defense of such action. If the Indemnitor shall have employed counsel to have charge of the defense or shall previously have assumed the defense of any such action or claim, the Indemnitor shall not thereafter be liable to any Indemnitee in investigating, preparing or defending any such action or claim. Each Indemnitee shall promptly notify the Indemnitor of the commencement of any litigation or proceedings against the Indemnitee in connection with the issue and sale of the Common Stock, Warrants, Warrants Shares, Additional Securities, Underwriters' Securities or in connection with the Registration Statement or Prospectus. (d) In order to provide for just and equitable contribution under the Act in any case in which: (i) the Underwriters make a claim for indemnification pursuant to Paragraph 10 hereof, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the time to appeal has expired or the last right of appeal has been denied) that such indemnification may not be enforced in such case notwithstanding the fact that this Paragraph 9 provides for indemnification of such case; or (ii) contribution under the Act may be required on the part of the Underwriters in circumstances for which indemnification is provided under this Paragraph 9, then, and in each such case, the Company and the Underwriters shall contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after any contribution from others) in such proportion so that the Underwriters are responsible for the portion represented by dividing the total compensation received by the -28- 29 Underwriters herein by the total purchase price of all Securities sold in the public offering and the Company is responsible for the remaining portion; provided, that in any such case, no person guilty of a fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The foregoing contribution agreement shall in no way affect the contribution liabilities of any persons having liability under Section 11 of the Act other than the Company and the Underwriters. As used in this Paragraph 9, the term "Underwriters" includes any officer, director, or other person who controls the Underwriters within the meaning of Section 15 of the Act, and the word "Company" includes any of officer, director or person who controls the Company within the meaning of Section 15 of the Act. If the full amount of the contribution specified in this paragraph is not permitted by law, then the Underwriters and each person who controls the Underwriters shall be entitled to contribution from the Company to the full extent permitted by law. No contribution shall be requested with regard to the settlement of any matter from any party who did not consent to the settlement. (e) Within fifteen (15) days after receipt by any party to this Agreement (or its representative) of notice of the commencement of any action, suit or proceeding, such party will, if a claim for contribution in respect thereof is made against another party (the "contributing party"), notify the contributing party of the commencement thereof, but the omission so to notify the contributing party will not relieve it from any liability it may have to any other party other than for contribution hereunder. In case any such action, suit or proceeding is brought against any party, and such party notifies a contributing party or his or its representative of the commencement thereof within the aforesaid fifteen (15) days, the contributing party will be entitled to participate therein with the notifying party and any other contributing party similarly notified. Any such contributing party shall not be liable to any party seeking contribution on account of any settlement of any claim, action or proceeding effected by such party seeking contribution without the written consent of such contributing party. The indemnification provisions contained in this Paragraph 9 are in addition to any other rights or remedies which either party hereto may have with respect to the other or hereunder. 10. Representations Warranties Agreements to Survive Delivery. The respective indemnity and contribution agreements by the Underwriters and the Company contained in Paragraph 9 hereof, and the covenants, representations and warranties of the Company and the Underwriters set forth in this Agreement, shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriters or on its behalf or by or on behalf of any person who controls the Underwriters, or by the Company or any controlling person of the Company or any director or any of officer of the Company, (ii) acceptance of any of the Securities and payment therefor, or (iii) any termination of this Agreement, and shall survive the delivery of the Securities and any successor of the -29- 30 Underwriters or the Company, or of any person who controls you or the Company or any other indemnified party, as the case may be, shall be entitled to the benefit of such respective indemnity and contribution agreements. The respective indemnity and contribution agreements by the Underwriters and the Company contained in this Paragraph 10 shall be in addition to any liability which the Underwriters and the Company may otherwise have. 11. Effective Date of This Agreement and Termination Thereof. (a) This Agreement shall become effective at 10:00 A.M., New York time, on the first full business day following the day on which you and the Company receive notification that the Registration Statement became effective. (b) This Agreement may be terminated by the Representative by notifying the Company at any time on or before the Closing Date, if any domestic or international event or act or occurrence has materially disrupted, or in your opinion will in the immediate future materially disrupt, securities markets; or if trading on the New York Stock Exchange, the American Stock Exchange, or in the over-the-counter market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required on the over-the-counter market by the NASD or NASDAQ or by order of the Commission or any other governmental authority having jurisdiction; or if a moratorium in foreign exchange trading by major international banks or persons has been declared; or if the Company shall have sustained a loss material or substantial to the Company taken as a whole by fire, flood, accident, hurricane, earthquake, theft, sabotage or other calamity or malicious act which, whether or not such loss shall have been insured, will, in your opinion, make it inadvisable to proceed with the delivery of the Securities; or if there shall have been a material adverse change in the conditions of the securities market in general, as in your reasonable judgment would make it inadvisable to proceed with the offering, sale and delivery of the Securities; or if there shall have been a material adverse change in the financial or securities markets, particularly in the over-the-counter market, in the United States having occurred since the date of this Agreement. (c) If you elect to prevent this Agreement from becoming effective or to terminate this Agreement as provided in this Paragraph 11, the Company shall be notified promptly by you by telephone or facsimile, confirmed by letter. (d) If this Agreement shall not become effective by reason of an election of the Representative pursuant to this Paragraph 11 or if this Agreement shall not be carried out within the time specified herein by reason of any failure on the part of the Company to perform any undertaking, or to satisfy any condition of this Agreement by it to be performed or satisfied, the sole liability of the Company to the Underwriters, in addition to the obligations assumed by the Company pursuant to Paragraph 7 herein, will be to reimburse the Underwriters for the following: (i) Blue Sky counsel fees and expenses to the extent set forth in Paragraph 7(a)(iv); (ii) Blue Sky filing fees; and (iii) such reasonable out-of-pocket expenses of the Underwriters (including the fees and disbursements of their counsel), to the extent set forth in Paragraph 7(c), -30- 31 in connection with this Agreement and the proposed offering of the Stock, but in no event to exceed the sum of $100,000 less such amounts already paid. Notwithstanding any contrary provision contained in this Agreement, any election hereunder or any termination of this Agreement, and whether or not this Agreement is otherwise carried out, the provisions of Paragraphs 7 and 9 hereof shall not be in any way affected by such election or termination or failure to carry out the terms of this Agreement or any part hereof. 12. Notices. All communications hereunder, except as herein otherwise specifically provided, shall be in writing and, if sent to the Underwriters, shall be mailed, delivered or telegraphed and confirmed to the Representative at J.W. Barclay & Co., Inc., One Battery Park Plaza, New York, New York 10004 Attention: John Cioffoletti, with a copy thereof to Lawrence G. Nusbaum, Esq., Gusrae Kaplan & Bruno, 120 Wall Street, New York, New York 10005, and, if sent to the Company, shall be mailed, delivered or telegraphed and confirmed to the Company at 780 Third Avenue, New York, New York 10017, Attention: Ronald G. Nathan, President, with a copy thereof to Hall Dickler Kent Friedman & Wood, LLP, 909 Third Avenue, New York, New York 10022, Attention: Steven D. Dreyer, Esq. 13. Parties. This Agreement shall inure solely to the benefit of and shall be binding upon, the Underwriters, the Company and the controlling persons, directors and officers referred to in Paragraph 9 hereof, and their respective successors, legal representatives and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. 14. Construction. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York and shall supersede any agreement or understanding, oral or in writing, express or implied, between the Company and you relating to the sale of any of the Securities. 15. Jurisdiction and Venue. The Company agrees that the courts of the State of New York shall have jurisdiction over any litigation arising from this Agreement, and venue shall be proper in the Southern District of New York. 16. Counterparts. This agreement may be executed in counterparts. -31- 32 If the foregoing correctly sets forth the understanding between you, the Selling Stockholders and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement between us. Very truly yours, RUSSIAN WIRELESS TELEPHONE COMPANY, INC. By:______________________________________ Ronald G. Nathan, President The Selling Stockholder: THE CAM NEELEY FOUNDATION By:______________________________________ Accepted as of the date first above written: J.W. BARCLAY & CO., INC. By:_____________________________________ -32- 33 SCHEDULE A Common Stock to be Sold By the Selling Stockholder
Name Number of Shares The Cam Neeley Foundation 30,000 ------ Total: 30,000 ======
34 SCHEDULE B
Number of Shares of common Stock to be Purchased --------------- Underwriter - ----------- J.W. Barclay & Co., Inc. ---------- Total: $1,650,000 ==========
35 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. INSTRUCTIONS FOR COMPLETING THE CUSTODY AGREEMENT AND POWER OF ATTORNEY THE ATTACHED AGREEMENT MUST BE COMPLETED AND SIGNED BY EACH STOCKHOLDER WHO WISHES TO SELL SHARES IN THE PROPOSED OFFERING. ALL SIGNATURES MUST BE GUARANTEED BY A BANK OR TRUST COMPANY OR MEMBER OF THE NEW YORK OR AMERICAN STOCK EXCHANGE (SEE INSTRUCTION "D"). A. You have been sent four copies of the Custody Agreement and Power of Attorney (the "Custody Agreement"). Please complete and return three copies of the Custody Agreement to the address listed in paragraph F below together with your endorsed stock certificate(s). One completed copy of the Custody Agreement will be retained by the Custodian, one will be sent to the Attorney-In-Fact and one will be returned to you. B. The Custody Agreement includes a questionnaire on pages 10 through 15, which will be used to prepare any amendments to a Registration Statement on Form SB-2 (No. 333-24177) which was filed by Russian Wireless Telephone Company, Inc. (the "Company") with the Securities and Exchange Commission on March 28, 1997. You must answer each question fully and carefully. C. You must indicate the number of shares you wish to sell by completing page 18 of the Custody Agreement. D. YOU MUST SIGN EACH COPY OF THE CUSTODY AGREEMENT ON PAGE 17, AND YOU ALSO MUST SIGN EACH STOCK CERTIFICATE (OR THE ACCOMPANYING STOCK POWER) DEPOSITED HEREUNDER. YOUR SIGNATURE MUST APPEAR ON THE CUSTODY AGREEMENT AND THE STOCK CERTIFICATE OR THE ACCOMPANYING STOCK POWER GUARANTEED BY ANY BANK OR TRUST COMPANY OR ANY BROKER WHO IS A MEMBER OF THE NEW YORK OR AMERICAN STOCK EXCHANGE. PLEASE SIGN THE STOCK CERTIFICATE (OR THE ACCOMPANYING STOCK POWER) AND EACH COPY OF THE CUSTODY AGREEMENT EXACTLY AS YOUR NAME APPEARS ON YOUR STOCK CERTIFICATE. E. IF STOCK CERTIFICATES TO BE DEPOSITED ARE ISSUED IN THE NAME OF TRUSTEES, EXECUTORS, ADMINISTRATORS, GUARDIANS, PARTNERS, ATTORNEYS-IN-FACT, NOMINEES, OR OTHERS ACTING IN A FIDUCIARY OR REPRESENTATIVE CAPACITY, THE CUSTOMARY EVIDENCE OF AUTHORITY OF THE PERSON OR PERSONS MAKING THE DEPOSIT MUST ACCOMPANY THE STOCK CERTIFICATES, TOGETHER WITH TRUE AND COMPLETE COPIES OF ANY TRUST INSTRUMENT. EACH NOMINEE SHOULD ATTACH A CERTIFIED COPY OF HIS APPOINTMENT AS NOMINEE OR A CERTIFIED AUTHORIZATION OF SUCH NOMINEE STATUS. F. Endorsed stock certificates or stock certificates with stock powers attached along with fully executed copies of the 36 completed Custody Agreement, and any other documents you are executing in connection with this transaction, should be promptly forwarded to: Hall Dickler Kent Friedman & Wood, LLP 909 Third Avenue New York, New York 10022 Attention: Steven D. Dreyer, Esq. G. If any certificate which you submit represents a greater number than the Shares to be sold by you, the Custodian will cause to be delivered to you a certificate for the excess number of shares within 10 days after the closing of the sale by the Underwriters. H. PLEASE CONTACT MR. RONALD G. NATHAN, PRESIDENT OF THE COMPANY, IF ANY INFORMATION OR REPRESENTATION INCLUDED IN THE ENCLOSED CUSTODY AGREEMENT SHOULD CHANGE PRIOR TO THE SALE OF YOUR SHARES. -2- 37 CUSTODY AGREEMENT AND POWER OF ATTORNEY for Sale of Shares of Common Stock, $.01 Par Value RUSSIAN WIRELESS TELEPHONE COMPANY Hall Dickler Kent Friedman & Wood, LLP 909 Third Avenue New York, New York 10022 Attention: Steven D. Dreyer, Esq. ("Attorney-In-Fact" and "Custodian") Dear Sirs: The undersigned stockholder (the "Selling Stockholder") of Russian Wireless Telephone Company, Inc., a Delaware corporation (the "Company"), and the Company desire to sell certain shares of the Common Stock of the Company, $.01 par value (the "Common Stock"), to J.W. Barclay & Co. Inc. as the representative of the underwriters (the "Representative") for distribution under a Registration Statement on Form SB-2 (File No. 333-24177) (the "Registration Statement") to the public at a price and on terms to be determined as hereinafter set forth. The Company proposes to issue and sell an aggregate of 1,620,000 shares of its authorized and unissued Common Stock and has granted the Underwriters an option to purchase up to an additional 247,500 shares of its authorized and unissued Common Stock on the terms and conditions of the Underwriting Agreement, as defined below. The Selling Stockholder proposes to sell an aggregate of 30,000 shares of Common Stock. The aggregate number of shares or any portion thereof to be sold are referred to hereinafter as the "Purchased Shares"; the aggregate number of shares or any portion thereof included in the option granted the Underwriters are referred to hereinafter as the "Option Shares"; and the Purchased Shares and the Option Shares together sometimes are referred to hereinafter as the "Shares". It is understood that such sale to the Underwriters shall be entered into only if, as and when the Attorney-In-Fact (as hereinafter defined), acting for the Selling Stockholder in his discretion determines that such sale is in the best interests of the Selling Stockholder. A. Power of Attorney The undersigned hereby irrevocably constitutes and appoints Steven D. Dreyer his true and lawful agent and attorney ("Attorney-In-Fact") with respect to all matters arising in connection with the public offering and sale of the Shares to be sold by the undersigned to the Underwriters, including, but not -3- 38 limited to, the power and authority on behalf of the undersigned to do any and all of the following things: 1. To make, execute and deliver an underwriting agreement (the "Underwriting Agreement") substantially in the form of the draft thereof which the undersigned has received and which was filed as Exhibit 1.1 to the Registration Statement, but with such insertions, changes, additions or deletions as the Attorney-In-Fact shall determine to be not materially adverse to the undersigned, and not inconsistent with the draft thereof, such approval to be conclusively evidenced by his execution and delivery thereof, and to carry out and comply in his sole discretion with all the provisions of the Underwriting Agreement, including the making of all representations and agreements provided in the Underwriting Agreement to be made by, and to exercise all authority thereunder vested in, the undersigned. 2. To sell, assign and transfer to the Underwriters pursuant to Section 4 of the Underwriting Agreement the aggregate number, but not less than the aggregate number, of Purchased Shares listed in Schedule A hereto and deposited hereunder for sale by the undersigned. 3. To negotiate, determine and agree upon (a) the price at which the Shares (including the Shares to be sold by the undersigned) will be sold by the Selling Stockholders to the Underwriters pursuant to the Underwriting Agreement, and (b) the price at which the Shares (including the Shares to be sold by the undersigned) initially will be offered to the public by the Underwriters, such price to be not less than $7.00 per share and to include an Underwriters' discount and commission of not more than 9%. The difference between the price paid by the Underwriters to the Company and the price at which the Shares are offered and sold to the public represents a portion of the Underwriters' compensation for its services. 4. To take any and all steps deemed necessary or desirable by the Attorney-In-Fact in connection with the registration with the Securities and Exchange Commission (the "Commission") of the Shares under the Securities Act of 1933, as amended (the "Securities Act"), and the registration or qualification of the Shares under the securities or blue sky laws of any jurisdiction, including the requesting of acceleration of effectiveness of the Registration Statement, the filing of letters with the Commission and such other steps as the Attorney-In-Fact may deem necessary or advisable. 5. To represent to the Commission, if requested by the Commission, that the undersigned is selling the Shares owned by him for the purposes of raising funds or diversifying the investment portfolio of the undersigned. -4- 39 6. To accept and deliver to the Custodian, on behalf of the undersigned, any certificates for shares of stock of the Company issued in the name of the undersigned after the date hereof but prior to the sale of the Shares to the Underwriters. 7. If necessary, to endorse (in blank or otherwise) on behalf of the undersigned the certificate or certificates representing the Shares to be sold by the undersigned, or a stock power or powers attached to such certificate or certificates, and to transfer and deliver such certificate or certificates representing such Shares to or upon the order of the Underwriters. 8. To instruct the Company's transfer agent with respect to all matters pertaining to the certificates representing the Shares; to cause the Company's transfer agent to issue and register a certificate or certificates representing the Shares in accordance with the directions of the Underwriters; and to permit inspection and packaging of such certificates by the Underwriters, in each case as provided in the Underwriting Agreement. 9. To retain Messrs. Hall Dickler Kent Friedman & Wood, LLP, as legal counsel for the Selling Stockholder. 10. Subject to the terms and conditions of Section 1 hereof, otherwise to take all actions and do all things, in his discretion, including the execution and delivery of all documents necessary or proper, required, contemplated or deemed advisable by the Selling Stockholder and generally to act for and in the name of the undersigned with respect to the sale of the Shares to the Underwriters and re-offering of the Shares by the Underwriters as fully as could the undersigned if then personally present and acting. The Attorney-In-Fact hereby is empowered to determine in his sole discretion the time or times when, and the purposes for and the manner in which, any power herein conferred upon him by the Selling Stockholder shall be exercised and to exercise any such power. This Power of Attorney shall terminate (other than as provided in Section H hereof) when the Shares to be sold by the Selling Stockholder have been delivered and paid for as provided in the Underwriting Agreement and any and all actions required to be taken by the Custodian under this Agreement and the Underwriting Agreement have been completed. -5- 40 B. Deposit of Shares For the purposes hereof, the undersigned herewith transmits to the Custodian, one or more certificates representing not less than the aggregate number of Shares set forth with respect to the undersigned in Schedule A attached hereto. Each such certificate so delivered (i) is in negotiable and proper deliverable form with the signature of the undersigned to the endorsement thereon guaranteed by a bank or trust company having an office or a correspondent in New York City or by a member of the New York Stock Exchange or American Stock Exchange, or (ii) is accompanied by a duly executed stock power or powers, in blank, bearing the signature of the undersigned so guaranteed. The Custodian is hereby authorized and directed, subject to the instructions of the Attorney-In-Fact: (i) to hold the Shares represented by the certificate or certificates referred to above in custody; (ii) to make such other appropriate arrangements as may be necessary for the safekeeping of said certificate or certificates and the delivery thereof for sale to the Underwriters at the date of delivery; and (iii) to deliver to the undersigned new certificates for the untransferred balance, if any, of the shares of Common Stock evidenced by the enclosed certificate or certificates. If acting as a trustee or in any other fiduciary or representative capacity, the undersigned has delivered duly certified copies of each trust agreement, will, letters testamentary or other instrument pursuant to which the undersigned is authorized to act as a Selling Stockholder. The undersigned agrees to deliver to the Attorney-In-Fact or the Custodian such additional documentation as the Company or the Underwriters may request to effectuate any of the provisions hereof or of the Underwriting Agreement. C. Sale of Shares The Custodian hereby is authorized and directed to deliver to the Underwriters certificates for the Shares to be sold by the undersigned as provided in the Underwriting Agreement against delivery to the Custodian for the account of the undersigned of the purchase price payable by the Underwriters in the form of a certified check of J.W. Barclay & Co., Inc., or by bank cashier's check in New York Clearing House funds payable to the order of each of the Selling Stockholders for their respective amounts. The Custodian is authorized, on behalf of the undersigned, to accept and acknowledge receipt of the payment of the purchase price for the Shares to be sold by the undersigned. D. Representations, Warranties and Agreements The undersigned represents and warrants to, and agrees with the Company and the Underwriters that (i) the undersigned has reviewed carefully the proof of the Underwriting Agreement, -6- 41 including without limitation, the representations and warranties to be made by the undersigned as a Selling Stockholder contained in Section 2.B, the certificate referred to in Section 8(i), and the indemnity and contribution provisions contained in Section 9; (ii) such representations and warranties are true and correct as of the date hereof and will be true and correct at the time of the execution of the Underwriting Agreement and the time of the sale of the Shares to the Under-writers; and (iii) such covenants and agreements are valid and binding as of the date hereof and will be valid and binding at the time of the execution of the Underwriting Agreement and the time of the sale of the Shares to the Underwriters. This Agreement constitutes a representation that the undersigned has received the Preliminary Prospectus of the Company and, except as set forth under "Exceptions" below, the information contained in such Preliminary Prospectus with respect to the undersigned is true and correct. The foregoing representations, warranties and agreements, as well as those contained in the Questionnaire which comprises Section I of this Agreement, and those contained in the Underwriting Agreement, are and will be made for the benefit of, and may be relied upon by, the Underwriter, the Attorney-in-Fact, and the Custodian and their respective representatives, agents and counsel. EXCEPTIONS: E. Irrevocability of Instruments This Agreement, the deposit pursuant hereto of certificates representing the Shares, and all authority herein conferred, is granted, made and conferred subject to and in consideration of the interest of the Underwriters and the Company, for the purpose of completing the transactions contemplated hereunder and by the Underwriting Agreement; and the Attorney-In-Fact further is vested hereby with an estate, right, title and interest in and to the Shares for the purpose of irrevocably empowering and securing to him authority sufficient to consummate said transactions at the time of purchase. Accordingly, this Agreement shall be irrevocable prior to August 31, 1997 and shall remain in full force and effect until that date. Furthermore, for the consideration herein referred to and in consideration of the said interest in the Shares, the undersigned agrees that this Agreement is irrevocable and shall not be terminated by operation of law upon the occurrence of any event whatsoever. -7- 42 F. Rights and Obligations of the Selling Stockholder Until payment in full for the Shares has been made by or for the account of the Underwriters, as above provided, the undersigned Selling Stockholder shall remain the owner of his Shares and shall retain all rights of ownership with respect to the Shares, including the right to vote and to receive any dividends and payment thereon, except the right to dispose of the Shares, which is subject to the Attorney-In-Fact's, rights pursuant hereto and subject to the Underwriting Agreement. However, until such payment in full has been made, or until the Underwriting Agreement has been terminated, the undersigned agrees not to give, pledge, hypothecate, grant liens on, transfer, deal with or contract with respect to, the Shares, or any interest therein, except in accordance with the Underwriting Agreement, and the Custodian shall not seek, request or demand any transfer, or transfer any, of the Shares except pursuant to the Underwriting Agreement. G. Liability and Indemnification of the Attorney-In-Fact and Custodian Subject to the terms and conditions of Section A.1 hereof, the Attorney-In-Fact and the Custodian are authorized to accept this Agreement and take any and all actions hereunder as the Attorney-In-Fact, in his sole discretion, shall determine. The Attorney-In-Fact and Custodian assume no responsibility or liability to the undersigned or to any other person, other than to deal with the Shares and any other shares of Common Stock held and received by the Attorney-In-Fact or deposited with the Custodian pursuant to the terms of this Agreement in accordance with the provisions hereof. The undersigned hereby does agree to indemnify and hold harmless the Attorney-In-Fact and the Custodian with respect to anything done by them in good faith in connection with any and all matters contemplated by this Agreement or the Underwriting Agreement. H. Return of Undelivered Shares If the Underwriting Agreement is not executed and delivered prior to November 30, 1997, or if the Underwriting Agreement shall be executed and delivered and then terminated pursuant to the provisions thereof without purchase of the Shares, this Custody Agreement (and the Power of Attorney included herein) shall terminate, and the Attorney-In-Fact, after all obligations hereunder or under the Underwriting Agreement have been fulfilled, shall instruct the Custodian to return to the undersigned the Shares held in custody for the account of the undersigned, together with any applicable stock powers, unless this Agreement is extended by written notice from the Selling Stockholder. -8- 43 I. Questionnaire In connection with the preparation of the Registration Statement it is necessary that the Company obtain from you the information called for by the following questions. The information supplied in response to this Questionnaire will be used to assure that certain of the information included in the Registration Statement is correct. Accordingly, great care should be exercised in the completion of the following questions, If the answer to any item is negative, or if such item is inapplicable, please so state in the space provided. If the space provided is insufficient for a complete answer, additional sheets may be attached to this Agreement. Question 1. Before answering this question, please read the explanatory information concerning "beneficial ownership" which follows this question. Please state as of (I) October 15, 1997, and (II) immediately following the sale of the Shares by you to the Underwriters:
I II As of Oct. 15, 1997 After sale ------------- ---------- A.1. The number of shares of the Company's Common Stock beneficially owned, directly or indirectly, by you: 2. The number of shares listed in A.1 as to which you have sole voting power: _____ shares _____ shares share voting power: _____ shares _____ shares have sole investment/ disposition power: _____ shares _____ shares share investment/ disposition power: _____ shares _____ shares
-9- 44
I II As of Oct. 15, 1997 After sale ------------- ---------- 3. The number of shares of the Company's Common Stock owned of record by you: _____ shares _____ shares 4. Whether the shares listed in A.3 are included in those listed in A.1: Yes____No____ Yes____No____ B.1. The number of shares of Company Common Stock that are owned by a partnership, firm, corporation, trust, estate or voting trust of which you are a partner, director, officer, principal stockholder, trustee, executor or participant: _____ shares _____ shares 2. The name (or other identification) of any such partnership, firm, corporation, trust, estate or voting trust: 3. Whether the shares listed in B.1 are included in those listed in A.1: Yes____No____ Yes____No____ C.1. The number of shares of Company Common Stock with respect to which you have the right to acquire beneficial ownership, directly or indirectly, within 60 days pursuant to the power to revoke or the automatic termination of a trust, discretionary account or similar arrangement: _____ shares _____ shares through the exercise of any option, warrant or right _____ shares _____ shares
-10- 45
I II As of Oct. 15, 1997 After sale ------------- ---------- 2. Whether the shares listed in C.1 are included in those listed in A.1: Yes____No____ Yes____No____
Note: Items A, B and C are intended to elicit information as to the nature of your beneficial ownership of shares (such as record ownership, beneficial ownership by virtue of your having or sharing voting or investment powers, beneficial ownership by reason of your right to acquire, etc.). If you do not believe that the nature of your beneficial ownership is apparent from your responses to items A, B and C, please further explain below: D. The number of shares reported as beneficially owned by you under Question A.1 that are subject to any put, call, straddle or other option, or to any pledge, hypothecation or other agreement which may affect your ownership thereof, and the nature of the option or agreement involved: _____ shares _____ shares E.1. The number of shares reported as beneficially owned by you under Question A.1 as to which you disclaim beneficial ownership: _____ shares _____ shares
2. If you disclaim beneficial ownership of any shares, please briefly identify such shares and state the reasons for such disclaimer: Beneficial ownership: A beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares (1) voting power, including the power to direct the voting of such security or (2) disposition power, including the power to dispose of or direct the disposition of such security. In addition, a person is deemed to have "beneficial ownership" of any securities as to which such person has the right to acquire beneficial ownership at any time within 60 days, including, but not limited to, any right to acquire: (i) through the exercise of any option, warrant or right; -11- 46 (ii) through the conversion of any security; (iii) pursuant to the power to revoke a trust, discretionary account or similar arrangement; or (iv) pursuant to the automatic termination of a trust, discretionary account or similar arrangement. It is possible that a security may have more than one "beneficial owner," such as a trust, with two co-trustees sharing voting power, and the settler or another third party having investment power, and the settler or another third party having investment power, in which case each of the three would be the "beneficial owner" of the securities in the trust. The power to vote or direct the voting, or to invest or dispose of, or direct the investment or disposition of, a security may be indirect and arise from legal, economic, contractual or other rights, and the determination of beneficial ownership depends on who ultimately possesses or shares the power to direct the voting or the disposition of the security. The final determination of the existence of beneficial ownership depends on the facts of each case; you may, in the space provided after Question 1.E.2, disclaim beneficial ownership of securities held in the name of another, although indicating the holdings of such other person. Since beneficial ownership by you of securities registered in the name of another may have serious consequences, financial or otherwise, to you, you should use great care, and if necessary consult your attorney, before reporting such shares as beneficially owned. Question 2. Describe briefly and state the approximate amount of any interest, direct or indirect, which you or any of your associates had or have in any transaction, or series of similar transactions, occurring in whole or in part since April 1994 or in any proposed transaction, or series of similar transactions, to which the Company was, or is to be, a party. You may merely affirm the statements made in the Preliminary Prospectus dated September 16, 1997 under the heading "Certain Relationships and Related Transactions." (You need not describe transactions in which you or any associate did not have an aggregate interest exceeding $10,000 or any transaction in which your interest arose solely from your ownership of securities of the Company provided that you received no extra or special benefit not shared on a pro rata basis by all other security holders.) For purposes of the foregoing, your "associates" include: (1) Any corporation or other organization (other than the Company) of which you are an officer or partner or of which you beneficially own, directly or indirectly, 10% or more of any class of equity securities; -12- 47 (2) Any trust or estate in which you have a substantial beneficial interest or as to which you serve as trustee, executor or in a similar fiduciary capacity; and (3) Your spouse and any relative of yours or of your spouse if such relative either lives with you or is a director or officer of the Company or any of its subsidiaries. ANSWER: Question 3. Please describe briefly any material legal proceeding pending or known to be contemplated in which you or any of your associates (as defined in the previous question) has an interest adverse to the Company, including the name of the court or agency in which any proceeding is pending or known to be contemplated, the date instituted or the date you anticipate it will be instituted, the principal parties thereto, a description of the factual basis alleged to underlie the proceeding or contemplated proceeding and the relief sought or to be sought. ANSWER: Question 4. Do you know of any arrangement (other than the proposed Underwriting Agreement) made or to be made by any person for any of the following purposes: (a) to limit or restrict the sale of shares of the Company's Common Stock during the period of distribution; (b) to stabilize the market for any shares of the Company's Common Stock to be offered; or (c) to withhold commissions, or otherwise to hold the Underwriters or each dealer responsible for the distribution of his participation in connection with the proposed offering? Yes_________ No_________ If yes, please summarize your knowledge of such arrangement: Question 5. Please state whether (a) you are, directly or indirectly, affiliated or associated with any member of the National Association of Securities Dealers, Inc. or (b) you have been or might be an underwriter, or a controlling person or member -13- 48 of any investment banking or brokerage firm which has been or might be an underwriter, for securities of the Company including the securities now being registered. If your answer to (a) is in the affirmative, please state the name of such member and the nature of the relationship. If your answer to (b) is in the affirmative, please state any underwriting discounts and commissions received or which might be received by you or such firm upon the sale of securities by the Company. ANSWER: Question 6. Please state each person or specify each class of persons (other than underwriters or dealers, as such) to whom any shares of Common Stock of the Company have been sold by you or any associate (as defined in Question 2) of yours, since April 26, 1994 or are to be sold by you or any such associate of yours. In answering this question, please make a separate statement with respect to each sale of Common Stock, giving the number of shares of Common Stock sold, the price at which such shares were sold and the consideration given for the shares so sold. ANSWER: Question 7. Do you or does any associate (as defined in Question 2) of yours have any understanding or agreement to sell to anyone shares of Common Stock other than pursuant to the Underwriting Agreement? If yes, please give details of any such sale, undertaking or agreement, including the date(s), number of shares, sale price and party to whom sold or to be sold. ANSWER: J. Miscellaneous This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original and all of which together shall be deemed to be one and the same instrument. Receipt by the Attorney-In-Fact and the Custodian of executed counterparts of this Agreement, or any certificate representing Shares deposited hereunder, shall constitute acceptance by each of the Attorney-In-Fact and the Custodian of the authorizations herein -14- 49 conferred and evidence the agreement of each of the Attorney-In-Fact and the Custodian to carry out and to perform this Agreement in accordance with the provisions hereof. The validity, enforceability, interpretation and construction of this Agreement shall be determined in accordance with the laws of the State of New York and shall inure to the benefit of, and this Agreement shall be binding upon, the undersigned and the undersigned's heirs, executors, administrators, successors end assigns, as the case may be. If any word, phrase, clause, portion or provision of this Agreement shall be held or deemed to be, or shall in fact be, inoperative or unenforceable as applied in any particular case or circumstance in any applicable jurisdiction or jurisdiction because if conflicts with any other provision hereof, or any constitution, statute or rule of public policy, or for any other reason, such eventuality shall not render any of the aforesaid inoperative or unenforceable in any other case or circumstance, or render any one or more or combination of any words, phrases, clauses, portions, or provisions herein invalid, inoperative, ultra vires or unenforceable to any extent whatsoever. The undersigned hereby ratifies and confirms all that the Attorney-In-Fact shall do by virtue hereof. IN WITNESS WHEREOF, the undersigned has executed this Agreement on this _____ day of __________, 1997. Signature: _________________________________ Signature of Selling __________________________________ Stockholder Guaranteed Please sign exactly as your by: name appears on your stock certificate. Name and address to which ___________________________ notices and funds shall be *(See Note below) sent (please print or type), _________________________________ (Name) _________________________________ (Street) _________________________________ (City) (State) (Zip Code, if in USA) *(NOTE: The Stockholder's signature must be guaranteed by a bank or trust company or by a member of the New York or American Stock Exchange.) -15- 50 SCHEDULE A Certificate for Shares of Common Stock of RUSSIAN WIRELESS TELEPHONE COMPANY, INC. Deposited Herewith 1. Your exact name and address: 2. Certificates for Shares of Common Stock Deposited A B C No. of Shares No. of Shares of Common Stock of Common Stock from This Certificate represented by Certificate Number Certificate* To Be Sold** - --------------- --------------- --------------- - --------------- --------------- --------------- - --------------- --------------- --------------- - -------------------- * The number to be inserted in this column is the number appearing on the stock certificate you are submitting for sale. ** The number to be inserted in this column is the number of shares from the certificate that you want to sell. If you deposit a certificate or certificates representing more shares than you plan to sell, the Custodian will cause to be delivered to you a new certificate representing the number of shares to be retained by you within ten days after the closing of the sale to the Underwriters. EX-1.2 3 AGREEENT AMONG UNDERWRITERS 1 EXHIBIT 1.2 1,650,000 SHARES OF COMMON STOCK RUSSIAN WIRELESS TELEPHONE COMPANY, INC. AGREEMENT AMONG UNDERWRITERS New York, New York __________ ___, 1997 J.W. Barclay & Co., Inc. As Representative of the Several Underwriters One Battery Park Plaza New York, New York 10004 Dear Sirs: 1. Underwriting Agreement. We understand that RUSSIAN WIRELESS TELEPHONE COMPANY, INC., a Delaware corporation (the "Company"), proposes to enter into an underwriting agreement in the form attached hereto as Exhibit A (the "Underwriting Agreement") with the underwriters named in Schedule B to the Underwriting Agreement (the "Underwriters") acting severally and not jointly with respect to the purchase of 1,650,000 shares (the "Stock") of common stock, $.01 par value per share ("Common Stock") of the Company, of which 1,620,000 shares are being sold by the Company and 30,000 shares by the stockholder listed in Schedule A of the Underwriting Agreement (the "Selling Stockholder"). In addition, the Underwriters (or, at its option, J.W. Barclay & Co., Inc., the "Representative," individually) have been granted an option to purchase up to 247,500 additional shares of Common Stock to cover over-allotments, if any, referred to in Section 5 of the Underwriting Agreement (the "Additional Stock"). This is to confirm that we agree to purchase, in accordance with the terms hereof and of the Underwriting Agreement, the number of shares of Stock set forth opposite our name in Schedule B to the Underwriting Agreement, plus such number of shares of Stock, if any, which we may become obligated to purchase pursuant to Section 4 hereof ("our Stock"). The ratio which the number of shares of our Stock bears to the total number of shares of Stock purchased pursuant to the Underwriting Agreement is herein called "our underwriting proportion". 2. Registration Statement and Prospectus. We have hereto-fore received and examined a copy of the registration statement, as amended to the date hereof, and the related prospectus in respect of the Stock, as filed with the Securities and Exchange Commission. The registration statement, as amended at the time it becomes effective, including financial statements and exhibits, is hereinafter referred to as the "Registration Statement," and the prospectus in the 2 form first filed with the Securities and Exchange Commission pursuant to Rule 424(b) after the Registration Statement becomes effective is referred to as the "Prospectus." We confirm that the information furnished to you by us for use in the Registration Statement and in the Prospectus is correct and is not misleading insofar as it relates to us. We consent to being named as an Underwriter in such Registration Statement and we are willing to accept our responsibilities under the Securities Act of 1933, as a result thereof. We confirm that we have authorized you to advise the Company on our behalf (a) as to the statements to be included in any Preliminary Prospectus and in the Prospectus under the heading "Underwriting" insofar as they relate to us and (b) that there is no other information about us required to be stated in the Registration Statement or Prospectus. We further confirm that, upon request by you, as Representative, we have furnished a copy of any amended preliminary prospectus to each person to whom we have furnished a copy of any previous preliminary prospectus, and we confirm that we have delivered, and we agree that we will deliver, all preliminary and final prospectuses required for compliance with the provisions of Rule 15c2-8 under the Securities Exchange Act of 1934. 3. Authority of the Representative. We authorize you, acting as Representative, to execute and deliver on our behalf the Under-writing Agreement, and to agree to any variation of its terms (except as to the purchase price and the number of our Securities) which, in your judgment, is not a variation which materially and adversely affects our rights and obligations. We also authorize you, in your discretion and on our behalf, with approval of counsel for the Underwriters, to approve the Prospectus and to approve of, or object to, any further amendments to the Registration Statement, or amendments or supplements to the Prospectus. We further authorize you to exercise all the authority and discretion vested in the Underwriters and in you by the provisions of the Under-writing Agreement and to take all such action as you, in your discretion, may believe desirable to carry out the provisions of the Underwriting Agreement and of this Agreement, including the extension of any date specified in the Underwriting Agreement, the exercise of any right of cancellation or termination, and to determine all matters relating to the public advertisement of the Stock; provided, however, that, except with the consent of Underwriters who shall have agreed to purchase in the aggregate 50% or more of the Stock, no extension of the time by which the Registration Statement is to become effective, as provided in Section 8(a) of the Underwriting Agreement, shall be for a period in excess of two business days. We authorize you to take such action as in your discretion may be necessary or desirable to effect the sale and distribution of the Stock, including, without limiting the generality of the foregoing, the right to determine the terms of any proposed offering, the concession to Selected Dealers (as hereinafter defined) and the reallowance, if any, to other dealers and the right to make the judgments provided for in Section 11 of the Underwriting Agreement. 4. Authority of Representative as to Defaulting Underwriters. Until the termination of this Agreement, we authorize you to arrange for the purchase by other persons, who may include you or any of the other Underwriters, of any Stock not taken up by any defaulting Underwriter. In the event that such arrangements are made, the respective amounts of the Stock to be purchased by the non-defaulting Underwriters and by such other person or persons, if any, -2- 3 shall be taken as the basis for all rights and obligations hereunder; but this shall not in any way affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from its default, nor shall any such default relieve any other Underwriter of any of its obligations hereunder or under the Underwriting Agreement except as herein or therein provided. In the event of default by one or more Underwriters in respect of their obligations (a) under the Underwriting Agreement to purchase the Securities, agreed to be purchased by them thereunder, or (b) under this Agreement to take up and pay for any Stock purchased, or (c) to deliver any Stock sold or over-allotted by you for the respective accounts of the Underwriters pursuant to Section 9 hereof, or to bear their respective share of expenses or liabilities pursuant to Sections 11, 13 and 14 hereof, and to the extent that arrangements shall not have been made by you for any persons to assume the obligations of such defaulting Underwriter or Underwriters, we agree to assume our proportionate share of the obligations of each defaulting Underwriter or Underwriters (subject in the case of clause (a) above to the limitations contained in Section 12 of the Underwriting Agreement) without relieving any such defaulting Underwriter or Underwriters of its liability therefor. 5. Offering of Securities. We understand that you will notify us when the initial public offering of the Stock is to be made and of the initial public offering price. We hereby authorize you, in your sole discretion, after the initial public offering, to change the public offering price, the concession and the reallowance. The offering price at any time in effect is hereinafter referred to as the "public offering price". We agree that we will not offer any of the Stock for sale at a price other than the public offering price or allow any discount therefrom except as herein otherwise specifically provided. We agree that public advertisement of the offering shall be made by you on behalf of the Underwriters on such date as you shall determine. We have not advertised the offering and will not do so until after such date. We understand that any advertisement we may then make will be our own responsibility and at our own expense. We authorize you to reserve and offer for sale to institutions and other retail purchasers and to dealers (the "Selected Dealers") to be selected by you (such dealers may include any Underwriter) such of our Stock as you, in your sole discretion, shall determine. Any such offering to Selected Dealers may be made pursuant to a Selected Dealers Agreement, in the form attached hereto as Exhibit B, or otherwise, as you may determine. The form of Selected Dealers Agreement attached hereto as Exhibit B is satisfactory to us. We authorize you to make purchases and sales of the Stock from or to any Selected Dealers or Underwriters at the public offering price, less all or any part of the concession and, with your consent, any Underwriter may make purchases or sales of the Stock from or to any Selected Dealer or Underwriter at the public offering price, less all or any part of the concession. -3- 4 We understand that you will notify each Underwriter promptly upon the release of the Stock for public offering as to the amount of Stock reserved for sale to Selected Dealers and retail purchasers. Stock not so reserved may be sold by each Underwriter for its own account, except that from time to time you may, in your discretion, add to the Stock reserved for sale to Selected Dealers and retail purchasers any Stock retained by an Underwriter remaining unsold. We agree to notify you, from time to time, upon request, of the amount of our Stock retained by us remaining unsold. If all of the Stock reserved for offering to Selected Dealers and retail purchasers are not promptly sold by you, any Underwriter may, from time to time, with your consent, obtain a release of all or any Stock of such Underwriter then remaining unsold, and Stock so released shall thereafter be deemed not to have been reserved. Stock of any Underwriter so reserved which remain unsold, or, if sold, have not been paid for at any time prior to the termination of this Agreement may, in your discretion or upon the request of such Underwriter, be delivered to such Underwriter for carrying purposes only, but such Stock shall remain subject to redelivery to you upon demand for disposition by you until this Agreement is terminated. We agree that in connection with sales and offers to sell the Stock, if any, made by us outside the United States or its territories or possessions, (a) we will furnish to each person to whom any such offer or sale is made such prospectus, advertisement or other offering document containing information relating to the Stock or the Company, as may be required under the laws of the jurisdiction in which such offer or sale is made and (b) we will furnish to each person to whom any such offer is made a copy of the then current preliminary prospectus, and to each person to whom any such sale is made, a copy of the Prospectus referred to in the Underwriting Agreement (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto). Any prospectus, advertisement or other offering document (other than any such preliminary prospectus or Prospectus) furnished by us to any person in accordance with the preceding sentence and all such additional offering material, if any, as we may furnish to any person (i) shall comply in all respects with the laws of the jurisdiction in which it is so furnished, (ii) shall be prepared and so furnished at our sole risk and expense, and (iii) shall not contain information relating to the Stock or the Company which is inconsistent in any respect with information contained in the then current preliminary prospectus or in the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto), as the case may be. We recognize the importance of a broad distribution of the Stock among bona fide investors and we agree to use our best efforts to obtain such broad distribution and, to that end, to the extent we deem practicable, to give priority to small orders. We agree that we will not sell to any account over which we exercise discretionary authority any of the Securities which we have agreed to purchase pursuant to the Underwriting Agreement. 6. Compensation to Representative. We authorize you to charge to our account, as compensation for your services as Representative in connection with this offering, including -4- 5 the purchase from the Company of the Stock and the management of the offering, an amount equal to $. per share of Common Stock in respect to each of our Stock. 7. Payment and Delivery. At or before 9:00 a.m., New York City time, on the Closing Date as defined in the Underwriting Agreement, we agree to deliver to you at your office a certified or official bank check payable in New York Clearing House funds to your order, in an amount equal to the initial public offering price, less the concession to the Selected Dealers in respect of that portion of our Stock which has been retained by or released to us for direct sales. In the event that our funds are not received by you when required, you are authorized, in your discretion, but shall not be obligated, to make payment for our account pursuant to the Under-writing Agreement by advancing your own funds. Any such payment by you shall not relieve us from any of our obligations hereunder or under the Underwriting Agreement. We authorize you to hold and deliver against payment any of our Stock which have been sold or reserved for sale to Selected Dealers or retail purchasers. Any of our Stock not sold or reserved by you as aforesaid will be available for delivery to us at your office as soon as practicable after such Stock have been delivered to you. Upon the termination of this Agreement, or prior thereto at your discretion, you will deliver to us any of our Stock reserved by you for sale to Selected Dealers or retail purchasers, but not sold and paid for against payment by us of an amount equal to the initial public offering price of such Stock, less the concession to the Selected Dealers in respect thereof. 8. Authority to Borrow. We authorize you to arrange loans for our account and to execute and deliver any notes or other instruments in connection therewith, and to pledge as security therefor all or any part of our Stock, as you may deem necessary or advisable to carry out the purchase, carrying and distribution of the Stock, and to advance your own funds, charging current interest rates. 9. Over-allotment; Stabilization. We authorize you, for the account of each Underwriter, prior to the termination of this Agreement, and for such longer period as may be necessary to cover any short position incurred for the accounts of the several Under-writers pursuant to this Agreement, (a) to over-allot in arranging for sales of Stock to Selected Dealers and others and, if necessary, to purchase Stock (whether pursuant to exercise of the option set forth in Section 5 of the Underwriting Agreement or otherwise) at such prices as you may determine for the purpose of covering such over-allotments, and (b) for the purpose of stabilizing the market in the Stock, to make purchases and sales of Stock on the open market or otherwise, for long or short account, on a when-issued basis or otherwise, at such prices, in such amounts and in such manner as you may determine; provided, however, that at no time shall our net commitment, either for long or short account, under this Section 9 exceed 15% of the amount of our Stock. Such purchases, sales and over-allotments shall be made for the respective accounts of the several Underwriters as nearly as practicable to their respective underwriting -5- 6 proportions. We agree to take up on demand at cost any Stock so purchased for our account and deliver on demand any Stock so sold or over-allotted for our account. We authorize you to sell for the account of the Underwriters any Stock purchased pursuant to this Section 9, upon such terms as you may deem advisable, and any Underwriter, including yourselves, may purchase such Stock. You are authorized to charge the respective accounts of the Underwriters with broker's commissions or dealer's mark-up on purchases and sales effected by you. If pursuant to the provision of the preceding paragraph and prior to the termination of this Agreement (or prior to such earlier date as you may have determined) you purchase or contract to purchase for the account of any Underwriter in the open market or otherwise any Stock which were retained by, or released to, us for direct sale, or any Stock which may have been issued in exchange for such Stock, we authorize you either to charge our account with an amount equal to the concession to Selected Dealers with respect thereto, which amount shall be credited against the cost of such Stock, or to require us to repurchase such Stock at a price equal to the total cost of such purchase, including transfer taxes and broker's commissions or dealer's mark-up, if any. In lieu of such action you may, in your discretion, sell for our account the Stock so purchased and debit or credit our account for the loss or profit resulting from such sale. You will notify us promptly if and when you engage in any stabilization transaction pursuant to this Section 9 or otherwise and will notify us of the date of termination of stabilization. We agree to file with you any reports required of us including "Not as Manager" reports pursuant to Rule 17a-2 under the Securities Exchange Act of 1934 not later than five business days following the day upon which such stabilization transaction was terminated, and we authorize you to file on our behalf with the Securities and Exchange Commission any reports required by such Rule. 10. Limitation on Transactions by Underwriters. Except as permitted by you, we will not, during the term of this Agreement, bid for, purchase, sell or attempt to induce others to purchase or sell, directly or indirectly, any Stock other than (i) as provided in the Underwriting Agreement and in this agreement, (ii) purchases from or sales to dealers of the Stock at the public offering price, less all or any part of the reallowance to dealers, or (iii) purchases or sales by us of any Stock as broker or unsolicited orders for the account of others. We represent that we have not participated in any transaction prohibited by the preceding paragraph and that we have at all times complied with the provisions of Regulation M of the Securities and Exchange Commission applicable to this offering. We may, with your prior consent, make purchases of the Stock from and sales to other Underwriters at the public offering price, less all or any part of the concession to dealers. 11. Allocation and Payment of Expenses. We understand that all expenses of a general nature incurred by you, as Representative, in connection with the purchase, carrying, marketing and sale of the Stock shall be borne by the Underwriters in accordance with their respective -6- 7 share of the underwriting obligations. We authorize you to charge our account with our share, based on our underwriting obligation, of the aforesaid expenses, including all transfer taxes paid on our behalf on sales or transfers made for our account. As promptly as possible after the termination of this Agreement, the accounts arising pursuant hereto shall be settled and paid. Your ascertainment of all expenses and the apportionment thereof shall be conclusive. Notwithstanding any settlement or settlements hereunder, we will remain liable for our share of all expenses and liabilities which may be incurred by or for the accounts of the Underwriters, including any expenses and liabilities referred to in Sections 13 and 14(b) hereof, which shall be determined as provided in this Section 11. 12. Termination. Unless this Agreement or any provision hereof is earlier terminated by you, and except for provisions herein that contemplate obligations surviving the termination hereof as noted in the next paragraph, this Agreement will terminate at the close of business on the 30th day after the date hereof, but in your discretion, may be extended by you for a further period not exceeding 30 days with the consent of the Underwriters who have agreed to purchase in the aggregate 50% or more of the Stock. No termination or suspension pursuant to this Section shall affect your authority under Section 9 to cover any short position under this Agreement. Upon termination of this Agreement, all authorizations, rights and obligations hereunder shall cease, except (i) the mutual obligations to settle accounts under Section 11, (ii) our obligation to pay any transfer taxes which may be assessed and paid on account of any sales hereunder for our account, (iii) our obligation with respect to purchases which may be made by you from time to time thereafter to cover any short position incurred under this Agreement, (iv) the provisions of Sections 13 and 14, and (v) the obligations of any defaulting Underwriter, all of which shall continue until fully discharged. 13. Liability of Representative and Underwriters. Neither as Representative nor individually shall you be under any liability whatsoever to any other Underwriter, nor shall you be under any liability in respect of any matters connected herewith or action taken by you pursuant hereto, except for the obligations expressly assumed by you in this Agreement. You shall be under no liability for or in respect of the value of the Stock or the validity of the form thereof, the Registration Statement, the Prospectus, or agreements or other instruments executed by the Company or others; or for or in respect of the delivery of the Stock; or for the performance by the Company or others of any agreement on its or their part. Nothing herein contained shall constitute the several Underwriters an association, or partners with us or with each other, or, except as herein expressly provided, render any Underwriter liable for the obligation of any other Underwriter. The rights, obligations and liabilities of each of the Underwriters are several, in accordance with their respective obligations, and not joint. Notwithstanding any settlement of accounts under this Agreement, we -7- 8 agree to pay our underwriting proportion of the amount of any claim, demand or liability which may be asserted against and discharged by the Underwriters or any of them, based on the claim that the Underwriters constitute an association, unincorporated business or other entity, and also to pay our underwriting proportion of expenses approved by you incurred by the Underwriters, or any of them, in contesting any such claims, demands or liabilities. If the Underwriters shall be deemed to constitute a partnership for income tax purposes, it is the intent of each Underwriter to be excluded from the application of Sub-chapter K, Chapter 1, Subtitle A of the Internal Revenue Code of 1954, as amended. Each Underwriter elects to be so excluded and agrees not to take any position inconsistent with such election. Each Underwriter authorizes you, in your discretion, to execute and file on behalf of the Underwriters such evidence of election as may be required by the Internal Revenue Service. 14. Indemnification and Future Claims. (a) We agree to indemnify and hold harmless you and each other Underwriter, and each person, if any, who controls you and such other Underwriter within the meaning of Section 15 of the Securities Act of 1933, and to reimburse their expenses, to the extent and upon the terms that we agree to indemnify and hold harmless the Company and to reimburse expenses as set forth in the Underwriting Agreement. Our indemnity agreement set forth in this Section 14 shall remain in full force and effect regardless of any investigation made by or on behalf of such other Underwriter or controlling person and shall survive the delivery of and payment for the Stock and the termination of this Agreement. (b) In the event that any time any claim or claims shall be asserted against you, as Representative, or otherwise involving the Underwriters generally, relating to the Registration Statement or any preliminary prospectus or the Prospectus, as such may be from time to time amended or supplemented, the public offering of the Stock or any of the transactions contemplated by this Agreement, we authorize you to take such other action as you shall deem necessary or desirable under the circumstances, including settlement of any such claim or claims if such course of action shall be recommended by counsel retained by you. We agree to pay to you on request, our underwriting proportion of all expenses incurred by you (including, but not limited to, disbursements and fees of counsel so retained) in investigating and defending against such claim or claims and our underwriting proportion of any liability incurred by you in respect of such claim or claims, whether such liability shall be the result of a judgment or as a result of any such settlement. 15. Title to Securities. The Stock purchased by, or on behalf of, the respective Underwriters shall remain the property of such Underwriters until sold, and title to any such Stock shall not in any event pass to the Representative by virtue of any of the provisions of this Agreement. 16. Blue Sky Matters. It is understood that you assume no responsibility with respect to the right of any Underwriter or other person to offer or to sell Stock in any jurisdiction, -8- 9 notwithstanding any information which you may furnish as to the jurisdictions under the securities laws of which it is believed the Stock may be sold. 17. Applicable Law. This Agreement will be governed by and construed in accordance with the laws of the State of New York. 18. Capital Requirements. We confirm that the incurrence by us of our obligation under this Agreement and under the Underwriting Agreement will not place us in violation of the net capital requirements of Rule 15c3-1 under the Securities Exchange Act of 1934 or of any applicable rules relating to capital requirements of any securities exchange to which we are subject. 19. Miscellaneous. Any notice from you to us shall be deemed to have been duly given if mailed, telephoned or telegraphed to us at the address set forth in the Underwriters Questionnaire furnished by us to you. Any notice from us to you shall be deemed to have been duly given if mailed, telephoned or telegraphed to you at One Battery Park Plaza, New York, New York 10004. We understand that you are a member in good standing of the NASD. We hereby confirm that we are actually engaged in the investment banking or securities business and are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions, and not registered as a broker or dealer under the 1934 Act, who agrees not to make any sales within the United States, its territories or its possessions, or to persons who are nationals thereof or residents therein (except that we may participate in sales to Selected Dealers and others under Section 5 of this Agreement). We hereby agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and if we are a foreign dealer and not a member of the NASD, we also hereby agree to comply with the NASD's interpretation with respect to free-riding and withholding and to comply, as though we were a member of the NASD, with the provisions of Rule 2730 and 2750 of the NASD Conduct Rules. In connection with sales and offers to sell Stock made by us outside the United States, its territories and possessions (i) we will either furnish to each person to whom any such sale or offer is made a copy of the then current Preliminary Prospectus or the Prospectus, as the case may be, or inform such person that such Preliminary Prospectus or Prospectus will be available upon request, and (ii) we will furnish to each person to whom any such sale or offer is made such prospectus, advertisement or other offering document containing information relating to the Stock or the Company as may be required under the law of the jurisdiction in which such sale or offer is made. Any prospectus, advertisement or other offering document furnished by us to any person in accordance with the preceding sentence and any such additional offering material as we may furnish to any person (x) shall comply in all respects with the law of the jurisdiction in which it is so furnished, (y) shall be prepared and so furnished at our sole risk and expense and (z) shall not contain information relating to the Stock or the Company which is inconsistent in any respect with the information contained in the then current Preliminary Prospectus or in the Prospectus, as the case may be. -9- 10 We understand that, in consideration of your services in connection with the public offering of the Stock, the Company has agreed with you individually and not as Representative of the Underwriters (a) to sell to you the Representative's Warrant referred to in Section 1(b) of the Underwriting Agreement for the sum of $10, (b) to pay to you a non-accountable expense allowance referred to in Section 7(b) of the Underwriting Agreement and (c) to enter into the Consulting Agreement described in Section 3(u) of the Underwriting Agreement. In addition, you may, at your sole discretion, elect to exercise the over-allotment option described in Section 5 of the Underwriting Agreement, individually. We confirm to you that we shall make no claim to the Representative's Warrant, any rights related thereto, the Common Stock underlying the Representative's Warrant, the non-accountable expense allowance, or, to the over-allotment option, to the extent you elect to exercise such option individually. You confirm to us that we shall have no obligations or liabilities with respect to the purchase of the Representative's Warrant, the exercise thereof, the Common Stock underlying the Representative's Warrant, or the non-accountable expense allowance, or, to the over-allotment option, to the extent you elect to exercise such option individually. Please confirm that the foregoing correctly states the understanding between us by signing and returning to us a counterpart hereof. Very truly yours, ___________________________________ By:________________________________ (Attorney-in-Fact for each of the several Underwriters named in Schedule B to the attached Underwriting Agreement.) Confirmed as of the date first above written: J.W. BARCLAY & CO., INC. as Representative By:__________________________ EX-1.3 4 SELECTED DEALERS AGREEMENT 1 EXHIBIT 1.3 RUSSIAN WIRELESS TELEPHONE COMPANY, INC. 1,650,000 shares and of Common Stock SELECTED DEALERS AGREEMENT __________ ___, 1997 Dear Sirs: J.W. Barclay & Co., Inc. is the representative (the "Representative") of the several underwriters, (collectively with the Representative, the "Underwriters") named in the Prospectus dated __________ __, 1997. The Underwriters have agreed to purchase, subject to the terms and conditions set forth in the Underwriting Agreement referred to in the Prospectus, an aggregate of 1,650,000 shares of common stock, par value $.01 per share (the "Common Stock") of Russian Wireless Telephone Company, Inc. (the "Company"), of which 1,620,000 shares are being sold by the Company and 30,000 shares are being sold by the selling stockholder listed in Schedule A of the Underwriting Agreement (the "Selling Stockholder"). The Underwriters have also agreed to purchase from the Company up to 247,500 additional shares of Common Stock (the "Additional Common Stock"), pursuant to an option for the purpose of covering over-allotments (said 1,650,000 shares of Common Stock plus any of said Additional Common Stock purchased upon exercise of the option being herein collectively called the "Stock"). The Stock and the terms upon which it is to be offered for sale by the Underwriters are more particularly described in the Prospectus. 1. The Stock is to be offered to the public by the Underwriters at a price of $7.00 per share (herein called the "Public Offering Price") and in accordance with the terms of the offering set forth in the Prospectus. 2. The Underwriters are offering, subject to the terms and conditions hereof, a portion of the Stock for sale to certain dealers which are members of the National Association of Securities Dealers, Inc. and agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and to foreign dealers or institutions ineligible for membership in said Association which agree (a) not to resell Securities (i) to purchasers located in, or to persons who are nationals of, the United States of America or (ii) when there is a public demand for the Securities to persons specified as those to whom members of said Association participating in a distribution may not sell; and (b) to comply, as though such foreign dealer or institution were a member of such Association, with Rules 2730 and 2750 of the NASD Conduct Rules (such dealers and institutions agreeing to purchase Common Stock and/or Warrants hereunder being hereinafter referred to as "Selected Dealers") at the Public Offering Price less a selling 2 concession of $.____ per share, payable as hereinafter provided. The Underwriters may be included among the Selected Dealers. 3. The Representative shall act as your representative under this Agreement and shall have full authority to take such action as the Representative may deem advisable in respect to all matters pertaining to the public offering of the Stock. 4. If you desire to purchase any of the Stock, your application should reach us promptly by telephone or facsimile at the office of the Representative, and we will use our best efforts to fill the same. We reserve the right to reject all subscriptions in whole or in part, to make allotments and to close the subscription books at any time without notice. The Stock allotted to you will be confirmed, subject to the terms and conditions of this Agreement. 5. The privilege of purchasing the Stock is extended to you by the Representative only if the Underwriters may lawfully sell the Stock to dealers in your state. 6. Any Stock purchased by you under the terms of this Agreement may be immediately re-offered to the public in accordance with the terms of the offering set forth herein and in the Prospectus, subject to the securities laws of the various states. Neither you nor any other person is or has been authorized to give any information or to make any representations in connection with the sale of Stock other than as contained in the Prospectus. 7. This Agreement will terminate when we shall have determined that the public offering of the Stock has been completed and upon telegraphic notice to you of such termination, but, if not previously terminated, this Agreement will terminate at the close of business on the 20th full business day after the date hereof; provided, however, that we shall have the right to extend this Agreement for an additional period or periods not exceeding 20 full business days in the aggregate upon telegraphic notice to you. Promptly after the termination of this Agreement there shall become payable to you the selling concession on all shares of Stock which you shall have purchased hereunder and which shall not have been purchased or contracted for (including certificates issued upon transfer) by us, in the open market or otherwise (except pursuant to Section 10 hereof), during the terms of this Agreement for the account of the Underwriters. 8. For the purpose of stabilizing the market in the Common Stock of the Company, we have been authorized to make purchases and sales thereof, in the open market or otherwise, and, in arranging for sale of the Stock, to over-allot. 9. You agree to advise us from time to time, upon request, prior to the termination of this Agreement, of the number of shares of Stock purchased by you hereunder and remaining unsold at the time of such request, and, if in our opinion any such Stock shall be needed to make delivery of the Stock sold or over-allotted for the account of the Underwriters, you will, forthwith upon our request, grant to us, or such party as we determine for, our account the right, exercisable promptly after receipt of notice from you that such right has been granted, to -2- 3 purchase, at the Public Offering Price less the selling concession as we shall determine, such number of shares of Stock owned by you as shall have been specified in our request. 10. On becoming a Selected Dealer and in offering and selling the Stock, you agree to comply with all applicable requirements of the Securities Act of 1933, the Securities Exchange Act of 1934 and the NASD Rules of Fair Practice. 11. Upon application, you will be informed as to the jurisdictions in which we have been advised that the Stock have been qualified for sale under the respective securities or blue sky laws of such jurisdictions, but we assume no obligation or responsibility as to the right of any Selected Dealer to sell the Stock in any jurisdiction or as to any sale therein. 12. Additional copies of the Prospectus will be supplied to you in reasonable quantities upon request. 13. It is expected that public advertisement of the Securities will be made on the first day after the effective date of the Registration Statement. Twenty-four hours after such advertisement shall have appeared but not before, you will be free to advertise at your own expense, over your own name, subject to any restrictions of local laws, but your advertisement must conform in all respects to the requirements of the Securities Act of 1933, and we will not be under any obligation or liability in respect of your advertisement. 14. No Selected Dealer is authorized to act as our agent or to make any representation as to the existence of an agency relationship otherwise to act on our behalf in offering or selling the Stock to the public or otherwise. 15. We shall not be under any liability for or in respect of the value, validity or form of the certificates for the shares of Common Stock, or delivery of the certificates for the Common Stock, or the performance by anyone of any agreement on his part, or the qualification of the Stock for sale under the laws of any jurisdiction, or for or in respect of any matter connected with this Agreement, except for lack of good faith and for obligations expressly assumed by us in this Agreement. The foregoing provisions shall be deemed a waiver of any liability imposed under the Securities Act of 1933. 16. Payment for the Securities sold to you hereunder is to be made at the Public Offering Price, on or about __________ __, 1997, or such later date as we may advise, by certified or official bank check payable to the order of J.W. Barclay & Co., Inc., in current New York Clearing House funds at such place as we shall specify on one day's notice to you against delivery of certificates for the Common Stock. 17. Notice to us should be addressed to us at the office of J.W. Barclay & Co., Inc., One Battery Park Plaza, New York, New York 10004. Notices to you shall be deemed to have been duly given if telefaxed or mailed to you at the address to which this letter is addressed. -3- 4 18. If you desire to purchase any of the Stock, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter enclosed herewith even though you have previously advised us thereof by telephone or facsimile. Dated: ___________ ___, 1997 J.W. BARCLAY & CO., INC. By:___________________________________ Accepted and agreed: as to _____ Shares of Common Stock this _____ day of ___________, 1997 By:__________________________________ 5 =============================================================================== REPRESENTATIVE'S WARRANT TO PURCHASE COMMON STOCK OF RUSSIAN WIRELESS TELEPHONE COMPANY, INC. =============================================================================== 6 Void after 5:00 p.m. New York Time, on ___________, 2002. Warrant to Purchase __________ Shares of Common Stock WARRANT TO PURCHASE COMMON STOCK OF RUSSIAN WIRELESS TELEPHONE COMPANY, INC. This is to Certify That, FOR VALUE RECEIVED, J. W. Barclay & Co., Inc. or assigns ("Holder"), is entitled to purchase, subject to the provisions of this Warrant, from Russian Wireless Telephone Company, Inc., a Delaware corporation ("Company"), _______________ (____) fully paid, validly issued and nonassessable shares of Common Stock, par value $.01 per share, of the Company ("Shares") at a price of $11.55 per share at any time or from time to time during the period from _____________ __, 1998 to ____________ __, 2002, but not later than 5:00 p.m. New York City Time, on ____________ __, 2002. The number of Shares to be received upon the exercise of this Warrant and the price to be paid for each Share may be adjusted from time to time as hereinafter set forth. The Shares deliverable upon such exercise, and as adjusted from time to time, are hereinafter sometimes referred to as "Warrant Shares" and the exercise price of a Share in effect at any time and as adjusted from time to time is hereinafter sometimes referred to as the "Exercise Price." This Warrant, together with warrants of like tenor, constituting in the aggregate warrants (the "Warrants") to purchase 165,000 Shares, was originally issued pursuant to an underwriting agreement between the Company and J. W. Barclay & Co., Inc., as Representative of the Underwriters, in connection with a public offering through the Underwriters of 1,650,000 Shares, in consideration of $10.00 received for the Warrants. (a) EXERCISE OF WARRANT. (1) This Warrant may be exercised in whole or in part at any time or from time to time on or after ___________ ___, 1998 and until ____________ ___, 2002 (the "Exercise Period"), subject to the provisions of Section (j)(2) hereof; provided, however, that (I) if either such day is a day on which banking institutions in the State of New York are authorized by law to close, then on the next succeeding day which shall not be such a day, and (ii) in the event of any merger, consolidation or sale of substantially all the assets of the Company as an entirety, resulting in any distribution to the Company's stockholders, prior to __________ ___, 2002, the Holder shall have the right to exercise this Warrant commencing at such time through __________ __, 2002 into the kind and amount of shares of stock and other securities and property (including cash) receivable by a holder of the number of Shares into which this Warrant might have been exercisable immediately prior thereto. This Warrant may be exercised by presentation and surrender hereof to the Company at its principal office, or at 7 the office of its stock transfer agent, if any, with the Purchase Form annexed hereto duly executed and accompanied by payment of the Exercise Price for the number of Warrant Shares specified in such form. As soon as practicable after each such exercise of the Warrants, but not later than seven (7) days from the date of such exercise (which exercise includes payment of the Exercise Price relating thereto), the Company shall issue and deliver to the Holder a certificate or certificate for the Warrant Shares issuable upon such exercise, registered in the name of the Holder or its designee. If this Warrant should be exercised in part only, the Company shall, upon surrender of this Warrant for cancellation, execute and deliver a new Warrant evidencing the rights of the Holder thereof to purchase the balance of the Warrant Shares purchasable thereunder. Upon receipt by the Company of this Warrant at its office, or by the stock transfer agent of the Company at its office, in proper form for exercise, the Holder shall be deemed to be the holder of record of the Shares issuable upon such exercise, notwithstanding that the stock transfer books of the Company shall then be closed or that certificates representing such Shares hall not then be physically delivered to the Holder. (2) At any time during the Exercise Period, the Holder may, at its option, exchange this Warrant, in whole or in part (a "Warrant Exchange"), into the number of Warrant Shares determined in accordance with this Section (a)(2), by surrendering this Warrant at the principal office of the Company or at the office of its stock transfer agent, accompanied by a notice stating such Holder's intent to effect such exchange, the number of Warrant Shares to be exchanged and the date on which the Holder requests that such Warrant Exchange occur (the "Notice of Exchange"). The Warrant Exchange shall take place on the date specified in the Notice of Exchange or, if later, the date the Notice of Exchange is received by the Company or its stock transfer agent (the "Exchange Date"). Certificates for the Shares issuable upon such Warrant Exchange and, if applicable, a new warrant of like tenor evidencing the balance of the Shares remaining subject to this Warrant, shall be issued as of the Exchange Date and delivered to the Holder within seven (7) days following the Exchange Date. In connection with any Warrant Exchange, this Warrant shall represent the right to subscribe for and acquire the number of Warrant Shares (rounded to the next highest integer) equal to (i) the number of Warrant Shares specified by the Holder in its Notice of Exchange (the "Total Number") less (ii) the number of Warrant Shares equal to the quotient obtained by dividing (A) the product of the Total Number and the existing Exercise Price by (B) the current market value of a Share. Current market value shall have the meaning set forth Section (c) below, except that for purposes hereof, the date of exercise, as used in such Section (c), shall mean the Exchange Date. (b) RESERVATION OF SHARES. The Company shall at all times reserve for issuance and/or delivery upon exercise of this Warrant such number of Shares as shall be required for issuance and delivery upon exercise of the Warrants. (c) FRACTIONAL SHARES. No fractional shares or script representing fractional shares shall be issued upon the exercise of this Warrant. With respect to any fraction of a share called for upon any exercise hereof, the Company shall pay to the Holder an amount in cash equal to such fraction multiplied by the current market value of a Share, determined as follows: -2- 8 (1) If the Shares are listed on a national securities exchange or admitted to unlisted trading privileges on such exchange or listed for trading on The Nasdaq National Market, the current market value shall be the last reported sale price of the Shares on such exchange or market on the last business day prior to the date of exercise of this Warrant or if no such sale is made on such day, the average of the closing bid and asked prices for such day on such exchange or market; or (2) If the Shares are not so listed or admitted to unlisted trading privileges, but is traded on The Nasdaq Small Cap Market, the current Market Value shall be the average of the closing bid and asked prices for such day on such market, and if the Shares are not so traded, the current market value shall be the mean of the last reported bid and asked prices reported by the National Quotation Bureau, Inc. on the last business day prior to the date of the exercise of this Warrant; or (3) If the Shares are not so listed or admitted to unlisted trading privileges and bid and asked prices are not so reported, the current market value shall be an amount, not less than book value thereof as at the end of the most recent fiscal year of the Company ending prior to the date of the exercise of the Warrant, determined in such reasonable manner as may be prescribed by the Board of Directors of the Company. (d) EXCHANGE, TRANSFER, ASSIGNMENT OR LOSS OF WARRANT. This Warrant is exchangeable, without expense, at the option of the Holder, upon presentation and surrender hereof to the Company or at the office of its stock transfer agent, if any, for other warrants of different denominations entitling the holder thereof to purchase in the aggregate the same number of Shares purchasable hereunder. This Warrant is not transferable (other than by will or pursuant to the laws of descent and distribution and except as provided under Subsection (a)( 1 )(ii) hereof) and may not be assigned or hypothecated for a period of one year from ____________ __, 1997, except to and among the officers of the Underwriters, any member of the selling group, or to and among the officers of any member of the selling group; and after such one-year period, such a transfer may occur providing the Warrant is exercised immediately upon transfer, and if not exercised immediately on transfer, the Warrant shall lapse. Upon surrender of this Warrant to the Company at its principal office or at the office of its stock transfer agent, if any, with the Assignment Form annexed hereto duly executed and funds sufficient to pay any transfer tax, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other warrants which carry the same rights upon presentation hereof at the principal office of the Company or at the office of its stock transfer agent, if any, together with a written notice specifying the names and denominations in which new Warrants are to be issued and signed by the Holder hereof The term "Warrant" as used herein includes any Warrants into which this Warrant may be divided or exchanged. Upon receipt by the Company of evidence satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and (in the case of loss, theft or destruction) of reasonably satisfactory indemnification, and upon surrender and cancellation of this Warrant, if mutilated, the Company will execute and deliver a new Warrant of like tenor and date. Any -3- 9 such new Warrant executed and delivered shall constitute an additional contractual obligation on the part of the Company, whether or not this Warrant so lost, stolen, destroyed, or mutilated shall be at any time enforceable by anyone. (e) RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be entitled to any rights of a shareholder in the Company, either at law or equity, and the rights of the Holder are limited to those expressed in the Warrant and are not enforceable against the Company except to the extent set forth herein. (f) ANTI-DILUTION PROVISIONS. The Exercise Price in effect at any time and the number and kind of securities purchasable upon the exercise of the Warrants shall be subject to adjustment from time to time upon the happening of certain events as follows: (1) In case the Company shall (i) declare a dividend or make a distribution on its outstanding Shares in Shares, (ii) subdivide or reclassify its outstanding Shares into a greater number of Shares, or (iii) combine or reclassify its outstanding Shares into a smaller number of Shares, the Exercise Price in effect at the time of the record date for such dividend or distribution or of the effective date of such subdivision, combination or reclassification shall be adjusted so that it shall equal the price determined by multiplying the Exercise Price by a fraction, the denominator of which shall be the number of Shares of outstanding after giving effect to such action, and the numerator of which shall be the number of Shares outstanding immediately prior to such action. Such adjustment shall be made successively whenever any event listed above shall occur. (2) Whenever the Exercise Price payable upon exercise of each Warrant is adjusted pursuant to Subsection (1) above, the number of Shares purchasable upon exercise of this Warrant shall simultaneously be adjusted by multiplying the number of Shares initially issuable upon exercise of this Warrant by the Exercise Price in effect on the date hereof and dividing the product so obtained by the Exercise Price, as adjusted. (3) No adjustment in the Exercise Price shall be required unless such adjustment would require an increase or decrease of at least five cents ($0.05) in such price; provided, however, that any adjustments which by reason of this Subsection (3) are not required to be made shall be carried forward and taken into account in any subsequent adjustment required to be made hereunder. All calculations under this Section (f) shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Anything in this Section (f) to the contrary notwithstanding, the Company shall be entitled, but shall not be required, to make such changes in the Exercise Price, in addition to those required by this Section (f), as it shall determine, in its sole discretion, to be advisable in order that any dividend or distribution in Shares, or any subdivision, reclassification or combination of Shares, hereafter made by the Company shall not result in any Federal Income tax liability to the holders of Shares or securities convertible into Shares (including Warrants). -4- 10 (4) Whenever the Exercise Price is adjusted, as herein provided, the Company shall promptly but no later than 10 days after any request for such an adjustment by the Holder, cause a notice setting forth the adjusted Exercise Price and adjusted number of Shares issuable upon exercise of each Warrant, and, if requested, information describing the transactions giving rise to such adjustments, to be mailed to the Holders at their last addresses appearing in the Warrant Register, and shall cause a certified copy thereof to be mailed to its transfer agent, if any. The Company may retain a firm of independent certified public accountants selected by the Board of Directors (who may be the regular accountants employed by the Company) to make any computation required by this Section (f), and a certificate signed by such firm shall be conclusive evidence of the correctness of such adjustment. (5) In the event that at any time, as a result of an adjustment made pursuant to Subsection (1) above, the Holder of this Warrant thereafter shall become entitled to receive any shares of the Company, other than Shares, thereafter the number of such other shares so receivable upon exercise of this Warrant shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Shares contained in Subsections (1) to (4), inclusive above. (6) Irrespective of any adjustments in the Exercise Price or the number or kind of shares purchasable upon exercise of this Warrant, Warrants theretofore or thereafter issued may continue to express the same price and number and kind of shares as are stated in the similar Warrants initially issuable pursuant to this Agreement. (g) OFFICER'S CERTIFICATE. Whenever the Exercise Price shall be adjusted as required by the provisions of the foregoing Section, the Company shall forthwith file in the custody of its Secretary or an Assistant Secretary at its principal office and with its stock transfer agent, if any, an officer's certificate showing the adjusted Exercise Price determined as herein provided, setting forth in reasonable detail the facts requiring such adjustment, including a statement of the number of additional Shares, if any, and such other facts as shall be necessary to show the reason for and the manner of computing such adjustment. Each such officer's certificate shall be made available at all reasonable times for inspection by the holder or any holder of a Warrant executed and delivered pursuant to Section (a) and the Company shall, forthwith after each such adjustment, mail a copy by certified mail of such certificate to the Holder or any such holder. (h) NOTICES TO WARRANT HOLDERS. So long as this Warrant shall be outstanding, (i) if the Company shall pay any dividend or make any distribution upon the Shares or (ii) if the Company shall offer to the holders of Shares for subscription or purchase by them any share of any class or any other rights or (iii) if any capital reorganization of the Company, reclassification of the capital stock of the Company, consolidation or merger of the Company with or into another corporation, sale, lease or transfer of all or substantially all of the property and assets of the Company to another corporation, or voluntary or involuntary dissolution, liquidation or winding up of the Company shall be effected, then in any such case, the Company shall cause to be mailed by certified mail to the Holder, at least fifteen days prior the date -5- 11 specified in (x) or (y) below, as the case may be, a notice containing a brief description of the proposed action and stating the date on which (x) a record is to be taken for the purpose of such dividend, distribution or rights, or (y) such reclassification, reorganization, consolidation, merger, conveyance, lease, dissolution, liquidation or winding up is to take place and the date, if any is to be fixed, as of which the holders of Shares or other securities shall receive cash or other property deliverable upon such reclassification, reorganization, consolidation, merger, conveyance, dissolution, liquidation or winding up. (i) RECLASSIFICATION, REORGANIZATION OR MERGER. In case of any reclassification, capital reorganization or other change of outstanding Shares of the Company, or in case of any consolidation or merger of the Company with or into another corporation (other than a merger with a subsidiary in which merger the Company is the continuing corporation and which does not result in any reclassification, capital reorganization or other change of outstanding Shares of the class issuable upon exercise of this Warrant) or in case of any sale, lease or conveyance to another corporation of the property of the Company as an entirety, the Company shall, as a condition precedent to such transaction, cause effective provisions to be made so that the Holder shall have the right thereafter by exercising this Warrant at any time prior to the expiration of the Warrant, to purchase the kind and amount of shares of stock and other securities and property receivable upon such reclassification, capital reorganization and other change, consolidation, merger, sale or conveyance by a holder of the number of Shares which might have been purchased upon exercise of this Warrant immediately prior to such reclassification, change, consolidation, merger, sale or conveyance. Any such provision shall include provision for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Warrant. The foregoing provisions of this Section (i) shall similarly apply to successive reclassifications, capital reorganizations and changes of Shares and to successive consolidations, mergers, sales or conveyances. In the event that in connection with any such capital reorganization or reclassification, consolidation, merger, sale or conveyance, additional Shares shall be issued in exchange, conversion, substitution or payment, in whole or in part, for a security of the Company other than Shares, any such issue shall be treated as an issue of Shares covered by the provisions of Subsection (1) of Section (f) hereof. (j) REGISTRATION UNDER THE SECURITIES ACT OF 1933. (1) The Company shall advise the Holder of this Warrant or of the Warrant Shares or any then holder of Warrants or Warrant Shares (such persons being collectively referred to herein as "holders") by written notice at least four weeks prior to the filing of any post-effective amendment to the Company's Registration Statement No. 333-24177-NY on Form SB-2 ("Registration Statement"), declared effective by the Securities and Exchange Commission on ___________ ___, 1997 ("Effective Date") or of any new registration statement or post-effective amendment thereto under the Securities Act of 1933 (the "Act") covering securities of the Company and will for a period of six years, commencing one year from the Effective Date, upon the request of any such holder, include in any such post-effective amendment or registration statement such information as may be required to permit a public offering of the -6- 12 Warrants or the Warrant Shares. The Company shall supply prospectuses and other documents as the Holder may request in order to facilitate the public sale or other disposition of the Warrants or Warrant Shares, qualify the Warrants and the Warrant Shares for sale in such states as any such holder designates and do any and all other acts and things which may be necessary or desirable to enable such Holders to consummate the public sale or other disposition of the Warrants or Warrant Shares, and furnish indemnification in the manner as set forth in Subsection (3)(C) of this Section (j). Such holders shall furnish information and indemnification as set forth in Subsection (3)(C) of this Section (j), except that the maximum amount which may be recovered from the Holder shall be limited to the amount of proceeds received by the Holder from the sale of the Warrants or Warrant Shares. The Company shall maintain the effectiveness of such Registration Statement for at least 12 months following the Effective Date thereof. (2) If any majority holder (as defined in Subsection (4) of this Section (j) below) shall give notice to the Company at any time during the four year period commencing one year from the effective date of the Registration Statement to the effect that such majority holder contemplates (i) the transfer of all or any part of his, her or its Warrants and/or Warrant Shares, or (ii) the exercise and/or conversion of all or any part of his, her or its Warrants and the transfer of all or any part of the Warrants and/or Warrant Shares under such circumstances that a public offering (within the meaning of the Act) of Warrants and/or Warrant Shares will be involved, and desires to register under the Act, the Warrants and/or the Warrant Shares, then the Company shall, within four weeks after receipt of such notice, file a post-effective amendment to the Registration Statement or a new registration statement on Form SB-2 or such other form as the holder requests, pursuant to the Act, to the end that the Warrants and/or Warrant Shares may be sold under the Act as promptly as practicable thereafter and the Company will use its best efforts to cause such registration to become effective and continue to be effective (current) (including the taking of such steps as are necessary to obtain the removal of any stop order) until the holder has advised that all of the Warrants and/or Warrant Shares have been sold; provided that such holder shall furnish the Company with appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall reasonably request in writing. In the event the registration statement is not declared effective under the Act prior to __________ __, 2002, the Company shall extend the expiration date of the Warrants to a date not less than six months after the effective date of such registration statement. The holder may, at its option, request the registration of the Warrants and/or Warrant Shares in a registration statement made by the Company as contemplated by Subsection (1) of this Section (j) or in connection with a request made pursuant to Subsection (2) of this Section (j) prior to the acquisition of the Warrant Shares issuable upon exercise of the Warrants and even though the holder has not given notice of exercise of the Warrants. If the Company determines to include securities to be sold by it in any registration statement originally requested pursuant to this Subsection (2) of this Section (j), such registration shall instead be deemed to have been a registration under Subsection (1) of this Section (j) and not under Subsection (2) of this Subsection (j). The holder may thereafter at its option, exercise the Warrants at any time or from time to time subsequent to the effectiveness under the Act of the registration statement in which the Warrant Shares were included. The Company shall maintain the effectiveness of such Registration Statement for at least nine months following the Effective -7- 13 Date thereof or such shorter period as may be reasonably required to provide for the sale of the Warrant Shares in the open market. (3) The following provision of this Section (j) shall also be applicable: (A) Within ten days after receiving any such notice pursuant to Subsection (2) of this Section (j), the Company shall give notice to the other holders of Warrants and Warrant Shares, advising that the Company is proceeding with such post-effective amendment or registration statement and offering to include therein Warrants and/or Warrant Shares of such other holders, provided that they shall furnish the Company with such appropriate information (relating to the intentions of such holders) in connection therewith as the Company shall reasonably request in writing. Following the effective date of such post-effective amendment or registration, the Company shall upon the request of any owner of Warrants and/or Warrant Shares forthwith supply such a number of prospectuses meeting the requirements of the Act, as shall be requested by such owner to permit such holder to make a public offering of all Warrants and/or Warrant Shares from time to time offered or sold to such holder, provided that such holder shall from time to time furnish the Company with such appropriate information (relating to the intentions of such holder) in connection therewith as the Company shall request in writing. The Company shall also use its best efforts to qualify the Warrant Shares for sale in such states as such majority holder shall designate. (B) The Company shall bear the entire cost and expense of any registration of securities initiated by it under Subsection (1 ) of this Section (j) notwithstanding that Warrants and/or Warrant Shares subject to this Warrant may be included in any such registration. The Company shall also comply with one request for registration made by the majority holder pursuant to Subsection (2) of this Section ) at its own expense and without charge to any holder of any Warrants and/or Warrant Shares; and the Company shall comply with one additional request made by the majority holder pursuant to Subsection (2) of this Section (j) (and not deemed to be pursuant to Subsection (1) of this Section (j)) at the sole expense of such majority holder. Any holder whose Warrants and/ or Warrant Shares are included in any such registration statement pursuant to this Section ) shall, however, bear the fees of his own counsel and any registration fees, transfer taxes or underwriting discounts or commissions applicable to the Warrant Shares sold by him pursuant thereto. (C) The Company shall indemnify and hold harmless each such holder and each underwriter, within the meaning of the Act, who may purchase from or sell for any such holder any Warrants and/or Warrant Shares from and against any and all losses, claims, damages and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement or any post-effective amendment thereto or any registration statement under the Act or any prospectus included therein required to be filed or furnished by reason of this Section (j) or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any such untrue statement or alleged untrue statement or omission or alleged omission based upon -8- 14 information furnished or required to be furnished in writing to the Company by such holder or underwriter expressly for use therein, which indemnification shall include each person, if any, who controls any such underwriter within the meaning of such Act provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said registration statement, said preliminary prospectus, said final prospectus or said amendment or supplement in reliance upon and in conformity with written information furnished by such Holder or any other Holder, specifically for use in the preparation thereof. (D) Neither the giving of any notice by any such majority holder nor the making of any request for prospectuses shall impose any upon such majority holder or owner making such request any obligation to sell any Warrants and/or Warrant Shares, or exercise any Warrants. (4) The term "majority holder" as used in this Section (j) shall include any owner or combination of owners of Warrants or Warrant Shares in any combination if the holdings of the aggregate amount of: (i) the Warrants held by such owner(s) or among them, plus (ii) the Warrants which such owner(s) would be holding if the Warrants for the Warrant Shares owned by such owner(s) or among them had not been exercised, would constitute a majority of the Warrants originally issued. The Company's agreements with respect to Warrants or Warrant Shares in this Section (j) shall continue in effect regardless of the exercise and surrender of this Warrant. RUSSIAN WIRELESS TELEPHONE COMPANY, INC. By:_______________________________________________ Ronald G. Nathan, President [SEAL] Dated: _____________ __, 1997 Attest: ______________________________ 15 PURCHASE FORM Dated: __________ __, 1997 The undersigned hereby irrevocably elects to exercise the within Warrant to the extent of purchasing _________ Shares and hereby makes payment of __________ in payment of the actual exercise price thereof. INSTRUCTIONS FOR REGISTRATION OF STOCK Name _______________________________________ (Please typewrite or print in block letters) Address_____________________________________ Signature___________________________________ 16 ASSIGNMENT FORM FOR VALUE RECEIVED, _____________________________ hereby sells, assigns and transfers unto Name _____________________________________ (Please typewrite or print in block letters) Address___________________________________ the right to purchase Shares represented by this Warrant to the extent of _____________ Shares as to which such right is exercisable and does hereby irrevocably constitute and appoint _____________________________ as attorney, to transfer the same on the books of the Company with full power of substitution in the premises. Date_____________ __, 1997 Signature ________________________ EX-4.3 5 SECOND PRIVATE PLACEMENT WARRANT 1 EXHIBIT 4.3 No. WW-___________ _________ Warrants TELCOM GROUP USA, INC. COMMON STOCK PURCHASE WARRANTS ____________, 1994 NEITHER THESE WARRANTS NOR THE SECURITIES ISSUABLE UPON EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), NOR UNDER ANY STATE SECURITIES LAW AND SHALL NOT BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED IN VIOLATION THEREOF UNTIL EITHER (i) A REGISTRATION STATEMENT WITH RESPECT THERETO IS DECLARED EFFECTIVE UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAW OR (ii) THE COMPANY RECEIVES AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL TO THE HOLDER OF SUCH SECURITIES WHICH OPINION IS SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SECURITIES MAY BE TRANSFERRED, SOLD, ASSIGNED OR HYPOTHECATED WITHOUT AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR APPLICABLE STATE SECURITIES LAWS. THIS CERTIFIES THAT __________ (hereinafter sometimes called the "Holder") is the holder of __________ common stock purchase warrants (the "Warrants") of TelCom Group USA, Inc., a Delaware corporation (the "Company"). Each Warrant entitles the Holder to purchase from the Company at the price and during the periods as hereinafter specified, one share of the Company's common stock, $.01 par value (the "Common Stock"). These Warrants, together with warrants of like tenor, is subject to adjustment in accordance with Paragraph 7 of these Warrants. 1. a. The rights represented by these Warrants shall be exercisable, at any time, commencing __________, 1995 [18 months from the First Closing Date, as defined in the subscription agreement (the "Subscription Agreement") annexed hereto as Exhibit B to the Company's Confidential Private Offering Memorandum dated May 10, 1994,] and terminating at 5:00 p.m. on __________, 1998 [three years after the date upon which these Warrants become exercisable] (the "Exercise Period") at a purchase price of $1.00 per share of Common Stock (the "Exercise Price"), subject to adjustment in accordance with Paragraph 7. For purposes of the adjustments under Paragraph 7, hereof, the per share Exercise Price shall be deemed to be $1.00, subject to further adjustment as provided in such Paragraph 7. The Exercise Price will be payable in cash in United States dollars or by official bank or certified check payable in 2 United States dollars to the order of the Company. After the last day of the Exercise Period, the Holder shall have no right to purchase any shares of Common Stock underlying these Warrants. b. Notwithstanding anything herein contained to the contrary, the Company and the Holder agree that in the event that, prior to the exercise or termination of the Exercise Period, the terms and conditions of any warrants to be registered in a registration statement (the "Registration Statement") relating to an initial public offering ("IPO") of the Company's securities for sale to the public are not identical to the terms and conditions of these Warrants, these Warrants will be automatically modified to conform exactly to the terms and conditions of the warrants offered pursuant to such Registration Statement, which modifications may include, among other things, provisions for redemption of the Warrants, changes in the Exercise Period and an increase in the Exercise Price. In connection with any Registration Statement filed by the Company in which the Warrants, as automatically modified, and the shares of Common Stock underlying such Warrants are registered, the holders thereof, if so required by the underwriter (the "Underwriter") of the IPO, if any, must effect sales of such Warrants and underlying shares of Common Stock through the Underwriter, and such holders must compensate the Underwriter in accordance with its customary compensation for such transactions. 2. The rights represented by these Warrants may be exercised at any time within the Exercise Period above specified, in whole or in part, by (i) the surrender of these Warrants (with the purchase form at the end hereof properly executed) at the principal executive office of the Company (or such other office or agency of the Company as it may designate by notice in writing to the Holder at the address of the Holder appearing on the books of the Company); and (ii) payment to the Company of the Exercise Price then in effect for the number of shares of Common Stock specified in the above-mentioned purchase form together with applicable stock transfer taxes, if any. These Warrants shall be deemed to have been exercised, in whole or in part to the extent specified, immediately prior to the close of business on the date these Warrants are surrendered and payment is made in accordance with the foregoing provisions of this Paragraph 2, and the person or persons in whose name or names the certificates for shares of Common Stock shall be issuable upon such exercise shall become the holder or holders of record of such shares of Common Stock at that time and date. The certificate or certificates for the shares of Common Stock so purchased shall be delivered to such person or persons within a reasonable time, not exceeding ten (10) days, after these Warrants shall have been exercised. If less than all of the Warrants evidenced by a Warrant certificate are exercised, a new certificate will be issued for the remaining number of such Warrants. Certificates evidencing the Warrants may be exchanged for new certificates of different denominations by presenting the 2 3 Warrant certificates at the office of the Company. 3. Neither these Warrants nor the shares of Common Stock issuable upon exercise hereof have been registered under the Securities Act nor under any state securities law and shall not be transferred, sold, assigned or hypothecated in violation thereof. If permitted by the foregoing, any transfer, sale, assignment or hypothecation shall be effected by the Holder surrendering these Warrants for cancellation at the office or agency of the Company referred to in Paragraph 2 hereof, accompanied by an opinion of counsel satisfactory to the Company and its counsel, stating that such transferee is a permitted transferee under this Paragraph 3 and that such transfer does not violate the Securities Act or such state securities laws. 4. The Company covenants and agrees that all shares of Common Stock which may be issued upon exercise of these Warrants will, upon issuance, be duly and validly issued, fully paid and nonassessable and no personal liability will attach to the Holder thereof. The Company further covenants and agrees that during the Exercise Period, the Company will at all times have authorized and reserved a sufficient number of shares of its Common Stock to provide for the exercise of these Warrants. 5. These Warrants shall not entitle the Holder to any rights, including, without limitation, voting rights, as a stockholder of the Company. 6. The Company shall be obligated to register these Warrants and the shares of Common Stock underlying these Warrants in accordance with the Securities Act, as set forth in the Registration Rights Agreement, by and between the Company and the Holder. 7. The Warrants will initially be exercisable at an exercise price of $1.00 per share. However, if at any time prior to the expiration of the exercise period of the Warrants, the Company completes an initial public offering ("IPO") of its Common Stock and warrants, the terms of the Warrants will be changed to be identical to those of the warrants issued in the IPO, which may include redemption provisions and a higher exercise price. In the event that no Warrants are issued in the IPO, the exercise price of the Warrants will be increased to 110% of the price per share of the Common Stock offered in the IPO. The Warrants and the shares of Common Stock underlying the Warrants will be registered under the Act in connection with the IPO, subject to a lock-up of 12 months if required by the underwriter of the IPO, commencing with the date of the IPO, during which period the Warrants and the shares issuable upon the exercise of the Warrants may not be sold without the prior written consent of such underwriter. 3 4 8. This Agreement shall be governed by and in accordance with the laws of the State of Delaware. IN WITNESS WHEREOF, TelCom Group USA, Inc. has caused this Warrant Certificate to be signed by its duly authorized officer and is dated as of the date set forth above. TELCOM GROUP USA, INC. By: ----------------------- Ronald G. Nathan Chief Executive Officer 4 EX-4.4 6 THIRD PRIVATE PLACEMENT WARRANT 1 EXHIBIT 4.4 FORM OF WARRANT THESE SECURITIES AND THE SECURITIES ISSUABLE UPON EXERCISE OF THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND THEY MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO SUCH SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE ACT BUT ONLY UPON A HOLDER HEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL TO THE CORPORATION, OR OTHER COUNSEL REASONABLY ACCEPTABLE TO THE CORPORATION, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR OTHER STATE SECURITIES LAW. CONNECTICUT THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER SECTION 36-485 OF THE CONNECTICUT UNIFORM SECURITIES ACT (THE "ACT") AND, THEREFORE, CANNOT BE RESOLD UNLESS THEY ARE REGISTERED UNDER THE ACT, OR UNLESS AN EXEMPTION FROM REGISTRATION IS AVAILABLE. __________________, 1995 TELCOM GROUP USA, INC. COMMON STOCK PURCHASE WARRANT The Transferability of this Warrant is Restricted as Provided in Section 3 ______________ Warrants For good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged by TELCOM GROUP USA, INC., a Delaware corporation (the "Company"), __________ is hereby granted the right to purchase, at the initial exercise price of $5.75 per share (subject to adjustment as provided herein) at any time commencing on the effective date (the "Effective Date") of the registration statement to be filed by the Company in connection with 1 2 the Company's proposed initial public offering (the "Initial Public Offering") until 5:00 p.m. on the five-year anniversary of the Effective Date, shares of Common Stock, $.01 par value, of the Company (the "Shares"). Upon consummation of the Initial Public Offering, the Warrants will be exchanged for an Initial Public Offering Warrant Certificate representing the right to purchase the same number of shares. If the Initial Public Offering is not consummated by __________, 1997 [eighteen (18) months from the closing of this Private Placement Offering] based upon the Company's decision not to proceed with the Initial Public Offering, each Warrant shall automatically convert on such date into one share of Common Stock. If the Initial Public Offering is not consummated by __________, 1997 [eighteen (18) months from the closing of this Private Placement Offering] for any other reason, these Warrants shall automatically become null and void. Each Common Stock Purchase Warrant (the "Warrant") initially is exercisable at a price of $5.75 per Share payable in cash or by certified or official bank check in New York Clearing House funds, subject to adjustments as provided in Section 5 hereof Upon surrender of this Warrant, with the annexed Subscription Form duly executed, together with payment of the Purchase Price (as hereinafter defined) for the Shares purchased at the offices of the Company, the registered holder of this Warrant (the "Holder") shall be entitled to receive a certificate or certificates for the Shares so purchased. (a). Exercise of Warrant. The purchase rights represented by this Warrant are exercisable at the option of the Holder, in whole or in part (but not as to fractional Shares underlying this Warrant), during the period in which this Warrant may be exercised as set forth above. In the case of the purchase of less than all the Shares purchasable under this Warrant, the Company shall cancel this Warrant upon the surrender hereof and shall execute and deliver a new Warrant of like tenor for the balance of the Shares purchasable hereunder. (b). Issuance of Certificates. Upon the exercise of this Warrant and payment in full for the Shares, the issuance of certificates for Shares underlying this Warrant shall be made forthwith (and in any event within five (5) business days thereafter) without charge to the Holder, including, without limitation, any tax which may be payable in respect of the issuance thereof, and such certificates shall be issued in the name of, or (subject to the provisions of Section 3.1 hereof) in such names as may be directed by, the Holder; provided, however that the Company shall not be required to pay any tax which may be payable in respect of any transfer involved in the issuance and delivery of any such certificates in a name other than that of the Holder and the Company shall not be required to issue or deliver such certificates unless or until 2 3 the person or persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The certificates representing the Shares underlying this Warrant shall be executed on behalf of the Company by the manual or facsimile signature of the Chairman or President and the Chief Financial Officer, the Secretary or Assistant Secretary of the Company holding office at the time such Shares are issued. (c). Restriction on Transfer: Registration Under the Securities Act of 1933, as amended. (d)..(e) Neither the Warrants nor any Share issuable upon exercise hereof has been registered under the Securities Act of 1933, as amended (the "Act"), and none of such securities may be offered, sold, pledged, hypothecated, assigned or transferred except (i) pursuant to a registration statement under the Act which has become effective and is current with respect to such securities, or, (ii) pursuant to a specific exemption from registration under the Act but only upon a Holder hereof first having obtained the written opinion of counsel to the Company, or other counsel reasonably acceptable to the Company, that the proposed disposition is consistent with all applicable provisions of the Act as well as any applicable "Blue Sky" or other state securities law. Upon exercise, in part or in whole, of this Warrant, each certificate issued representing the Shares underlying this Warrant shall bear a legend to the foregoing effect. (f)..(g) If at any time after the date hereof and expiring five (5) years thereafter, the Company proposes to register any of its securities under the Act (other than in connection with a merger, acquisition or exchange offer on Form S-4 or pursuant to Form S-8 or successor forms), it will give written notice by registered mail, at least thirty (30) days prior to the filing of each such registration statement to the Holder(s) of the Warrants and/or Shares of its intention to do so. Upon the written request of any Holder of the Warrants and/or Shares given within ten (10) days after receipt of any such notice of its or their desire to include any such Warrants and/or Shares in such proposed registration statement, the Company shall afford such Holder(s) of the Warrants and/or Shares the opportunity to have any such Warrants and/or Shares registered under such registration statement. Notwithstanding the provisions of this Section 3.2, the Company shall have the right at any time after it shall have given written notice pursuant to this Section 3.2 (irrespective of whether a written request for inclusion of any such securities shall have been made) to elect not to file any such proposed registration statement, or to withdraw the same after the filing but prior to the effective date thereof. If any registration pursuant to this Section 3.2 shall be underwritten in 3 4 whole or in part, the Company may require that the Warrants and/or Shares requested for inclusion pursuant to this Section 3.2 be included in the underwriting on the same terms and conditions as the securities otherwise being sold through the underwriters. Notwithstanding the provisions of this Section 3.2, if the managing underwriter in an underwritten public offering of securities shall advise the Company in writing that inclusion of some or all of the Warrants and/or Shares would, in such managing underwriter's opinions materially interfere with the proposed distribution of the securities to be offered by the Company, in respect of which registration was originally to be effected, then the number of Warrants and/or Shares to be included in the registration statement may be reduced pro rata (by number of shares) among any holders of securities requesting registration or excluded in their entirety if so required by the underwriter from the registration statement. (h)..(i) In connection with any registration under Sections 3.2 or 6 hereof, the Company covenants and agrees as follows: (j) The Company shall pay all costs (excluding fees and expenses of Holder(s)' counsel and any underwriting or selling commissions or other charges of any broker-dealer acting on behalf of Holder(s)), fees and expenses in connection with all registration statements filed pursuant to Sections 3.2 and 6 hereof including, without limitation, the Company's legal and accounting fees, printing expenses and blue sky fees and expenses. (k) The Company will take all necessary action which may be required in qualifying or registering the Warrants and/or Shares included in a registration statement for offering and sale under the securities or blue sky laws of such states as reasonably are requested by the Holder(s), provided that the Company shall not be obligated to qualify as a foreign corporation to do business under the laws of any such jurisdiction. (l) The Company shall indemnify the Holder(s) of the Warrants and/or Shares to be sold pursuant to any registration statement and each person, if any, who controls such Holder(s) within the meaning of Section 15 of the Act or Section 20(a) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), against all loss, claim, damage, expense or liability (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which any of them may become subject under the Act, the Exchange Act or any other statute, common law or otherwise, arising out of or based upon any untrue statement or alleged untrue statement of a material fact contained in such registration statement executed by the Company or based upon written information furnished by the Company filed in any jurisdiction in order to qualify the Warrants 4 5 and/or the Shares under the securities laws thereof or filed with the Securities and Exchange Commission (the "Commission"), any state securities commission or agency, the National Association of Securities Dealers, Inc., The Nasdaq Stock Market or any securities exchange, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements contained therein not misleading, unless such statement or omission was made in reliance upon and in conformity with written information furnished to the Company by the Holder(s) expressly for use in such registration statement, any amendment or supplement thereto or any application, as the case may be. If any action is brought against the Holder(s) or any controlling person of the Holder(s) in respect of which indemnity may be sought against the Company pursuant to this Section 3.3(c), the Holder(s) or such controlling person shall, within thirty (30) days after the receipt of a summons or complaint, notify the Company in writing of the institution of such action and the Company shall assume the defense of such action, including the employment and payment of reasonable fees and expenses of counsel (which counsel shall be reasonably satisfactory to the Holder(s) or such controlling person), but the failure to give such notice shall not affect such indemnified person's right to indemnification hereunder except to the extent that the Company's defense of such action was materially adversely affected thereby. The Holder(s) or such controlling person shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of the Holder(s) or such controlling person unless the employment of such counsel shall have been authorized in writing by the Company in connection with the defense of such action, the Company shall not have employed counsel to have charge of the defense of such action or such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to the Company (in which case the Company shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events the fees and expenses of not more than one additional firm of attorneys for the Holder(s) and/or such controlling person shall be borne by the Company. Except as expressly provided in the previous sentence, in the event that the Company shall have assumed the defense of any such action or claim, the Company shall not thereafter be liable to the Holder(s) or such controlling person in investigating, preparing or defending any such action or claim. The Company agrees promptly to notify the Holder(s) of the commencement of any litigation or proceedings against the Company or any of its officers, directors or controlling persons in connection with the resale of the Warrants and/or the Shares or in connection with such registration statement. (m) The Holder(s) of the Warrants and/or Shares to be sold pursuant to a registration statement, and their successors and assigns, shall severally, and not jointly, indemnify the Company, its officers and directors and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against all loss, claim, damage, expense or liability 5 6 (including all expenses reasonably incurred in investigating, preparing or defending against any claim whatsoever) to which they may become subject under the Act, the Exchange Act or otherwise, arising from written information furnished by or on behalf of such Holders, or their successors or assigns, expressly for use in such registration statement. (n) Nothing contained herein shall be construed as requiring the Holder(s) to exercise their Warrants prior to the initial filing of any registration statement or the effectiveness thereof. (o)..(p) In connection with any registration made pursuant to Sections 3.2 or 6 hereof, the Holder(s) of the Warrants and/or Shares agree as follows: (q) Any public sale of the Warrants and/or Shares included in such registration statement shall be effected through the underwriter for such registration and the Holder(s) shall compensate the underwriter in accordance with its customary compensation practices for such transactions. (r). Price. (s)..(t) Initial and Adjusted Purchase Price. The initial purchase price shall be $5.75 per Share. The adjusted purchase price shall be the price which shall result from time to time from any and all adjustments of the initial purchase price in accordance with the provisions of Section 5 hereof and subject to Section 6 hereof. (u)..(v) Purchase Price. The term "Purchase Price" herein shall mean the initial purchase price or the adjusted purchase price, depending upon the context. (w). Adjustments of Purchase Price and Number of Shares. In the event that, prior to the issuance by the Company of all the Shares issuable upon exercise of this Warrant, there shall be any change in the outstanding common stock of the Company by reason of the declaration of stock dividends, or through a recapitalization resulting from stock splits or combinations, without the payment to the Company of any compensation therefor in money, services or property, the remaining Shares still subject to this Warrant and the purchase price thereof shall be appropriately adjusted (but without regard to fractions) by the Board of Directors of the Company to reflect such change. (x). Automatic Conversion; Cancellation. If the Company consummates a public offering of its securities prior to 6 7 the last day on which the Warrants may be exercised, which offering includes warrants to purchase shares of common stock of the Company ("Redeemable Warrants") and the Warrants shall not have been exercised in full, then the unexercised portion of the Warrants shall automatically, without any action by the Holder, be converted into Redeemable Warrants (the "New Warrants") exercisable to purchase the same number of Shares as are purchasable upon the exercise of the unexercised portion of the Warrants but having terms identical to those of the Redeemable Warrants, including, but not limited to, the anti-dilution provisions contained therein and an exercise price per share equal to the exercise price per share of the Redeemable Warrants offered in the public offering. The Company shall cause the New Warrants and the underlying shares of common stock of the Company to be included in the registration statement for such offering, provided, however, if the managing underwriter, other than J.W. Barclay & Co., Inc. ("JWBC") or an affiliate of JWBC, in an underwritten public offering of securities shall advise the Company in writing that inclusion of some or all of the New Warrants and the underlying shares of Common Stock of the Company would, in such managing underwriter's reasonable opinion, materially or adversely affect the proposed distribution of the securities to be offered by the Company, then the number of New Warrants and the underlying shares of Common Stock to be included in the registration statement may be reduced pro rata (by number of shares) among any holders of securities requesting registration if so required by the underwriter from the registration statement. In the event that JWBC or an affiliate of JWBC is the managing underwriter of such public offering, the Company shall cause the New Warrants and the underlying shares of Common Stock of the Company to be included in the registration statement for such offering. In the event that the provisions of this Section 6 shall become applicable, the Holder shall be required to return this Warrant to the Company for cancellation or, if this Warrant cannot then be located, to execute and deliver to the Company a lost security affidavit and indemnity agreement reasonably satisfactory to the Company. In addition, in the event that the provisions of this Section 6 shall become applicable, this Warrant shall no longer be of any force or effect and the New Warrant shall set forth the respective rights and obligations of the Holder and the Company. If the Initial Public Offering is not consummated by __________, 1997 [eighteen (18) months from the closing of this Private Placement Offering] based upon the Company's decision not to proceed with the Initial Public Offering, each Warrant shall automatically convert on such date into one share of Common Stock. If the Initial Public Offering is not consummated by __________, 1997 [eighteen (18) months from the closing of this Private Placement Offering] for any other reason, these Warrants shall automatically become null and void. (y). Merger or Consolidation. In case of any consolidation of the Company with, or merger of the 7 8 Company with, or merger of the Company into, another corporation (other than a consolidation or merger which does not result in any reclassification or change of the outstanding common stock of the Company), the corporation formed by such consolidation or merger shall execute and deliver to the Holder a supplemental warrant agreement providing that the Holder shall have the right thereafter (until the expiration of such Warrant) to receive, upon exercise of his Warrant, the kind and amount of shares of stock and other securities and property receivable upon such consolidation or merger by a holder of the number of shares of common stock of the Company for which his Warrant might have been exercised immediately prior to such consolidation, merger, sale or transfer. Such supplemental warrant agreement shall provide for the automatic conversion provision of Section 6 and adjustments which shall be identical to the adjustments provided in Section 5. The above provisions of this Section 7 shall similarly apply to successive consolidations or mergers. (z). Exchange and Replacement of Warrant. This Warrant is exchangeable without expense, upon the surrender hereof by the registered Holder at the principal executive office of the Company for a new Warrant of like tenor and date representing in the aggregate the right to purchase the same number of Shares as are purchasable hereunder in such denominations as shall be designated by the Holder hereof at the time of such surrender. Upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it, and reimbursement to the Company of all reasonable expenses incidental thereto, and upon surrender and cancellation of this Warrant, if mutilated, the Company will make and deliver a new Warrant of like tenor, in lieu of this Warrant. (aa). Elimination of Fractional Interests. The Company shall not be required to issue certificates representing fractions of Shares on the exercise of this Warrant, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated. (bb). Reservation of Securities. The Company shall at all times reserve and keep available out of its authorized common stock, solely for the purpose of issuance upon the exercise of this Warrant, such number of Shares as shall be issuable upon the exercise hereof. The Company covenants and agrees that, upon exercise of this Warrant and 8 9 payment of the Purchase Price therefor, all Shares issuable upon such exercise shall be duly and validly issued, fully paid and nonassessable. (cc). Notices to Warrant Holders. Nothing contained in this Warrant shall be construed as conferring upon the Holder hereof the right to vote or to consent or to receive notice as a shareholder in respect of any meetings of shareholders for the election of directors or any other matter, or as having any rights whatsoever as a shareholder of the Company. (dd). Notices. All notices, requests, consents and other communications required or permitted hereunder shall be in writing and shall be delivered personally, telegraphed or sent by certified, registered, or express mail, postage prepaid, and shall be deemed given when so delivered personally, telegraphed or, if mailed, five days after the date of deposit in the United States mails, as follows: (ee). If to the Company, to: TelCom Group USA, Inc. 575 Lexington Avenue, Suite 410 New York, New York 10022 Attn: Ronald G. Nathan, President and Chief Executive Officer With a copy to: Olshan Grundman Frome & Rosenzweig 505 Park Avenue New York, New York 10022 Attn: Robert H. Friedman Esq. (ff). If to the registered Holder, to the address of such Holder as shown on the books of the Company. (gg). Successors. All the covenants, agreements, representations and warranties contained in this Warrant shall bind the parties hereto and their respective heirs, executors, administrators, distributees, successors and assigns. (hh). Headings. 9 10 The headings in this Warrant are inserted for purposes of convenience only and shall have no substantive effect. (ii). Law Governing. This Warrant is delivered in the State of New York and shall be construed and enforced in accordance with, and governed by, the laws of the State of New York, without giving effect to conflicts of law principles. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed in its corporate name by, and such signature to be attested to by, a duly authorized office and has caused its corporate seal to be affixed hereto on the date first above written. TELCOM GROUP USA, INC. By: ------------------------------ Name: Ronald G. Nathan Title: President and Chief Executive Officer [SEAL] Attest: - ----------------------- 10 11 SUBSCRIPTION FORM (To be Executed by the Registered Holder in order to Exercise the Warrant) The undersigned hereby irrevocably elects to exercise the right to purchase __________ Shares represented by this Warrant in accordance with the conditions hereof and herewith makes payment of the Purchase Price of such Shares in full. _________________________ Signature _________________________ Address _________________________ Dated: Social Security Number or Taxpayer's Identification Number 11 EX-5 7 OPINION OF HALL DICKLER KENT FREIDMAN & WOOD 1 Exhibit 5 Hall Dickler Kent Friedman & Wood LLP 909 Third Avenue New York, New York 10022 October 29, 1997 Russian Wireless Telephone Company, Inc. 575 Lexington Avenue New York, New York 10022 Gentlemen: We have acted as counsel for Russian wireless Telephone Company, Inc. (the "Company") in connection with the registration under the Securities Act of 1933, as amended (the "Act") and offering (the "Offering"), of (a) up to 1,867,500 shares (the "Shares") of the Company's $.01 par value common stock (the "Common Stock") which are being offered for sale by the Company (including up to 247,500 shares of Common Stock which may be offered subject to an over-allotment option); (b) 30,000 shares of Common Stock which are being offered for sale for the account of a certain selling stockholder (the "Selling Stockholder's Shares"); (c) a warrant issuable to J.W. Barclay & Co., Inc. (the "Representative"), in its capacity as representative of the several underwriters of the Offering, to purchase up to 165,000 shares of Common Stock (the "Representative's Warrant"); and (d) the Common Stock issuable upon exercise of the Representative's Warrant. We have also acted as counsel for the Company in connection with the registration for the accounts of certain selling securityholders (the "Selling Securityholders") under the Act of 1,155,000 shares of Common Stock, 2,462,515 warrants (the "Warrants"), and the shares of Common Stock issuable upon exercise thereof, and 25,000 shares of Common Stock to be issued upon exercise of an option held by one of the Selling Securityholders (collectively, the "Selling Securityholders' Securities"), all of which are being offered for sale by the respective holders of the Selling Securityholders' Securities on a delayed, non-underwritten basis. In connection with the opinions hereinbelow expressed, we have examined the following documents (or true copies thereof): the Company's Certificate of Incorporation, as amended, the Certificate of Merger of Russian Wireless Telephone Company, Inc. with and into the Company; the Company's By-Laws, its stock and warrant records, the minutes of actions heretofore taken by the Company's stockholders and directors, the Registration Statement on SEC Form SB-2, as amended (the "Registration Statement") which has been filed with the Securities and Exchange Commission under File No. 333-24177 with respect to the registration of the Shares, the Representative's Warrant, the Common Stock issuable upon exercise of the Representative's Warrant and the Selling Securityholders' Securities, the form of Common Stock certificate, the form of Representative's Warrant, the Blue Sky registration materials filed by the Company in various jurisdictions and such other documents as we deemed necessary or appropriate under the circumstances. Based upon, and subject to the foregoing, we are of the opinion that: 1. The Company is a corporation duly organized, validly existing and in good standing under the laws of the state of Delaware, and has all requisite power and authority (corporate and other) to own or lease its properties and conduct its business. 2. The Company has taken all necessary corporate action required with respect to the issuance of the Shares, the execution and delivery of the Representative's Warrant, and the issuance of the shares of Common Stock issuable upon valid exercise of the Warrants and the Representative's Warrant (collectively, the "Warrant Shares"). 3. The Company has reserved a sufficient number of its authorized but unissued shares of Common Stock for issuance upon valid exercise of the Warrants and the Representative's Warrant. 4. Subject to the proviso that none of the Shares or the Selling Securityholders' Securities shall be issued in any jurisdiction unless and until a valid Blue Sky registration or exemption therefrom pertaining to such Shares and Selling Securityholders' Securities shall be in effect, upon receipt of full payment for the Shares and the Warrant Shares, such Shares and Warrant Shares shall be (or, in the case of the Selling Securityholder's Shares, already will have been) validly issued and outstanding as fully paid and non-assessable shares of the Company's Common Stock. 5. Subject to the further proviso that none of the Warrants or the Representative's Warrant shall be issued in any jurisdiction unless and until a valid Blue Sky registration or exemption therefrom pertaining to such securities shall be in effect, upon receipt of full payment for such securities, the same shall be validly issued and outstanding securities of the Company entitling the holders thereof to purchase shares of the Company's Common Stock in accordance with the terms, and subject to the conditions and limitations set forth therein. 6. Upon each timely exercise, in whole or in part, of the Warants and/or the Representative's Warrant, and the receipt of full payment for the shares of Common Stock which are the subject of each such exercise transaction, such shares shall be validly issued and outstanding as fully paid and non-assessable shares of the Company's Common Stock. Very truly yours, Hall Dickler Kent Friedman & Wood LLP EX-11 8 COMPUTATIONS OF EARNINGS (LOSS) PER SHARE 1 EXHIBIT 11 Russian Wireless Telephone Company, Inc. (formerly Telcom Group, USA) Computation of Earnings (Loss) Per Share
Month of Weighted Average Issuance For Number of Shares Outstanding F/S Purposes Shares 1996 1995 - -------------------------------------------------------------------------------- Common Stock at January 1, 1995 4,536,876 4,536,876 4,536,876 January '95 600,000 600,000 600,000 May '95 (2,663,876) (2,663,876) (1,553,928) April '95 300,000 300,000 200,000 May '95 (800,000) (800,000) (466,667) August '95 (488,000) (466,000) (462,667) February '96 300,000 275,000 December '96 450,000 450,000 450,000 --------- --------- --------- Weighted Average shares 2,235,000 2,210,000 3,603,614 ========= ========= =========
Net Weighted Net (Loss) YEAR (Loss) Avg Shares Per Share - ------------------------------------------------------ 1995 (1,227,502) 3,603,614 (0.34) 1996 (1,470,878) 2,210,000 (0.67)
Weighted Average Shares Outstanding Month of 6 Months Ended Issuance For Number of June 30, June 30, F/S Purposes Shares 1997 1996 - -------------------------------------------------------------------------------- Common Stock at January 1, 1996 1,485,000 1,485,000 1,485,000 February 1996 300,000 300,000 200,000 December 1996 450,000 450,000 -- February 1997 750,000 580,110 -- --------- --------- --------- Weighted Average Shares 2,985,000 2,815,110 1,685,000 ========= ========= =========
Net Weighted Net (Loss) 6 MONTHS ENDED (Loss) Average Shares Per Share - ------------------------------------------------------------------------------- June 30, 1996 (308,642) 1,685,000 (0.18) June 30, 1997 (7,835,118) 2,815,110 (2.78)
-----END PRIVACY-ENHANCED MESSAGE-----