As filed with the Securities and Exchange Commission on June , 1998.
Registration No. 333-37409
_______________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
AMENDMENT No. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
Baltia Air Lines, Inc.
(Name of small business issuer in its charter)
New York 4500 11-2989648
(State or (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification
organization) Code) No.)
East Wing Building #51
IcelandAir Terminal
JFK International Airport
Jamaica, NY 11430
Tel: (718) 553-6636
(Address and telephone number of principal executive offices)
Igor Dmitrowsky, President
Baltia Air Lines, Inc.
63-25 Saunders St., Suite 7I
Rego Park, NY 11374
Tel: (718) 275-5205
(Name, address and telephone number of agent for service)
Copies to:
Steffanie J. Lewis, Esq. Charles Spinelli, Esq.
Counsel for Baltia Counsel for Underwriter
International Business Law Spinelli & Associates
Firm 120 Wall Street, 28th Floor
3511 N. 13th Street New York, NY 10005
Arlington, VA 22201 Tel: (212) 635-4100
Tel: (703) 522-1198 Fax: (212) 465-2699
Fax: (703) 522-1197
The date of proposed sale to the public: Within approximately five
days after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis, pursuant to Rule 415 under
the Securities Act of 1933, check the following box: [X]
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 statement number
for 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, please check the following box and
list the Securities Act registration statement number of the earlier
effective registration for the same offering: [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box: [ ]
<TABLE>
<CAPTION>
Calculation of Registration Fee
Title of Each Class being Amount Being Offering Price Aggregate Amount of
Registered Registered Per Security Offering Price Registration Fee
<FN1> <FN1> <FN4>
<S> <C> <C> <C> <C>
Common Stock $1,100,000 $5.50 $6,050,000 $1,833.33
Warrants <FN2> $1,100,000 0.10 $110,000 33.33
Common Stock $1,100,000 6.05 $6,655,000 2,016.66
underlying Warrants
Over-Allotment $165,000 5.50 $907,500 275.00
- Common Stoc
Over-Allotment $165,000 0.10 $16,500 5.00
Warrants <FN2>
Over-Allotment $165,000 6.05 $998,250 302.50
- Common Stock
underlying Warrants
<FN2>
Underwriter's Option $110,000 6.05 $665,500 201.66
- Common Stock <FN3>
Underwriter's Option $110,000 0.11 $12,100 3.67
- Warrants <FN3>
Underwriter's Option $110,000 6.66 $732,600 222.00
- Common Stock
underlying Underwriter's
Warrants <FN3>
Common Stock $575,000 6.05 $3,478,750 1,054.17
underlying Class A
Bridge Warrants<FN5>
Common Stock underlying $250,000 6.05 $1,512,500 485.33
Class B Bridge
Total Fee $7,413.98
paid by Company $10,163.63
Refund due to Company $2,749.65
<FN>
Notes:
<FN1>
(1) Estimated for purposes of calculating registration fee.
<FN2>
(2) Unless redeemed sooner by the Company, Warrants are exercisable at
$6.05 per share of Common Stock("Share") commencing six months after
the date the public offering("Offering")becomes effective ("Effective
Date")until five years after the Effective Date.
<FN3>
(3) Under the Underwriter's Option, the underwriters are entitled to
purchase from the Company up to 110,000 Shares at $6.05 per Share and
up to 110,000 Warrants at $.11 per Warrant. The exercise price of
Warrants underlying the Underwriter's Option is $6.66 per Share. The
Underwriter's price represents an amount equal to 110% of the initial
public offering price.
<FN4>
(4) The Registration Fee is calculated as 1/33rd of one percent of the
aggregate Offering price.
<FN5>
(5) In February 1998 the Company issued 250,000 warrants in connection with
a bridge loan for $250,000. These warrants are exercisable during the
four-year period commencing one year form the Effective Date.
Otherwise the terms of these warrants are identical to those offered to
the public in the Offering ("Class B Bridge Warrants"). The holder of
the Class B Bridge Warrants is being registered with the Offering as a
Selling Securityholder.
<FN6>
(6) In June 1998 the Company issued 575,000 warrants in connection with a
series of bridge loans in the aggregate amount of $575,000. The terms
of these warrants are identical to the Warrants offered to the public
in the Offering ("Class A Bridge Warrants"). The holders of the Class
A Bridge Warrants are being registered with the Offering as Selling
Securityholders.
</FN>
</TABLE>
The 4,950,000 securities (3,300,000 common stock and 1,650,000 warrants)
previously registered in SB-2 333-20006-NY approved 9/16/97, are carried
forward and included in the calculation of the Registration Fee table in
this
Registration Statement 333-37409. The fee previously paid to register such
securities, $9,269.01, and the check in the amount of $522.20 which was
submitted by wire transfer on October 8, 1997 are carried forward and off
set against the current registration fee of $7,413.98 leaves a balance
refund due to the Company of $2,749.65.
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.
Baltia Air Lines, Inc.
Cross Reference Sheet
Between Items on Form SB-2 and the Prospectus
Item in Form SB-2 Prospectus Caption
1. Front of Registration Forepart of Registration Statement
Statement and Outside Front Cover and Outside Front Cover Page of
of Prospectus Prosp
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Pages of Prospectus Cover Page of Prospectus
3. Summary Information and Risk Prospectus Summary; Risk Factors
Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Prospectus; Outside Front Cover
Price Page of Prospectus; Underwriting;
Risk Factors
6. Dilution Dilution
7. Selling Securityholders Use of Proceeds, Common Stock
Available for Future Sale
8. Plan of Distribution Underwriting; Prospectus Supplement
9. Legal Proceedings N/A
10. Directors, Executive Management
Officers, Promoters and Control
11. Security Ownership of Principal Stockholders
Certain Beneficial Owners and
12. Description of Securities Description of Securities
13. Interest of Named Legal Matters; Experts
Experts and Counsel
14. Disclosure of Commission Underwriting; Item 24 and Item 28
position on Indemnification for
Securities Act Liabilities
15. Organization within Summary; Business
Last Five Years
16. Description of Business Summary; Business
17. Management's Discussion Management's Discussion and
and Analysis or Plan of Operation Analysis of Financial Condition
and Results of Operation
18. Description of Property Business - Facilities
19. Certain Relationships Certain Transactions
and Related Transactions
20. Market for Common Equity Description of Securities
and Related Stockholder Matters
21. Executive Compensation Management - Compensation
22. Financial Statements Selected Financial Data; Financial
23. Changes and N/A
Disagreements with Accountants on
Accounting and Financial Disclosure
SUBJECT TO COMPLETION, DATED June ___, 1998
PROSPECTUS
(c) BALTIA AIR LINES - U.S. INTERNATIONAL AIR CARRIER
The New Way to Europe(tm)
1,100,000 Shares of Common Stock and
1,100,000 Redeemable Common Stock Purchase Warrants
All of the 1,100,000 shares of common stock of $.0001 par value ("Common
Stock" or "Shares") and 1,100,000 redeemable Common Stock purchase warrants
("Warrants") offered hereby (together, the "Securities") by Baltia Air
Lines, Inc. (the "Company") are being sold through Hornblower & Weeks, Inc.
and Madison Capital Markets Corp. as the co-managers ("Co-Managers")
together referred to as ("Underwriters.") The initial public offering
("IPO") price is $5.50 per Share and $.10 per Warrant. The Shares and
Warrants will be separately tradable as of the date hereof. Investors may
purchase Common Stock, Warrants or both securities. Each Warrant entitles
the holder to purchase one Share for $6.05 commencing six months after the
date the Public Offering becomes effective ("Effective Date") until five
years after the Effective Date. The Company may redeem outstanding
Warrants, once they become exercisable, at a price of $.10 per Warrant on
not less than 30 days' written notice, provided the closing bid quotations
of the Shares have exceeded $10 for 20 consecutive trading days ending on
the third day prior to the date on which notice is given. See "Description
of Securities."
<R/>
This Prospectus, dated ______, 1998 ("Prospectus"), also relates to a
secondary registration of seventeen Selling Securityholders of 825,000
warrants ("Bridge Warrants"). Each Bridge Warrant entitles the holder to
purchase one Share at 6.05 per Share. The 825,000 Shares underlying the
Bridge Warrants are registered herein.
Prior to this Offering, there has been no public market for the Securities,
and there can be no assurance that any such market will develop or, if
developed, that it will be sustained. The IPO prices as well as Warrant
exercise and redemption prices were determined by negotiations between the
Company and the Underwriters. See "Underwriting." The Company has applied
for quotation of the Shares and Warrants on the SmallCap tier of the Nasdaq
Stock Market ("Nasdaq SmallCap Market") under symbols "BALT" and "BALTW,"
respectively, and for listing on the Boston Stock Exchange under the symbols
_______ and ________ , respectively.
-------------------------------------
The Securities offered hereby are speculative and involve a high degree of
risk and immediate substantial dilution. See "Risk Factors" at page ___ and
"Dilution" at page ___.
-------------------------------------
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.
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. The 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.
<TABLE>
<CAPTION>
Price to Underwriting Discounts Proceeds to
Public and Commissions <FN1> Company <FN2>
<S> <C> <C> <C>
Per Share . . . . . . $5.50 $0.55 $4.95
Per Warrant . . . . . $0.10 $0.01 $0.09
Total <FN3> . . . . . $6,160,000 $616,000 $5,544,000
<FN>
<FN1>
(1) Does not include a 3% non-accountable expense allowance which the
Company has agreed to pay to the Underwriters. The Company has also agreed
to issue to the Underwriters warrants to purchase up to 110,000 Shares and
110,000 Warrants ("Underwriters' Warrants"), and to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
<FN2>
(2) Before deducting other expenses of this offering payable by the Company
estimated at $235,000, and the Underwriter's non- accountable expense
allowance of $184,800.
<FN3>
(3) The Company has granted the Underwriters an option, exercisable within
45 days from the date of the Prospectus, to purchase up to 165,000
additional Shares and 165,000 additional Warrants on the terms set forth
above, solely for the purpose of covering 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 and
Proceeds to Company will be $7,084,000, $708,400 and $6,375,600
respectively. See "Underwriting."
</FN>
</TABLE>
The Securities are being sold by the underwriters on a firm commitment
basis, subject to prior sale, when, as, and if delivered to and accepted by
the Underwriters, and subject to the right to reject any order, in whole or
in part, and subject to certain other conditions. It is expected that
delivery of certificates representing the Securities will be made against
payment therefore at the offices of Hornblower & Weeks, Inc. in New York
City, on or about July , 1998 ("Closing").
HORNBLOWER & WEEKS, INC. MADISON CAPITAL MARKETS CORP
The date of this Prospectus is June 8, 1998
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
AND WARRANTS SOLD. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF
DISTRIBUTION". IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY
OVER-ALLOT OR EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE
MARKET PRICES OF COMMON STOCK OR WARRANTS AT A LEVEL ABOVE WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NASDAQ SMALLCAP MARKET AND BOSTON STOCK EXCHANGE.
SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
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. Unless otherwise indicated, the information contained
herein assumes no exercise of the Over-allotment Option, the Warrants,
Bridge Warrants and the Underwriters' Warrant. Investors should carefully
consider the information set forth under the caption "Risk Factors."
THE COMPANY - HISTORICAL DEVELOPMENT
The Company, a U.S. airline, was incorporated in 1989 under the laws of
New York to provide full-service commercial, passenger, cargo and mail
transportation between New York City and the former Soviet Union. In 1990,
the Company competed with eleven airlines (American Airlines, Delta,
Continental, TWA, PanAm, Northwest Airlines, American Trans Air, United
Airlines, Alaska Airlines, Federal Express and Evergreen International
Airlines) before the U.S. Department of Transportation ("DOT") for rights to
fly to the former Soviet Republics. See "Business - U.S. Carrier Operations
Under Bilateral Rights."
In 1991, under the U.S. - U.S.S.R. Civil Air Transport Agreement of
1990 ("Bilateral Agreement"), the DOT granted the Company non-stop authority
to carry passengers, cargo and mail between JFK - St. Petersburg, Russia;
and JFK -Riga, Latvia, with on-line service beyond Riga to Minsk, Kiev, and
Tbilisi. In 1992, and anticipating utilization of the authorities, the
Company commenced the US Federal Aviation Administration ("FAA")
certification process, and trained 30 pilots, 38 flight attendants, 17
mechanics, and 8 dispatchers, but did not complete the process because the
Company did not have sufficient financing to take delivery of aircraft.
At the time the Company received authority in 1991, the capital markets
were slow, the airline industry was in a down-turn, and the USSR was
transforming into separate sovereign nations, all of which the Company
believed limited its access to public or private financing. Resources of
the Company's officers and directors were insufficient to commence revenue
operations. Due to incomplete financing, the DOT withdrew the Company's
authorities in 1993.
In 1995, believing the capital markets to be favorable, the airline
industry to be in an up-turn, and Russia to have expanded its political and
economic ties with the United States ("US") which were reflected in the
growth of passenger traffic and freight, the Company reapplied for JFK-St.
Petersburg authority. Based upon the Company's planned IPO and having
examined the Company's operating plan and management, its background and
qualifications, the DOT found the Management fit to operate a US flag
carrier (DOT Order 96-1-24, and 96-2-51). The DOT authority is conditional
upon the Company's obtaining FAA air carrier certification and meeting the
DOT regulatory one-time financial requirement to have, upon commencement of
flight operations, working capital equal to an averaged three months
operating expenses. Founder, Chairman and President Igor Dmitrowsky foresaw
the dissolution of the Soviet Union, realized the immense commercial
opportunities for a US airline to serve this rapidly developing market, and
testified to such in 1991 before the House Aviation Subcommittee. Mr.
Dmitrowsky, a US citizen and native of Riga, Latvia, has traveled
extensively in the Republics of the former Soviet Union and he speaks fluent
Latvian and Russian.
The Company's activities, from inception to the present, have been
devoted to raising capital, obtaining route authority and approval from the
DOT and the FAA, and on market research and development of the Company's
overall marketing program. In 1996, and upon reexamination of the Company's
fitness as a US air carrier, the DOT reissued JFK-St. Petersburg route
authority to the Company. In January 1998, the Company's President met with
the FAA regarding the air carrier certification process consisting of
document approval, crew training, and flight demonstration. Prior to
commencement of service, the Company is required to complete the FAA air
carrier certification.
BUSINESS STRATEGY
The Company's business strategy is to establish itself as a leading
carrier in the US-Russia niche market, but there is no assurance that such
will occur. The Company's marketing strategy is to associate the Company's
name with quality service. In 1992, and as part of its marketing strategy,
the Company sponsored the St. Petersburg Festival in New York featuring the
Kirov Ballet and Opera at the Met. As a result, the Company established
relationships with key individuals within the St. Petersburg's community,
the Conductor, Director, and Assistant General Manager of Kirov Opera &
Ballet; and management of Hotel Astoria, Grand Hotel Europa, and
Pribaltiyskaya Hotel. There is no assurance written contracts will evolve
as a result of having established these relationships. The Company's
Director of Public Relations maintains these relationships presently, but no
promotion is currently conducted. The Company does not plan to use Offering
proceeds for promotion of art in St. Petersburg. The cost of promotion of
the arts of St. Petersburg will be paid from operating revenues. The
Department of Commerce ("DOC") describes St. Petersburg as the former
capital of Russia, with a population of just under five million people,
which makes it the second largest city in Russia and the fourth largest in
Europe. It is a central hub for commercial activity in the Northwestern
Region of Russia, and is the major intellectual, cultural, financial, and
industrial center of the Russian Federation. The DOC statistics record that
US-Russia air cargo more than doubled in both directions from 1992 to 1995
(DOC, Bureau of the Census).
The Company intends to offer non-stop and palletized and containerized
air cargo service from the United States into the St. Petersburg market, a
service presently not offered by any other U.S. airline. The US Postal
service stated that the Company may be required to carry about half of all
US mail to Russia (approximately 14,000 lbs per month), which the Company's
management ("Management") believes the Company can carry profitably and
which is not expected to have a material adverse effect on the Company's
flight schedule. Currently, priority mail is channeled through Moscow
because US non-stop service to St. Petersburg is not available. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations." A number of freight forwarders, including Paramount Cargo
Marketing, Inc., RAF International Sales, Inc., Transatlantic Royal Company,
Inc., The International Grapevine, Quantum International Forwarding, Ltd.,
American Export Lines, who specialize in the US-Russian market, have
expressed an interest in utilizing the Company's proposed cargo service.
Negotiations have included quantities to be carried at quantity market rates
and contracts with Paramount Cargo Marketing and RAF International Sales are
expected to be signed following closing of the IPO, at which time the
Company can approximate the date of inaugurating flights. However, there
are no assurances that agreements will be reached at that time, or that
cargo shipments will materialize as expected. Paramount Cargo Marketing
projected that it would ship 20 tons five times per week, and RAF
International Sales projected its shipments at 50 to 75 tons per week to St.
Petersburg. The Company will commence revenue flight operations with one
round trip per week and increase frequency as economically advantageous.
Operating one round trip per week with full cargo payload, the Company
expects to carry less than a quarter of the requirements of these
forwarders. Thus initially, the Company expects to operate with full cargo
payload. The Company expects to receive DOT authority to operate up to five
round trip flights per week.
The Company is presently in discussions with Pegasus Capital
Corporation / Pacific Aviation Holding Company ("Pegasus") for the
acquisition of two B747 aircraft. The Company has allocated $750,000 for
the initial acquisition deposit on the first aircraft. See "Use of
Proceeds." There is no assurance that these aircraft will be acquired.
BALTIA(c), VOYAGER CLASS(c), THE NEW WAY TO EUROPE(tm), CLUB
BALTIA(tm), BALTIA CARGO(tm), AIR BALTIA(tm), and BALTIA EXPRESS(tm) are
trademarks of the Company.
The Company's office is located in the East Wing of the International
Arrivals Building (IAB) at JFK International Airport, Jamaica, NY 11430 and
its telephone number is (718) 553-6636.
THE OFFERING
Securities Offered(1) . . . . . . 1,100,000 shares of Common Stock and
1,100,000 Warrants. The Common
Stock and Warrants are separately
tradeable as of the date of this
Prospectus.
Description of Warrants . . . . . Each Warrant entitles the registered
holder to purchase one share of
Common Stock for $6.05 commencing
six months from the Date of this
Prospectus and continuing until five
years from the Date of this
Prospectus. The Company may redeem
the outstanding Warrants, once they
become exercisable, at a price of
$.10 per Warrant on not less than 30
days prior written notice, provided
the closing bid quotations of the
Shares have exceeded $10 for 20
consecutive trading days ending on
the third day prior to the date on
which notice of redemption is given.
See "Description of Securities."
Common Stock Outstanding . . . . 2,442,500 shares.
Common Stock Outstanding
After Offering . . . . . . . 3,542,500 shares(1)
Proposed Nasdaq SmallCap
Market Symbols . . . . . . . Common Stock: BALT
Warrants: BALTW
Proposed Boston Stock
Exchange Symbols . . . . . . Common Stock:
Warrants:
USE OF PROCEEDS
Of the $5,124,200(2) net proceeds of this Offering, the Company intends
to reserve approximately $90,000 to pay liabilities, and approximately
$2,166,000 for commencement of scheduled nonstop service on the JFK-St.
Petersburg route, including costs for aircraft deposit, spare parts/ground
equipment, office facilities, compensation, contract services, marketing,
consultants, and mini-evacuation tests. To accelerate commencement of
scheduled service, the Company borrowed money ("Bridge Loans") and, prior to
the Closing, it purchased certain goods and services which otherwise would
have been purchased from proceeds of the Offering("Proceeds"). Bridge Loans
will be repaid at the Closing from Proceeds allocated for commencement of
scheduled service and accumulated interest thereon is expected to be paid
from Proceeds allocated to pay liabilities. Approximately $2,958,200 is
expected to be reserved as working capital. See "Use of Proceeds."
RISK FACTORS
The Securities offered hereby involve a high degree of risk. An
investment in the Securities should be considered only by investors who can
afford the loss of their entire investment. Prospective investors should
review carefully the information set forth under "Risk Factors."
______________
(1) Does not include the Over-Allotment Option of up to 165,000
additional Shares.
(2) Based upon the IPO price of $5.50 per Share and $.10 per Warrant,
net proceeds to the Company of $5,124,200 are calculated by
deducting from the total Proceeds of $6,160,000, the Underwriting
Discounts and Commissions of $616,000, the Underwriters's
non-accountable expense allowance of $184,800, and expenses of
this Offering payable by the Company estimated at $235,000. The
Bridge Loans are expected to be repaid at Closing from net
Proceeds. There is no impact on "Use of Proceeds", except that
some uses are expected to be transacted prior to the Closing with
money from the Bridge Loans.
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth certain selected financial data for
three months ended March 31, 1998 and 1997 (unaudited), and years ended
December 31, 1997, and 1996, as derived from the financial statements of the
Company. The information should be read in conjunction with the "Management
Discussion and Analysis of Financial Condition and Results of Operations"
("Management Discussion and Analysis"), and the financial statements and
related notes included in this Prospectus.
<TABLE>
<CAPTION>
Three Months Ended Years Ended
March 31 December 31
1998 1997 1997 1996
Statement of Operations Data:
(Development Stage)
<S> <C> <C> <C> <C>
Operating revenue . . . . . . . . . . . 0 0 0 0
Pre-operating expenses . . . . . . . . $145,832 $39,230 $143,137 $170,566
Pre-operating loss . . . . . . . . . . (145,832) (39,230) (143,137) (170,566)
Interest expense net . . . . . . . . . 52,466 5,382 0 68,120
Net loss . . . . . . . . . . . . . . . (198,298) (44,612) (143,137) (238,686)
Loss per share of Common Stock . . . . (.08) (.02) (.06) (.11)
<CAPTION>
March 31, 1998
Pro forma Adjusted
Actual
for Offering <FN1><FN2>
Balance Sheet Data:
<S> <C> <C>
Working capital (deficit) . . . . . . . . . . . . . . . . $ (959,735) $ 4,164,465
Total assets . . . . . . . . . . . . . . . . . . . . . . 262,214 5,386,414
Total liabilities . . . . . . . . . . . . . . . . . . . . 986,438 986,438
Redeemable common shares <FN4>. . . . . . . . . . . . . . 0 0
Stockholders' equity (deficit) <FN3>. . . . . . . . . . . (724,224) 4,399,976
Net Tangible Book Value per share . . . . . . . . . . . . (.38) 1.19
<FN>
<FN1>
(1) Does not include proceeds from the Over-Allotment Option of up to
165,000 additional Shares.
<FN2>
(2) Based upon the IPO price of $5.50 per Share and $.10 per Warrant, net
proceeds to the Company of $5,124,200 are calculated by deducting from
the total Proceeds of $6,160,000 the Underwriting Discounts and
Commissions of $616,000, the underwriter's non-accountable expense
allowance of $184,800 and expenses of this Offering payable by the
Company estimated at $235,000.
<FN3>
(3) In June 1997, the Company converted the following liabilities: (1)
$1,048,000 in demand notes issued in 1992, together with accrued
interest, were converted into 75,000 restricted Shares; (2) $1,628,000
in accounts payable were converted into 150,000 restricted Shares;(3)
$110,000 in accounts payable to a consultant were converted into 10,000
restricted Shares; and (4) $270,928 and $22,142 in accrued expenses
were forgiven by certain shareholders. The Company's Shareholders'
deficit attributes zero value for $396,090 of pre-paid media
placements. See "Management Discussion and Analysis - Results During
Development." On March 31, 1998, certain Shareholders relinquished the
amount due them totaling $160,983.
<FN4>
(4) In June 1997 certain shareholders canceled their option to sell back to
the Company 25,000 Shares at total buy-back amount of $400,000.
</FN>
</TABLE>
SUBSCRIBER'S FLIGHT COUPON
In order to introduce its non-stop JFK - St. Petersburg service to its
IPO shareholders, the Company will issue Subscriber's Flight Coupons. For
each 1,500 Shares purchased, the Subscriber receives one Flight Coupon to
purchase two round-trip tickets from JFK to St. Petersburg for $650. Each
Subscriber's Flight Coupon is not a security. See "Subscriber's Flight
Coupon."
RISK FACTORS
Investment in the Securities offered hereby involves a high degree of
risk. Prospective investors should carefully review the following factors
together with the other information in this Prospectus prior to making an
investment decision. Such risks include, among others:
RISKS RELATING TO THE COMPANY
No Operating Revenue History
The Company has not yet commenced revenue producing operations.
Excepting investments and loans from present securityholders, the Company
has not generated any revenues. Since inception to March 31, 1998, the
Company has accumulated a loss of $6,585,804 in preparation for the
commencement of revenue producing service. With the net proceeds from this
Offering, the Company expects to start revenue service on the JFK - St.
Petersburg route. Accordingly, the Company is in its development stage of
business. As a "development stage" business, the Company is subject to many
of the risks common to such enterprises, including under capitalization,
cash shortages, limitations with respect to personnel, financing and other
resources, and uncertainty of customers and revenues. There is no assurance
that the Company's activities will be successful or result in any revenues
or profit for the Company, and the likelihood of the Company's success must
be considered in the light of its stage of development. See "Business."
The Company's Continuing as a Going Concern Depends Upon Financing
The Company's plans are dependent upon the closing of the IPO for $6.2
million which Management believes will be sufficient to meet the financial
fitness criteria for an operation consisting of one round-trip flight per
week between new York and St. Petersburg with one B-747-100 aircraft. (DOT
Order 97-9-11, p.5.) If the Company does not raise sufficient working
capital, and continues to experience pre-operating losses, there will most
likely be substantial doubt as to its ability to continue as a going
concern. Because the Company has generated no revenue, all expenditures
during the development stage have been recorded as pre-operating losses.
Revenue operations have not commenced because the Company has not raised the
necessary capital. The Company's independent auditors have qualified their
report on the Company's financial statements to state that if the Company
does not raise sufficient capital there is substantial doubt as to its
ability to continue as a going concern. See "Use of Proceeds, Business and
Management Discussion and Analysis."
Loss of DOT Authority Without IPO Closing or Other Funding
If the IPO does not close, or sufficient working capital is not raised prior
to August 7, 1998, there is a risk that the Company's New York - St.
Petersburg route authority may not be renewed by the DOT and may cause the
DOT to terminate the NY-St. Petersburg authority for dormancy.
Obtaining FAA Air Carrier Certification is Prerequisite to Commencing
Revenue Service
Obtaining FAA air carrier certification is a condition of commencing
revenue flight operations under the Company's DOT fitness certificate. The
certification process includes FAA approval of the Company's written
operation procedures, approval of Company training for compliance with the
written procedures, and the Company's demonstration to the FAA in actual
flight operations. At the time the Company received authority in 1991, the
capital markets were slow, the airline industry was in a down-turn, and the
USSR was transforming into separate nations, all of which Management
believed limited the Company's access to public and private financing in
1992, and due to incomplete financing, in 1992 the Company could not take
delivery of airplanes and as a result could not complete the FAA
certification process. Although at no time in 1992 was the Company
deficient in any FAA certification task undertaken, the FAA air carrier
certification process must be recommenced because of the six-year lapse.
While Management believes the net Proceeds are adequate to complete the FAA
process, satisfy the DOT Financial Requirement (discussed below), and
commence revenue service, nevertheless, it is possible that some
unforeseeable event could occur that could prevent the Company from
obtaining FAA air carrier certification. See "Use of Proceeds, and
Management Discussion and Analysis."
Meeting DOT Financial Requirement is Prerequisite to Commencing Revenue Service
The DOT requires that, at the time it commences revenue service, a new
airline have cash or credit in a one-time amount equal to expenses
reasonably to be incurred during the first three months of operations. In
practice the DOT takes one fourth of the total annual forecast expenses.
Projected revenues cannot be used to offset the three months average
expenses. ("DOT Financial Requirement"). The Company will commence
operations with one round trip per week. The averaged three months
operating expenses approximates $2.8 million. Assuming the use of Proceeds
as set forth under "Use of Proceeds," the Company will have reserve working
capital in the amount of $2,958,200 with which to meet the DOT financial
requirement to commence service with one round trip per week. Once
operations have commenced, the Company may increase service as traffic
demands up to five round trips per week, and regardless of demand, will not
increase frequency of service at a rate that might diminish quality of
service. If some unforeseeable pre-operating cost is incurred, the Company
may have to raise additional financing , to meet the DOT Financial
Requirement thereby causing further dilution of book value per share. See
"Use of Proceeds, Business and Management Discussion and Analysis."
Need for Additional Financing
With the Proceeds from the Offering, assuming no additional financing,
the Company expects to commence revenue operations with one JFK-St
Petersburg round trip per week. However, it is possible that unforeseeable
circumstances may arise so that capital raised in this Offering may be
insufficient to commence revenue operations. If additional financing is
required to meet the DOT Financial Requirement, or other unforeseeable
event, the Company will have to raise additional funds and may have to
negotiate equity for funds. See discussion of additional potential sources
of financing under Liquidity and Capital Resources subsection of "Management
Discussion and Analysis." There are no present commitments by an
individual, firm or entity for future financing. The need for additional
financing carries the risk of book value per share dilution and may revenue
flight operations indefinitely. If revenue operations commence, no
guarantee can be given that the Company's JFK -St. Petersburg operation will
generate sufficient revenues to satisfy its cash needs at various periods in
the future. In which case, equity may be negotiated for debt and book value
per share would be further diluted. See "Use of Proceeds" and "Management
Discussion and Analysis."
The Company's International Route May Not Have Resale Value
In contrast to domestic airline routes, which became unlimited-entry
markets following air transport deregulation, international airline routes
are frequently limited-entry markets with competition restricted by
bilateral agreements between contracting nations. Each contracting nation
designates its national carrier[s] to provide international service on air
routes permitted by the agreement. Subject to DOT approval, US airlines have
sold international route authorities to each other for value. The Company's
route authority has no resale value during the one year following
commencement of air service because the route's transferability is
prohibited by the DOT until the Company has operated the route for at least
one year, and then may have no resale value. Accordingly, route valuation
should not be relied upon when evaluating the equity of the Company. See
"Management Discussion and Analysis - Liquidity and Capital Resources".
Dependence on DOT Qualified Management
The Management and members of the Company's Board of Directors are
required to meet the qualifications of the DOT in order to operate a US
airline. The loss of the services of any present member may have an adverse
effect on the Company's operations, and qualified replacements acceptable to
the DOT and FAA would have to be retained. There can be no assurance that
the Company will be able to attract qualified personnel in the future on
terms attractive to the Company or on any terms. The Company has a no
written employment agreement policy. The Company intends to acquire key-man
life insurance in place 90 days after the Closing on the President. See
"Management."
Management Has Discretion as to the Use of Proceeds
Management has discretion as to the use of proceeds with respect to
working capital which represents 47% of the Proceeds from the Offering.
There can be no assurance that Management's decisions will cause the most
positive results for the Company or are the spending decisions that
individual investors would make if they were in Management's position. IPO
Investors may have no control over such decisions because officers,
directors and existing shareholders of the Company may still control the
board of directors following the Offering. Unforeseen events or changed
circumstances may cause Management to use Proceeds differently from
allocations set forth in the Use of Proceeds section. See "Description of
Securities - Lack of Control by Minority Shareholders."
No Assurance of Future Profitability
As a US start-up airline, the Company is likely to be subjected to
greater initial scrutiny by the FAA than established mainstream airlines,
and the Company is likely to spend extra resources to make required
adjustments. A start-up airline can be expected to confront many problems,
delays, expenses and unforeseen difficulties relating to operations,
marketing and compliance with applicable regulations. Despite offering the
only non-stop US service from JFK to St. Petersburg, the Company may
experience periods of operating losses. The Company believes that its
results of operations will be affected by various factors, including market
acceptance of its new non-stop flights, seasonality variation, economic and
political factors, and the need for additional capital. There can be no
assurance that the Company, and its operations, will experience
profitability in the future, if at all. See "Management Discussion and
Analysis."
Revenue Operations are Dependent upon Initial FAA Certification and
Continued Regulatory Compliance
The Company is a US start-up airline. In order to commence service on
the JFK - St. Petersburg route, the Company is required to complete its FAA
air carrier certification. Following the certification, a US airline is
required to maintain its air carrier standards as prescribed by regulation.
Failure to do so may ground the Company's aircraft. See "Business - Air
Carrier Certification, and - Regulatory Compliance."
US International Air Carrier Operations are Subject to Terms and Conditions
in Bilateral Agreements
The Company's proposed operation on its route from JFK to St.
Petersburg, Russia will be conducted pursuant to the Air Transport Agreement
Between the Government of the United States of America and the Government of
the Russian Federation, signed 14 January 1994 ("Bilateral Agreement"),
entitling the Company to certain rights and privileges backed by the US
government. However, the Company is subject to any change negotiated by US
and Russia which may not be to the Company's advantage. By operating its
service, the Company will establish "grandfather rights" on its route.
However, there can be no assurance that the Bilateral Agreement will not be
modified in the future to the effect that certain provisions which are
beneficial to the Company may be diminished in the future. See "Business -
US Carrier Operations Under Bilateral Rights."
Political Risk may Affect the Company's Growth
The Company's long-term business strategy is to build a niche market
for itself in the US-Russia market. Because the Company's right to operate
from the US to Russia is protected by Bilateral Agreement, the Company's
service is not likely to be interrupted by political change, unless a
breakdown in diplomatic relations occurs between the US and Russia.
However, adverse political developments in Russia may slow the present rapid
growth of passenger and cargo traffic between the United States and Russia.
This in turn, may have a material adverse effect on the Company's
operations. See "Business - US Carrier Operations Under Bilateral Rights."
Dependence Upon Aircraft Availability
The Company is negotiating a lease with Pegasus for a Boeing 747-100
aircraft. The aircraft is presently available for delivery in 1998.
Pegasus has an additional sister ship also available to Baltia. However,
until successful completion of this Offering, an acquisition contract cannot
be completed. The Company does not currently own or lease any planes, and
is not currently a party to a lease or contract granting it access to a
plane, and intends to contract for aircraft acquisition at the earliest time
following the Closing. The Company may purchase or lease its aircraft
depending upon acquisition terms. The Company intends to make monthly lease
or purchase payments from operating revenue in an amount ranging from
$175,000 to $225,000 per month. In the event the Company is unable to meet
such monthly payments, as in most lease or purchase plans, its aircraft may
be repossessed. If the Company's sole aircraft were repossessed, there is a
risk that the Company would cease flight operations and cessation could be
permanent. See "Business - Pending Aircraft Acquisition."
Risk of Escalating Fuel Cost and Labor Costs
The Company's fuel costs are based upon a Texaco quote of fuel costs at
JFK and an Aer Rianta fuel costs quote at St. Petersburg. However, no
assurance can be given that future fuel costs will not escalate beyond the
current level. The Company's business is fuel-intensive. Fuel is one of
the most significant cost elements over which the Company has very little or
no control. A significant increase in the fuel cost may diminish or
eliminate the Company's profit, or create an operating loss.
Labor cost is also a significant operating cost which can vary over time.
Despite the Company's long-term labor strategies, there can be no assurance
that the Company will be able to control escalating labor costs over time,
or that in the future it will not be exposed to collective bargaining that
may adversely affect future operating costs and efficiency. See "Management
Discussion and Analysis - Market Statistics."
Security and Drug Testing Requirements
The Company is required to follow its FAA approved program for air
carrier security and drug testing. The Port Authority at JFK and
authorities in St. Petersburg, Russia have additional security requirements.
However, even when complying with these measures, no guarantee can be given
that security violations, as well as controlled substance violations, can be
totally prevented by the Company. There may be situations over which the
Company has no control. Any such potential violation presents a significant
risk for the Company, a risk which appears to be inherent in the airline
industry.
Single Aircraft Operation
The Company intends to operate a single wide body aircraft for a period
of time before acquiring another aircraft. The dispatch reliability of the
B747-100 is better than 97% (Boeing report ID:RM 23004). The FAA requires
that the Company have line maintenance at JFK and in St. Petersburg, as well
as spare parts reserves and parts pool arrangements at both airports.
Despite the technical servicing capability required by the FAA, the Company
may experience delays due to technical problems which a multi-aircraft
operator would be better equipped to resolve. Such potential occurrences
may impact adversely on the Company's marketing objective to provide
reliable on-time service to passengers and cargo shippers. There is no
additional safety risk associated with operating a single aircraft because
the FAA requires US airlines to observe uniform safety standards regardless
of the number of aircraft.
For each hour of aircraft operation, the Company accumulates capital
reserves for various maintenance items. It is possible that during the
initial period, until sufficient maintenance cash reserves are accumulated,
an unexpected significant maintenance cost can adversely impact the
Company's operating cash flow. See "Business - Description of the
Industry," and "- Pending Aircraft Acquisition."
Currency Exchange Fluctuations
In addition to dollar sales throughout the United States and in Russia,
the Company will accept non-dollar currencies at St. Petersburg. The
Company is authorized to freely transfer its funds between the US and
Russia. Rubles are freely exchangeable to dollars, and the Company intends
to periodically make compensatory adjustments in its ticket prices,
purchased with rubles. However, for marketing reasons aimed at maintaining
an apparent stability of the Company's ticket pricing for passengers and
shipments originating abroad, the Company does not plan to adjust its ticket
prices simultaneously with exchange rate fluctuations. Thus, an inherent
exchange risk exists in the Company's international currency transactions,
risk which increases with exchange rate volatility. The Russian government
began freeing prices in 1992 which sparked devaluation of the Ruble. See
"Management Discussion and Analysis - Currency Exchange Fluctuations."
Competition by Major Airlines
The rapidly growing US-Russian market is primarily being served by
foreign airlines providing a one-or two-stop service. The major foreign
competitors include Finnair, SAS, Lufthansa, KLM, Swissair, British Air and
other smaller foreign airlines. Only US and Russian airlines derive rights
to fly non-stop under the Bilateral Agreement. Thus, excepting a Russian
airline, no foreign carrier can obtain rights to fly non-stop between the US
and Russia. Delta is currently providing non-stop service to Moscow, and the
Company will fly non-stop to St. Petersburg.
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Despite the apparent advantage that the Company may have by providing
the only US non-stop service to passengers and cargo shippers in the US -
St. Petersburg market, the major carriers have an established name and
reputation. As a start-up US airline, the Company will have to establish
its reputation and name recognition in the market in order to capitalize on
its non-stop service. Unlike some of its competitors, the Company does not
currently have interline agreements with other airlines. The Company intends
to sign interline agreements with other airlines after the Company commences
service, but there is no assurance that such agreements would contain
discounts equal to those of its competitors. Interline agreements allow
participating carriers to reduce the total cost of a multi-legged ticket
involving two or more airlines, each airline contributing a certain discount
for the leg on which it provides service in order to bring down the overall
price of such a ticket. Prior to the Company's signing interline agreements
with other airlines, passengers will be able to purchase a multi-leg ticket
through the CRS (Computer Reservation System) at their local travel agent
without the benefit of interline discount. Without interline discount, the
multi-leg ticket may be more expensive than a multi-leg ticket on a
competitive airline that has interline agreements in place. No assurance
can be given that the Company's non-stop service will offer a sufficient
marketing advantage over the established airlines. If the Company is unable
to establish itself as the leading US operator in the market, or if the
Company is forced to respond to overall price slashing, the Company's
revenues will most likely be adversely affected.
Based on reciprocity of the Bilateral Agreement, a Russian airline can
also offer non-stop service between the US and Russia. It is likely that
over time Russian airlines will upgrade their services and will be more
competitive in the mainstream market. There can be no assurance that such
future competition by a Russian airline in the market will not adversely
affect the revenue growth of the Company. See "Business --- Competition,"
"--- US Carrier Operations Under Bilateral Rights," and "--- Interlining at
JFK and LaGuardia Airports."
Effects of Seasonality on the North Atlantic
Traffic over the North Atlantic fluctuates seasonally with higher load
factors in the summer and lower load factors in the winter. Historically the
February North Atlantic traffic (low point) is 25% lower than the average
monthly traffic, and the August North Atlantic traffic (high point) is 45%
above the monthly average North Atlantic traffic. During the low season, to
mitigate the typical seasonal traffic decline, the Company intends to market
St. Petersburg's winter cultural attractions and may reduce the frequency of
its winter scheduled flights while providing supplemental charter service
with its aircraft when the aircraft is not flying scheduled service.
However, no assurance can be given that the Company's marketing strategies
will be sufficiently effective to maintain desirable passenger and cargo
load factors throughout the year. Nor can the Company guaranty that revenues
from potential charter services would counter-balance the negative impact on
revenue due to North Atlantic seasonal fluctuations, or if charter
opportunities will be timely available to the Company. On occasion, JFK
airport, St. Petersburg airport, or alternative airports could close. In
such a case, the Company's flight departure may be delayed. This type delay
is not expected to be a significant economic factor because the delay would
be absorbed in turn around time. North Atlantic flights follow FAA
established procedures to assure safety. Separate procedures exist for
twin-engine aircraft that are not applicable to aircraft with more than two
engines. Extended Range Twin-engine Operations (ETOPS) regulates twin engine
operations by requiring the availability of alternate en route airports
along the North Atlantic route in the event one engine were to fail. When
weather closes a critical en route airport, the twin engine aircraft flight
may not depart. The Boeing 747 aircraft, which the Company is considering,
is not subject to ETOPS regulations. The Company is not presently
considering a twin aircraft. See seasonality chart in "Management
Discussion and Analysis."
Limited Insurance Coverage and a Fluctuating Insurance Market
As a US airline, the Company is required to maintain comprehensive
airline liability insurance. The Company intends to carry $750 million in
liability coverage. Additionally, the Company intends to purchase hull
insurance, both to be effective upon delivery of the aircraft immediately
prior to commencement of flight operations. The Company has no control over
the fluctuation in the insurance market and no assurance can be given that
future increases in the overall insurance premiums will not adversely affect
the Company's profitability.
The risk of an airline disaster can be devastating to a major carrier.
The liability coverage purchased by the Company may not provide adequate
coverage in the event of a significant disaster which is likely to have a
material adverse effect on the Company. See "Management Discussion and
Analysis - Insurance Coverage and Expense."
Consequences in the Event of Default on LainBanka Line of Credit
The DOT is empowered to withdraw the authority from any US airline
should it find that non-US citizens directly or indirectly control that
airline. The Company has a $6.2 million line of credit ("LOC") from
LainBanka of Riga, Latvia. Should the Company draw upon that LOC and
default on repayment to LainBanka, notice must be made to the DOT. The
Company has made no draws upon this LOC and owes no debt to LainBanka. See
"Twelve Month Operating Plan" and "Notes to Financial Statements," for terms
and conditions of this LOC. Although in management's opinion, the value of
the Company to LainBanka lies in its US certification and the Company and
LainBanka would have a continued interest in retaining US control of the
airline, it is not certain what action LainBanka would take in the event the
Company should default. LainBanka is located in Latvia and subject to
Latvian law. There is no assurance that the investor in this Offering would
not be adversely affected by action of the DOT, the Latvian government, or
by action of the LainBanka in the event of default. See "Management
Discussion and Analysis - Results During Development."
Executive Compensation
During the period commencing when the Proceeds are released to the
Company and commencement of revenue operations, the Company's President and
the Vice Presidents will receive compensation reduced to an amount equal to
50% of budgeted salary. From the total net Proceeds of $5,124,200, the
executive officers' compensation totals $42,000 which represents 0.8% of the
net Proceeds. The proceeds allocated for executive compensation are not
available for other uses in commencing revenue service. See "Use of
Proceeds and Management - Compensation."
Potential Conflicts of Interest
The Company's directors and executive officers may serve as directors
and executive officers of other business entities. The Company does not
prohibit its officers and directors, or their affiliates, from transacting
business with the Company. As of the date of this Prospectus, there have
been no such transactions, excepting rental of office space from the
Company's President prior to moving the office to JFK. Not withstanding
full Board disclosure of any transaction between the Company and an officer
or director, it is possible that an official could act to increase his/her
interest at the expense of the Company. Anita Schiff-Spielman owns dental
laboratories and will be available to the Company for board of directors
meetings and related activities of her directorship. Andris Rukmanis is a
partner in a Latvian law firm and will be a full time employee of the
Company after the IPO closing. Walter Kaplinsky is currently inactive in
Globe Enterprises, a company exporting to Russia, and contributing his
services full time to the Company. Presently no other companies have
demands upon the officers or directors and no conflict of interest exists.
Since June 1997, after converting the $1,628,432 that was owed to her by the
Company into 150,000 restricted shares, the outside legal counsel, Steffanie
J. Lewis, The International Business Law Firm, P.C., owns a total of 190,000
shares, or approximately 7.8%, of the Company's issued and outstanding
Common Stock. Her financial interest potentially could influence her
independent opinion.
In 1990, Airline Economics, Inc. was engaged by the Company as industry
analysts for the US - USSR Route Authority proceeding before the DOT Airline
Economics was involved in the preparation of the Company's traffic
projections for the JFK - St. Petersburg market and testified as expert
witness for the Company in the proceeding. Airline Economics has been issued
28,750 shares of Common Stock, or approximately 1.2%, of the Company's
issued and outstanding Common Stock which includes the June 1997 conversion
of $110,000 that was owed to it by the Company into 10,000 restricted
Shares. Airline Economics' financial interest potentially could influence
its independent opinion. See "Management Discussion and Analysis - Liquidity
and Capital Resources."
The Company's Operating Revenue may not be Sufficient to Repay Indebtedness
The Company has debt in the amount of $986,438. Excepting $90,000
reserve, the Company does not intend to use net proceeds to repay
indebtedness. If the Company does not generate sufficient operating revenue
to repay indebtedness, it intends to postpone payment until such time as it
has the capability to pay, or it may borrow on its LainBanka LOC. For terms
of credit, see "Management Discussion and Analysis - Twelve Months Operating
Plan." Tight fiscal policies and enhanced bank supervision have contributed
to the stabilization of the economy leading to the strengthening of the
financial system and acceleration of structural reforms enabling Latvia to
emerge strongly from the 1995 banking crisis. (The US Department of
Commerce, International Trade Administration, Central and Eastern Europe
Business Information Center, Commercial Update, September/October 1997.)
There is no guarantee that the Latvia financial system will maintain its
strong emergence. If another banking crisis occurred, it is possible that
Baltia's line of credit may be jeopardized.
Lack of Control by Minority Shareholders
Upon the closing of this Offering, the officers and directors of the
Company will own 47% of the issued and outstanding Shares (assuming the
Warrants, and Underwriters' Purchase Option are not exercised). The
Company's Certificate of Incorporation does not provide for cumulative
voting. Therefore, the major shareholders may control 100% of the board of
directors after this Offering. A minority shareholder may have no control
over the management of the Company and will be unable to elect any
directors. See "Principal Stockholders" and " Description of Securities -
Lack of Control by Minority Shareholders."
Dividends
The Company has never paid dividends on its Common Stock and presently
intends to retain earnings, if any. There can be no assurance that dividends
will or will not be paid to its shareholders. Payment of dividends on the
Company's Common Stock rests with the discretion of the Company's board of
directors and will depend upon future earnings, if any. See "Dividend Policy."
Trademark Infringement
The Company has seven trademarks, of which two, "Baltia" and "Voyager
Class," are registered with the US Patent and Trademark Office and five are
subject to registration. While the Company intends to protect its
trademarks, there can be no assurance that the Company can enforce the
trademarks against infringement. "See Management Discussion and Analysis -
Liquidity and Capital Resources."
RISKS RELATING TO THE OFFERING
Arbitrary Price
The IPO price of the Shares and Warrants has been determined by
negotiations between the Underwriters and the Company. In determining the
number of Shares and Warrants to be offered and the Offering price, the
Company and the Underwriters considered (among other things) the Company's
history, capital structure, results of operations and financial condition,
estimates of the business potential of the Company, prospects for the
industry in general, and the general condition of the securities market. The
price does not necessarily bear any relationship to the Company's assets,
book value, earnings or other established criteria for valuing a company.
Accordingly, the Offering price should not be considered an indication of
the actual value of the Company's Securities. See "Underwriting -
Determination of Public Offering Price."
No Assurance of Market and Possible Volatility
Prior to this Offering there has been no public market for the Common
Stock or Warrants, and although the Shares and Warrants (including the
Shares underlying the Warrants) will be free of restrictions on
transferability, there can be no assurance that a public market will develop
after this Offering, or if developed, that it will be sustained. The Company
has applied for quotation of shares on Nasdaq SmallCap Market and Boston
Stock Exchange, however, if approved, there is no guarantee that the Company
will be able to maintain its listing.
There have been periods of extreme fluctuation in the stock market
that, in many cases, were unrelated to the operating performance of, or
announcements concerning, the issuers of the affected securities. The lack
of current market for the Common Stock and Warrants, fluctuations in trading
interest and changes in the Company's operating results, financial condition
and prospects could have a significant impact on the market price of the
Shares and Warrants.
Although the IPO price of the Securities reflects the Company's and the
Underwriter's assessment of current market conditions, there can be no
assurance that the price of the Company's Securities will be maintained
following the Offering. Accordingly, purchasers may not be able to resell
their Common Stock, or Warrants at or above the public offering price, if at
all, and a purchaser may not be able to liquidate his investment even at a
loss without considerable delay. See "Common Stock Available for Future
Sale," and "Underwriting - Determination of Public Offering Price."
Listing Requirements
Under prevailing rules of the National Association of Securities
Dealers, Inc. ("NASD"), in order to qualify for initial quotation of
securities on The Nasdaq SmallCap Market, a company, among other things,
must have at least $4,000,000 net tangible assets or $50,000,000 market
capitalization, or $750,000 net income two of last three years, as well as
the following: $1,000,000 public float, $5 million market value of public
float, $4.00 bid price, 3 market makers, 300 shareholders, and either 1
year's operating history or $50 million market capitalization. Although the
Company qualifies for initial quotation of its Securities on Nasdaq, for
continued listing on Nasdaq, a company, among other things, must have net
tangible assets of $2 million, or $500,000 net income in two of the last
three years, or market capitalization of at least $35 million, as well as
the following: 500,000 public float shares, $1 million public float value,
$1 bid price, two market makers and 300 shareholders. In the event the
Company should fail to maintain Nasdaq listing and the Common Stock and
Warrants are not accepted on the Boston Stock Exchange, or if accepted and
the Company fails to maintain such a listing, an investor would likely find
it difficult to dispose of the Common Stock or Warrants, or to obtain
current quotation to their value. There can be no assurance that the Company
will meet the requirements for continued listing in the Nasdaq SmallCap
Market or be listed and maintain listing on the Boston Stock Exchange.
Potential Effect of Penny Stock Rules on Liquidity of Shares
If the Company's Securities are not listed on Nasdaq or certain other
national securities exchanges and the resale price thereof falls below
$5.00, then resales of such Securities will be subject to the requirements
of the penny stock rules absent the availability of another exemption. The
Securities and Exchange Commission ("SEC") has adopted rules that regulate
broker-dealer practices in connection with transactions in penny stocks.
Penny stocks generally are equity securities with a price of less than $5.00
(other than securities registered on certain national securities exchanges
or quoted on the Nasdaq system). The penny stock rules require a
broker-dealer to deliver a standardized risk disclosure document prepared by
the SEC, to provide the customer with current bid and offer quotations for
the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction, and monthly account statements showing the market value
of each penny stock held in the customer's account, to make a special
written determination that the penny stock is a suitable investment for the
purchaser and to receive the purchaser's written agreement to the
transaction. These disclosure requirements may have the effect of reducing
the level of trading activity in the secondary market for a stock that
becomes subject to the penny stock rules. If the Company's Securities
become subject to the penny stock rules, investors in this Offering may find
it more difficult to sell their Securities. If the Company's Securities
were subject to the existing or proposed regulations on penny stocks, the
market liquidity for the Company's Securities could be severely and
adversely affected by limiting the ability of broker-dealers to sell the
Company's Securities and the ability of purchasers in this Offering to sell
their Securities in the secondary market.
Warrant is Subject to Company's Redemption
The Company may redeem outstanding Warrants, once they become
exercisable, at a price of $.10 per Warrant on not less than 30 days written
notice, provided the closing bid quotations of the Shares have exceeded $10
for 20 consecutive trading days ending on the third day prior to the date on
which notice is given. The Company intends to redeem Warrants at the
earliest opportunity, provided there is a current prospectus at that time.
Thereafter the Warrant is worthless. Thus, the investor may have to exercise
his/her Warrant before maximum profit can be gained from it. Investors are
advised that Warrants may not be redeemed or exercised in the absence of a
current prospectus. The Company intends to keep the Prospectus current, but
assumes no obligation to do so. The Company's intent to keep the Prospectus
current is fully set out in the following two paragraphs. See "Description
of Securities - Warrants."
Current Prospectus and State Blue Sky Registration Required to Exercise
Warrants
The Company intends to qualify the sale of the Securities in a limited
number of states, NY, NJ, CO, CT, FL, GA, IL, MD, WA, and UT, and certain
exemptions under certain securities ("blue sky") laws may permit the
Warrants to be transferred to purchasers in states other than those in which
the Warrants were initially qualified. Although the Securities will not
knowingly be sold to purchasers in jurisdictions in which they are not
registered or otherwise qualified for sale, purchasers may buy Shares or
Warrants in the aftermarket or may move to jurisdictions in which the Shares
issuable upon exercise of the Warrants are not so registered or qualified
during the period that the Warrants are exercisable. The Company may decide
not to seek, or may not be able to obtain qualification of the issuance of
such Common Stock in all of the states in which the ultimate purchasers of
the Warrants reside. In this event, the Company would be unable to issue
Shares to those persons desiring to exercise their Warrants. No assurance
can be given as to the ability of the Company to effect any required
registration or qualification of the Common Stock in any jurisdiction. See
"Description of Securities."
Necessity for Updating Registration Statement
So long as the Warrants are exercisable, the Company would be required
to file one or more Post-Effective Amendments to its Registration Statement
on Form SB-2 ("Registration Statement") to update the general and financial
information contained in this Prospectus. These obligations could result in
substantial expense to the Company and could be a hindrance to any future
financing. The Company will not notify Warrant holders if Warrants may not
be exercised due to the absence of an effective Post-Effective Amendment.
Although the Company has undertaken and intends to keep its Registration
Statement current, there is no assurance that the Company will be able to
keep its Registration Statement current, and if for any reason it does not
do so, the Warrants will not be exercisable. The Company's Warrant and
Transfer agent has been instructed not to accept Warrants for exercise
without a current prospectus. See "Description of Securities - Warrants."
Underwriters' Warrants
Subject to the requirements of the SEC and NASD, the Company will grant
to the Underwriter, as partial consideration for services rendered, a
warrant to purchase up to 110,000 Shares and 110,000 Warrants, exercisable
at any time during a period of four years commencing at the beginning of the
second year after the Effective Date of the Offering after which time all
rights attached terminate. The Underwriters' Warrants may not be sold,
transferred, assigned or hypothecated for a period of one year from the
Effective Date, except to officers of the Underwriter and members of the
underwriting group and their respective officers or partners. An exercise of
the Underwriters' Warrants, which may be effected at any time, either in
whole or in part, beginning one year after the date of this Prospectus for a
period of four years thereafter and can be expected to be exercised at a
time when the Company can obtain new capital on more favorable terms. This
may adversely affect the Company's ability to obtain equity capital, and, if
the Common Stock issuable upon the exercise of the Underwriters' Warrants is
sold in the public market, may adversely affect the market price of the
Company's Common Stock. The Underwriters' Warrants and the Shares issuable
upon exercise of such option have been included in the Registration of which
this Prospectus is a part. The Company has agreed to keep such Registration
Statement current, which could result in substantial expense to the Company.
This obligation is in addition to certain registration rights granted to the
Underwriters. See "Description of Securities - Underwriters' Warrants,
Underwriting, and Dilution."
Underwriters as Market Maker
In connection with the Offering, the Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock and Warrants. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant
to which such persons may bid for or purchase Common Stock or Warrants for
the purpose of stabilizing their market prices. The Underwriters may also
create a short position for the account of the Underwriters by selling more
securities in connection with the Offering than they are committed to
purchase form the Company and in such case may purchase securities in the
open market following completion of the Offering to cover all or a portion
of such short position. The Underwriters may also cover all or a portion of
such short position, up to 165,000 additional shares of Stock and 165,000
Warrants, by exercising the Over-Allotment Option. Any of the transactions
described in this paragraph may result in the maintenance of the Securities
at a level above that which might otherwise prevail in the open market. None
of the transactions described in this paragraph is required, and, if they
are undertaken, they may be discontinued at any time.
In connection with the Offering the Underwriters and selling group
members (if any) and their respective affiliates may also engage in passive
market making transactions in the Stock and Warrants on the Nasdaq SmallCap
Market immediately prior to the commencement of sales in this Offering, in
accordance with Rule 103 under Regulation M. Passive market making consists
of displaying bids on the Nasdaq Small Cap Market limited by the bid prices
of independent market makers for a security and making purchases of a
security which are limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average trading volume in
the securities during a specified prior period and must be discontinued when
such limit is reached. Passive market making may stabilize the market price
of the securities at a level above that which might otherwise prevail and,
if commenced, may be discontinued at any time. See "Underwriting and
Available Information."
Substantial Dilution to Purchasers
Assuming no value attributable to the Warrants, at the IPO price of
$5.50 per Share, purchasers in this offering will incur immediate and
substantial dilution of $4.31 (78%) dilution per Share in the net book value
per share of their investment. In addition, purchasers in this Offering
will be contributing approximately 50% of the total investment consideration
to the Company but will receive only 47.5% of the shares outstanding
(assuming the Warrants, and Underwriters' Warrants are not exercised).
Additional dilution will occur upon the exercise of Warrants, Underwriters'
Warrants, and Over-allotment Option. Accordingly, in the aggregate,
purchasers in this Offering will bear a greater risk of loss than the
current stockholders. See "Dilution."
Shares Eligible for Future Sale
Prior to the Offering there has been no public market for the Common
Stock or the Warrants. Sales of substantial amounts of Shares, pursuant to
Rule 144 or otherwise, could adversely affect the market price of the Shares
and the Warrants, and make it more difficult for the Company to sell equity
securities in the future at a time and price which it deems appropriate.
Upon completion of the Offering, approximately 3,542,500 shares of
Common Stock will be outstanding. The 2,442,500 shares of Common Stock held
by present shareholders ("Insider Shares") have not been registered under
the Securities Act of 1933, as amended ("Securities Act"). The Company and
holders of 95% Insider Shares (2,320,000 shares) have signed agreements not
to sell their shares publicly or privately for 24 months following the
Prospectus date without the prior written consent from the Underwriters.
Whether or not to grant consent lies within the discretion of the
Underwriters, who have no present intent to grant consent for any shares
currently outstanding. Should the Underwriters provide written consent, the
Company's General Counsel will issue the appropriate opinion letter removing
the restriction on selling the eligible Insider Shares. Following the
24-month Underwriters' lock up, substantially all Insider Shares will be
freely tradable in the public market, if one exists, subject to Rule 144.
In general, Rule 144 allows a shareholder who has beneficially owned
restricted shares for at least one year (including persons who may not be
defined to be "affiliates" of the Company under Rule 144) to sell within any
three (3) month period a number of shares that does not exceed the greater
of 1% of the then outstanding shares of the Company's Common Stock or the
average weekly volume on Nasdaq during the four calendar weeks preceding
such sale, and may only sell such shares through unsolicited broker's
transactions. A shareholder who is not deemed to have been an "affiliate" of
the Company for at least 90 days and who has beneficially owned his shares
for at least two years would be entitled to sell such shares under Rule 144
without regard to the volume limitations described above. See "Common Stock
Available for Future Sale."
Future Issuance of Stock by the Company
Except as provided herein, pursuant to agreement with the Underwriters,
for 24 months following the Prospectus date, the Company shall not issue any
additional equity securities without the Underwriters' prior written
consent. Following the exercise of the 1,100,000 Warrants, and
Underwriters' Warrants consisting of 110,000 Shares and/or 110,000 Warrants,
the Company will have outstanding 4,862,500 Shares. This does not include
the exercise of 825,000 Bridge Warrants issued in connection with Bridge
Loans. The Company is also authorized by its Certificate of Incorporation to
issue 15,000 Preferred shares, none of which have been issued. The remaining
Shares, and the unissued Preferred Shares, not issued or reserved for
specific purposes may be issued without any action or approval by the
Company's minority shareholders. Although there are no present plans,
agreements or undertakings involving the issuance of such shares, except as
disclosed in this Prospectus, any such issuances could be used as a method
of discouraging, delaying or preventing a change in control of the Company
or could dilute the public ownership of the Company. There can be no
assurance that the Company will not undertake to issue such shares if it
deems appropriate to do so. See "Dilution," "Common Stock Available for
Sale," and "Description of Securities."
USE OF PROCEEDS
The proceeds from this Offering will be used to commence scheduled
non-stop flights from JFK to St. Petersburg, Russia. In particular, the
Proceeds will be used to meet the costs to: (1) Obtain FAA Air Carrier
Certification, includes acquiring an aircraft and hiring/training flight
crew allowances, (2) Conduct preliminary marketing, (3) Satisfy the one-time
DOT Financial Requirement, and (4) Reserve approximately $90,000 for
liabilities. Prior to the Closing, and to accelerate the commencement of
revenue operations, the Company intends to use Bridge Loans to purchase
certain goods and services necessary for FAA Certification, to be repaid as
allocated from the Proceeds immediately following Closing. The net Proceeds
from the sale of 1,100,000 Shares and 1,100,000 Warrants are estimated to be
$5,124,200 after deducting underwriting discounts, Underwriters' 3%
non-accountable expenses and other Offering expenses of $235,000.
Obtaining FAA Air Carrier certification is a condition of commencing
revenue flight operations under the Company's DOT fitness certificate. The
certification process includes FAA approval of the Company's written
operating procedures, approval of Company training for compliance with the
written procedures, and the Company's demonstration to the FAA in actual
flight operations. Because financing could not be completed in 1992, the
Company could not take delivery of airplanes, and therefore could not
complete the FAA certification process. At no time in 1992 was the Company
deficient in any FAA certification task undertaken. In 1998, because of the
six-year lapse, the Company must commence FAA Air Carrier Certification
anew. While the Company believes the net proceeds from this Offering are
adequate to complete the FAA process, satisfy the DOT Financial Requirement,
and commence revenue service, nevertheless, it is possible that some
unforeseeable event could occur that could prevent the Company from
obtaining FAA Air Carrier Certification.
Assuming all costs of the certification process are paid, the DOT
requires the Company to have cash or credit equal to three months operating
expenses assuming zero revenue. The Company will commence service with one
round trip per week and will increase frequencies as traffic demands.
Assuming zero revenue and one round trip per week, the Company projects
average three months operating costs to be $2.8 million. Management
believes that the net Proceeds allocated as working capital and the LOC from
LainBanka will be sufficient to satisfy the DOT Financial Requirement.
Following commencement of airline service, the Company may increase the
frequency up to the limit of five round trips per week.
The table below lists in the order of Company priority the expenses and
working capital reserve for which the Company may use the Proceeds, and
includes all costs the Company estimates it will incur prior to commencing
revenue operations. The table assumes acquisition of one B747-100 aircraft.
However, the Company intends to select the best aircraft for lease or
purchase available at the time. The Company prefers a B747-100 and the
aircraft must meet FAA air worthiness requirements. Consideration will also
be given to the prior ownership and maintenance of the aircraft. The
Company has estimated the market value and initial deposit required to
acquire an aircraft based upon its discussions with aircraft sellers and
lessors. Management believes that $750,000 will be sufficient to allow the
Company to make a deposit on one aircraft. The Company expects to make
monthly lease or purchase payments from operating revenue. There is no
guaranty that an aircraft will be available to the Company at these
estimated prices at the time funds are available for lease or purchase. It
is the opinion of the Director of Technical Services that spare parts for
the B747-100 are in relative abundance at favorable prices. The numbers in
the table below are Company estimates only.
<TABLE>
<CAPTION>
USE OF PROCEEDS
<S> <C> <C>
Aircraft Lease or Purchase Deposit <FN1>. .$ 750,000 14.6%
Spare Parts/Ground Equipment <FN2>. . . . . 850,000 16.6%
General and Administrative <FN3>. . . . . . 70,000 1.4%
Compensation and Benefits <FN4> . . . . . . 196,000 3.8%
Contract Services <FN5> . . . . . . . . . . 80,000 1.6%
Marketing (direct costs only) <FN6> . . . . 60,000 1.2%
Consultants <FN7> . . . . . . . . . . . . . 20,000 .4%
Mini-Evacuation Test <FN8>. . . . . . . . . 50,000 .9%
Repayment of Liabilities <FN9>. . . . . . . 90,000 1.8%
Reserve Working Capital <FN10>. . . . . . . 2,958,200 57.7%
TOTAL ("Net Proceeds") . . . . . . . . . 5,124,200 100%
Less Bridge Loan
inclusive of interest <FN11> . . . . . 849,167
Adjusted net proceeds . . . . . . . . . . $ 4,275,033
<FN>
<FN1>
(1) Represents initial deposit. Monthly lease or purchase payments are
similar in cost ranging from $175,000 to $225,000, and are expected to
be made from operating revenue.
<FN2>
(2) Estimated range for spare parts and ground equipment costs is based
upon the Company's Director of Technical Services experience and
discussions with suppliers.
<FN3>
(3) Inclusive of direct and indirect office facility operating expenses and
general liability insurance for 90 days. (See note 10 and paragraph
below.)
<FN4>
(4) This number represents all compensation costs and includes hiring/
training flight crew allowances, reduced salaries, and reduced
executive compensation for the period commencing with the Closing and
culminating with FAA certification. Training allowances remain
constant. Salaries and executive compensation will be reduced by 50%.
Executive compensation for the period equals $42,000. Executive
compensation represents 0.8% of Net Proceeds.
<FN5>
(5) This is an allocation of deposits for contractual services commencing
with revenue operations including deposits to caterers, Port Authority
and St. Petersburg Airport Authority, US Customs, Aeronautical Radio,
Official Airline Guide, and Jeppesen who will provide the Company with
aeronautical charts.
<FN6>
(6) Pre-flight marketing costs include expenses of database marketing,
direct mailing, agency advertising (select print and radio) and initial
PR presentation. Does not include the cost of salaries and the use of
the Company's facilities, equipment and communications, costs of which
are absorbed elsewhere in the budget. Nor does it include the
marketing budget during revenue operations, ex. the costs of promotion
of the arts in St. Petersburg will not be paid from the marketing
allocation set forth in the Use of Proceeds , but are expected to be
paid from operating revenues.
<FN7>
(7) Allocated for temporary instructors and office help to accelerate the
FAA air carrier certification process of the Company.
<FN8>
(8) The FAA required mini-evacuation test's budget contains a reserve in
the event the FAA requires the Company to repeat the test.
<FN9>
(9) The Company has allocated $90,000 reserve for the repayment of accounts
payable and accrued expenses.
<FN10>
(10) The Company intends to retain this amount to meet the DOT initial
financial requirement pursuant to the Twelve Month Operating Plan. See
"Management Discussion and Analysis - Twelve Months Operating Plan."
Aircraft hull insurance and aircraft liability, including facilities
and general liability, premiums are payable on a monthly basis with the
first installment due in 30 days following commencement of revenue
operations. Thus, aircraft hull and liability insurance is not included
in the pre-revenue budget and will be paid from operating revenue and
not from net proceeds.
<FN11>
(11) Investors have lent the Company $825,000 in bridge funds (Bridge
Lenders). (See "Notes to Financials".) The bridge funds enable the
Company to accelerate the FAA certification procedure prior to the IPO
closing by enabling the Company to purchase certain goods and services
the costs of which are included in "Use of Proceeds." The bridge funds
are being used as follows: $275,000 partial aircraft deposit /
inspection, $90,000 spare parts / ground equipment initial deposits,
$105,000 general and administrative, $45,000 transport/lodging
personnel, $25,000 compensation and benefits, $75,000 contract
training/services deposits, $20,000 marketing direct, $40,000
printing/miscellaneous, $25,000 consultants, and $25,000 working
capital. The Bridge Loans will be repaid at IPO closing together with
interest. Interest is calculated to be $24,167 based on 10% per annum
for approximately 7 months. (Use of $250,000 for 5 months; $525,000 for
2 months). The Company expects to pay interest from the Proceeds
reserved to pay liabilities. In connection with the Bridge Loans,
Bridge Lenders received 825,000 Bridge Warrants. (See "Underwriting"
and "Common Stock Available for Future Use.")
</FN>
</TABLE>
The foregoing represents the Company's best estimates of its allocation
of the Net Proceeds based upon its present plans and current business
conditions. Except as stated herein, the Company will pay short-term
liabilities, accounts payable and other debt from operating revenues and not
from Net Proceeds. As of March 31, 1998, total current liabilities were
$986,438. Aircraft hull and airline liability insurance will not be paid
from Net Proceeds. Insurance premiums are normally payable in monthly
installments beginning 30 days following commencement of revenue operations.
Annual insurance costs, including facilities and general liability
insurance, associated with the Company's operating a B747-100 would total
approximately $1,100,000 including comprehensive airline liability coverage
up to $500,000,000 any one occurrence. Monthly premiums will not be paid
from Net Proceeds but rather from anticipated operating revenue after
revenue operations have begun. Therefore, insurance has not been listed
separately under "Use of Proceeds." Unforeseen events or changed business
conditions, of which Management has no present knowledge, could necessitate
changes in the application of Proceeds. Pending expenditure of the
Proceeds, the Company may make short term investments in interest-bearing
savings accounts, certificates of deposit, short-term United States
government obligations, or other short term interest bearing investments.
Proceeds from the exercise of the Warrants will be added to the working
capital reserve.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
March 31, 1998 and gives effect to the sale of 1,100,000 Shares and
1,100,000 Warrants offered hereby at $5.50 per Share and $.10 per Warrant
and the application of Net Proceeds therefrom. This table should be read in
conjunction with the financial statements and notes thereto that are
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
March 31, 1998
(Unaudited)
Actual Pro Forma as
Adjusted <FN1>
Stockholders' Equity:
<S> <C> <C>
Preferred Stock, no par value; 15,000 0 0
shares authorized, none issued and
outstanding
Common Stock, $.0001 par value; $245 $355
100,000,000 shares authorized,
2,442,500 shares issued and
outstanding before Offering <FN2>, and
3,542,500 shares issued and
outstanding at Offering
Additional paid-in capital . . . 6,257,425 12,417,315
Deficit accumulated during development (6,585,804) (6,585,804)
Prepaid media costs (396,090) (396,090)
Total stockholders' equity (deficit) (724,224) 4,399,976
<FN>
<FN1>
(1) Based upon the IPO price of $5.50 per Share and $.10 per Warrant, Net
Proceeds of $5,124,200 are calculated by deducting from the Proceeds of
$6,160,000 the Underwriting Discounts and Commissions of $616,000, the
Underwriters' non-accountable expense allowance of $184,800, and
expenses of this Offering payable by the Company estimated at $235,000.
<FN2>
(2) The Company has 2,442,500 Shares issued and outstanding.
(3) Stockholders' deficit attributes zero value to $396,090 of pre-paid
media placements.
</FN>
</TABLE>
DILUTION
As of March 31, 1998, the Company had 2,442,500 Shares issued and
outstanding. Assets at March 31, 1998 were $262,214, of which $62,214 were
tangible. Total liabilities at March 31, 1998 were $986,438. Thus, net
tangible book deficit was ($924,224) or ($.38) per share. Net Tangible Book
Deficit per Share represents the amount of total tangible assets less total
liabilities, divided by the number of Shares outstanding, which is
calculated to include stockholders' deficit of ($724,224). Without taking
into account any changes in the net tangible book deficit after March 31,
1998, other than to give effect to the sale of 1,100,000 Shares and
1,100,000 Warrants offered herein at initial offering prices of $5.50 and
$.10 for Shares and Warrants, respectively, and the application of Net
Proceeds of $5,124,200, the pro forma book value of the Company's Common
Stock will be $4,199,976 or $1.19 per Share. Consequently, the purchasers
of the Shares offered hereby will sustain an immediate substantial dilution
(i.e. the difference between the purchase price of $5.50 per Share and pro
forma net tangible book value per Share) of $4.31 (78%) per Share.
<TABLE>
<CAPTION>
The following table illustrates as of March 31, 1998, the per Share
dilution.
<S> <C> <C>
IPO price . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5.50
Net tangible book deficit . . . . . . . . . . . . . . (0.38)
Increase attributable to new investors . . . . . . . 1.57
Pro forma net tangible book value after Offering . . . . . . . 1.19
Dilution to new investors . . . . . . . . . . . . . . . . . . . $ 4.31
</TABLE>
The following table summarizes, on a pro forma basis at the Closing,
the book differences between the existing stockholders and the new investors
with respect to the number of Shares, the total consideration paid (cash,
services rendered and property contributed) and the average price per Share.
<TABLE>
<CAPTION>
Shares Purchased Total
Shares Percent Amount Percent Average Price
Shares Contrib per Share
<S> <C> <C> <C> <C> <C>
Existing Shareholders 2,442,500 69% $6,257,670 50% $2.56
New Investors 1,100,000 31% $6,160,000 50% $5.50
Total . . . . . . . . 3,542,500 100% $12,417,670 100%
</TABLE>
The foregoing analysis assumes no exercise of Warrants, Bridge
Warrants, Underwriters' Warrants, or the Over-Allotment Option. In the
event any such option or warrants are exercised, the percentage ownership of
the investors in this Offering will be reduced and the dilution per Share to
investors in this Offering will increase.
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock and presently
expects to retain future earnings for use in business. Future dividend
policy will be determined by the board of directors of the Company in light
of prevailing financial needs and objectives of the Company.
SELECTED FINANCIAL AND OPERATING DATA
The following table sets forth selected historical data for the Company
as of and for the three months ended March 31, 1998 and 1997 (unaudited),
and years ended December 31, 1997 and 1996, as well as results since
inception to March 31, 1998. The financial data of the Company for the
fiscal years ended December 31, 1997 and 1996, are derived from the
Company's audited financial statements. The information below should be
read in conjunction with "Management Discussion and Analysis".
<TABLE>
<CAPTION>
Three Months Ended Years Ended Aug 24,1989
March 31, December 31, (Inception) to
1998 1997 1997 1996 March 31, 1998
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATION:
(Development Stage)
Operating income . . . . . . 0 0 0 0 0
Expenses:
General and administrative $101,832 $39,230 $84,512 $92,749 $2,328,715
Professional fees . . . . 44,000 0 58,625 77,817 2,028,945
Service contributions . . 0 0 0 0 1,352,516
Training expenses . . . . 0 0 0 0 225,637
Abandoned fixed asset acq 0 0 0 0 205,162
Interest expense, net . . 52,466 5,382 0 68,120 444,829
Net (loss) during development $(198,298) $(44,612) $(143,137) $(238,686) $(6,585,804)
Net (loss) per share . . . . $(.08) $(.02) $(.06) $(.11) ($2.70)
March 31, 1998 Stockholders' per share deficit . . . . . . . . . . . . . . . . . . . . . . $(.30)
Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,442,500
BALANCE SHEET DATA:
(Development Stage)
March 31, 1998
Working capital (deficit) . . . . . . . . . . . . . . $(959,735)
Total assets . . . . . . . . . . . . . . . . . . . 262,214
Total liabilities . . . . . . . . . . . . . . . . . 986,438
Stockholders' deficit . . . . . . . . . . . . . (724,224)
(1) Stockholders' deficit attributes zero value to $396,090 of prepaid media
placements.
</TABLE>
MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
"Selected Financial and Operating Data" and all of the financial statements
and notes thereto and included elsewhere in this Prospectus.
GENERAL
The Company was formed as a US airline on August 24, 1989 in the State
of New York. The Company's objective is to provide scheduled air
transportation from the US to Russia. In 1991, the DOT granted the Company
routes to provide non-stop passenger, cargo and mail service from JFK to St.
Petersburg and from JFK to Riga, with online service to Minsk, Kiev and
Tbilisi. That authority expired in 1993. In 1996, and following the
Company's 1995 application, the DOT reissued authority to the Company to
serve JFK-St. Petersburg. The Company has two registered trademarks
"BALTIA" and "VOYAGER CLASS," and five trademarks subject to registration.
The Company's activities to date have been devoted principally to raising
capital, obtaining route authority and approval from the DOT and the FAA,
training crews, and conducting market research to develop the Company's
marketing strategy. Following the receipt of the Proceeds, the Company
intends to commence scheduled non-stop service on the JFK - St. Petersburg
route.
DIFFICULTY OF FINANCING AN AIRLINE IN 1991-1992
No revenue operations commenced on DOT authorities granted in 1991
because the Company had not completed financing in 1992. At the time the
Company received DOT authority in 1991, the capital markets were slow, the
airline industry was in a down-turn, and the USSR was transforming into
separate nations, all of which the Company believed limited its access to
public or private financing for commencement of flight service. Several of
the Company's shareholders who are knowledgeable in financial matters tried
to make introductions, but their efforts were useless. Private funding did
not materialize, and resources of the Company's officers and directors were
insufficient to commence revenue operations. In addition, a scheduled
delivery of aircraft from SAS was aborted costing SAS approximately $114,000
to return the planes to service. Since the Company is no longer obtaining
aircraft from SAS, it has no legal financial obligation to refund SAS the
return to service costs, but the Company would like to make it right with
SAS sometime in the future. Due to incomplete financing, the DOT withdrew
the Company's authorities in 1993. In 1995, believing the capital markets
to be favorable, the airline industry to be in an up-turn, and Russia to
have expanded its political and economic ties with the United States, which
were reflected in the growth of passenger traffic and freight, the Company
reapplied for JFK-St. Petersburg authority. In 1996 the DOT reissued
JFK-St. Petersburg route authority to the Company based upon reexamination
of the Company's operating plan and fitness as a US air carrier. In
September 1997, and upon another examination of the Company's operating
plan and fitness as a US air carrier, the DOT renewed the Company's JFK-St.
Petersburg route authority again in February 1998. If the FAA certification
process is begun but not complete by August, and if the money is in place
to commence airline service, the Company intends to seek an additional
extension of authority to complete the FAA certification and commence
revenue flights. However, there can be no assurance that such an extension
will be granted by the DOT. The failure of the Company to secure operating
authority will have a material adverse effect upon the Company's proposed
operations and may render the Shares and the Warrants worthless.
MARKET STATISTICS
Facts set forth below were filed with the DOT in 1995 and 1997, and
were used as part of the Company's application for fitness to serve the
JFK-St. Petersburg route, Docket OST-95-396 and 97-2763. The DOT examined
the Company's pre-operating projected expenses, the year-one estimated
traffic, fare calculations, resulting passenger and freight revenues, and
year-one operating cost estimates projected from these facts, and found them
to be comprehensive. DOT also compared the Company's projected aircraft
operating costs per block hour with the average of the aircraft operating
costs per block hour reported to the DOT for the first quarter of 1995 by
carriers operating B747-100 equipment and found the Company's projections to
be reasonable (DOT Order 96-1-24, p.6). The DOT specifically does not
project that any particular company applying these facts will or will not be
profitable.
In estimating passenger traffic, the Company used the following
statistics. The 1994 DOC, United States Travel and Tourism Administration
("USTTA"), traffic statistics show that 605,108 passengers traveled between
US and Russia. Prior to 1995, no study identified the traffic that entered
or departed through St. Petersburg, but a USTTA survey reported that 8 of
10 Americans visiting Russia, visit St. Petersburg. Using 1994 USTTA
statistics and assuming that 20% of the US-Russia traffics would arrive in
or depart form St. Petersburg, Baltia conservatively projected St.
Petersburg traffic for 1996 for use in its business plan. A subsequent 1995
survey by CIC Research (DOC contractor) reports that US-St. Petersburg
traffic more than doubled that which Baltia projects. The International Air
Transport Association ("IATA") forecast annual growth of 10.2%. See
"Business - Pricing."
In estimating cargo revenues, the Company used the following data. The
1993 US-Russia cargo volume was 34,540,000 lbs. The DOC, Bureau of the
Census, air cargo statistics for 1994 report that between 1992 and 1993 air
cargo transported from US to Russia grew from 14,000,000 lbs to 30,800,000
lbs, a 120% increase. In the same period, air cargo transported from Russia
to the US grew, from 1,540,000 lbs to 3,740,000 lbs, a 143% increase. In
1993 IATA had forecast a 21.1% annual growth rate for freight traffic to and
from all of Eastern Europe for the period from 1993 to 1997. The statistics
demonstrate that the 1992 to 1993 growth rate in US-Russia air cargo traffic
was 5.8 times greater than the IATA forecast. The B747-100 aircraft offers
wide-body palletized and containerized cargo capacities to meet the needs of
US-Russia passenger and cargo traffic growth. The Company will offer
non-stop, B747-100 air service from the JFK into the St. Petersburg market.
The Company has received two offers from JFK-based cargo forwarders.
Paramount Cargo Marketing, Inc. projected shipping 20 tons of cargo five
times a week and RAF International Sales, Inc. projected shipping 50 to 75
tons per week to St. Petersburg. In addition, smaller freight forwarders
have expressed interest in using the Company's cargo services. Following is
a list of such carriers including their previous shipment patterns. In
1993, the Transatlantic Royal Company, Inc., Long Island City, NY, shipped
on average 120,000 lbs of freight per month to Russia. The International
Grapevine, San Francisco, CA ships each month 1,000 cases of American wine
from New York into St. Petersburg. Quantum International Forwarding, Ltd.,
Jamaica, NY, ships between 400 to 4,000 lbs of consolidated air freight
twice a week from JFK to St. Petersburg. American Export Lines, JFK, NY, as
of December 1994, had shipped in the previous six months 92,000 lbs of air
freight to the NIS. Contracts with cargo transporters are expected to be
signed after the IPO closes. No contracts presently exist.
Currently US mail is channeled through Moscow because non-stop US
service to St. Petersburg is not available. The US Postal Service advised
the Company's management at a meeting in May of 1994, that the Company can
be expected to carry about half of all US mail to Russia and the Newly
Independent States, which at May 1994 was about 28,000 lbs per month. With
one flight per week, the Company would carry 3,500 pounds of mail per
flight, approximately 7% of its cargo capacity, at cargo rates. Mail
carriage does not impact the Company's flight schedule.
Currently Texaco quotes fuel at $0.62/gal at JFK and Aer Rianta quotes
fuel at $0.96/gal at St. Petersburg. Fuel and other industry operating
costs are subject to variation.
TWELVE MONTHS OPERATING PLAN
For the first 12 months following the closing of the Offering, the
Company intends to operate one weekly round trip of passengers, cargo and
mail between New York and St. Petersburg, increasing the frequency as
market demands, up to five weekly round trips. If sufficient capital is
raised, the Company may apply to the DOT to serve additional cities in the
former Soviet Russia, but there is no specific plan to do so at this time.
Assuming zero revenue, and thus zero traffic, service would remain at one
round trip per week.
Management believes the Company's cash requirements to operate one 74-100
between NY and St. Petersburg, Russia once a week for twelve months will be
$11.5 million. This estimate is comprised of three months pre-operating
expenses at $2.2 million, nine months operating expenses at $8.3 million,
and the Company's total liabilities at $1 million. (DOT Order 97-9-11, p.5.
Nine months operating expenses equal DOT average three months expenses
of$2.7 million times 3.) The pre-operating and operating expenses include,
but not exclusively, aircraft leasing costs of $2.2 million, aircraft
insurance in the amount of $1.1 million, personnel expenses of
approximately $4 million. Complete budget projections of expenses expressed
in regulated categories is available in OST 96-2032 and OST 97-2763.
The capital assets necessary to provide for the Company's proposed
initial service will be purchased with the proceeds of the Offering. Monthly
aircraft lease payment are expected to be paid from operating revenue.
Management believes that there will be sufficient funds available from the
IPO and LainBanka line of credit ("LOC") to make lease payments for one
year.
The LainBanka LOC was issued in 1998. The LOC, in the amount of $6.2
million will be immediately available to the Company upon the Company's
opening an account including registering a subsidiary in Latvia, give the
LainBanka two weeks advance notice of its borrowing need, and pay an
interest rate between 10 to 14 percent per annum. However, there is no
assurance that the terms, then in effect in Latvia, will be acceptable to
the Company. The LOC will be a short-term loan that the Company does not
intend to use for capital investments or long-term financing. The Company
intends to register a subsidiary in Latvia. This process is similar to
registering as a foreign corporation in another state of the US and would
subject the Company to legal process in Latvia.
At Closing, the Company expects to receive Net Proceeds in the amount
of $5.1 million, which, together with the $6.2 million LOC and advertising
credits in the amount of $.4 million, will make available resources totaling
$11.7 million.
In addition to the financial resources set forth above, the Company may
obtain additional funds through the issuance of $6 million in bonds through
W.R. Lazard. The Company has no specific present intent to issue the
bonds, but has an agreement with W.R. Lazard to effect optimum timing of
the bond issue should the Company so choose. If the Company were to issue
bonds it would incur debt equal to the amount of bonds issued plus a current
monthly liability for 10% to 15% interest on the debt. Further, potential
proceeds from the exercise of Warrants in this issue may provide additional
cash following the initial twelve month period following the Closing.
Background. Since its inception in 1989 the Company has focused its
efforts exclusively on developing the necessary elements for the
commencement of international air service from the US to Russia. The
Company has invested $6 million in development which enables it to commence
carrying revenue passengers and cargo upon obtaining a certificate for safe
operational procedures from the FAA ("FAA Air Carrier Certificate"). In
total, the Company has expensed $6 million as developmental costs during the
periods in which they occurred. During six years of development, the
Company has accumulated $.986 million in total liabilities (includes current
liabilities).
FAA Certification. In January 1998, the Company's President met with
the FAA regarding the air carrier certification process which consists of
document approval, crew training, and flight demonstration. The Company
intends to submit the Pre-application of Intent Form in June 1998 which will
commence the certification process. See "Use of Proceeds."
Viability Discussion. The FAA Air Carrier Certification activities are
highly regulated and controlled by the FAA. The costs associated with these
tasks are reasonably ascertained and verifiable because the activities are
tightly controlled and details of the Company's proposed operations are
publicly filed with the DOT and available for industry criticism. The
Company's proposed operations were reviewed by the DOT Office of Aviation
Analysis prior to issuing to the Company its airline fitness certification
which is conditional upon obtaining FAA Air Carrier Certification. Revenue
flight operating costs, for the same reasons, are also reasonably
ascertained, verifiable and are publicly filed with the DOT. The DOT
required the Company to submit its projected certification and revenue
operational costs for review and comment to Delta Airlines, United Airlines,
American Trans Air, TWA, Northwest Airlines, FAA Flight Standards District
Office, FAA Flight Standards Division, and the Air Transport Association.
Neither airlines nor the Air Transport Association criticized or commented
on the Company's projected air carrier certification and revenue operational
costs. Nor was there any criticism filed by the FAA Flight Standards
District Office or FAA Flight Standards Division. If there had been any
criticisms or comments from the FAA, the industry or the Air Transport
Association, the same would have been recited in the DOT Order that was
issued at the closing of the comment period, but there were none. That DOT
Order 96-1-24 found the Company's costs to be comprehensive and reasonable.
RESULTS DURING DEVELOPMENT
During the developmental stage, the Company has expensed its activities
in each year since inception and has an accumulated deficit and a working
capital deficit at March 31, 1998, of $6,585,804 and $724,224 respectively,
which results in a per share loss of $2.70 and stockholders' per share
deficit of $.30. At December 31, 1997, the Company has net operating loss
carry forward of $5,072,844, available to offset future taxable income.
These carry forwards expire between the years 2006-2013. As of December 31,
1997, and 1996, a net deferred tax benefit has not been reflected for
temporary differences between the amount of assets and liabilities recorded
for financial reporting and income tax purposes due to the establishment of
a 100% valuation allowance relating to the uncertainty of recovery. Rent
expense charged to operations for three months ended March 31, 1998 and
years ended December 31, 1997, and 1996 totaled $957, $273, $5,215 and
$5,392, respectively. In October 1995, the Company began leasing office
space on month to month basis in the East Wing at the International Arrival
Building, JFK International Airport at a rate of $1,200 per month. Rent
expenses charged to operations for the three months ended March 31, 1998 and
1997 and years ended December 31, 1997 and 1996 totaled $9,600, $12,000 and
$13,200 respectively. Upon commencement of scheduled operations, of which
there can be no assurance, the Company expects to expand facilities at JFK
and expects an additional terminal use fee of approximately $750 per
aircraft turn-around (an aircraft's arrival and departure) to be paid from
operating revenue.
In February 1998, the Company received a $6.2 LOC from the LainBanka of
Riga, Latvia. For details, see "Twelve Months' Operating Plan", supra.
As of March 31, 1998, the Company has current liabilities of $986,438
which it expects to pay within two years. Management believes it unlikely
that liabilities will be called earlier than their scheduled repayment
because the debt is held by its vendors and stockholders, entities with
vested interests in seeing the Company succeed. Additionally, the Company
has advised these creditors that repayment will be made promptly from
operating revenue. The Company assumes that the approximately 50 vendors to
whom the Company has owed $0.5 million for three years in current
liabilities, and who have expressed the desire to supply the Company once it
starts revenue operations, may foresee years of income from providing the
Company with goods and services. Likewise, the present stockholders to whom
current liabilities are owed, have invested considerable time and money to
develop the Company to the point of commencing revenue operations. If the
Company is successful, these stockholders have the potential of selling
their shares for a profit and will share in the Company's future profits.
The conditions restricting use of the LOC do preclude use of the LOC to
repay liabilities called early. As of March 31, 1998, total liabilities
were $986,438, all of which are current liabilities. Use of LOC funds is
conditioned on it not being used for long-term investments, thus permitting
its use should early calls be made on outstanding current liabilities.
The DOT has the power to withdraw US airline authority from any US
airline should it find that non-US citizens directly or indirectly control
that airline. Since the LainBanka is a foreign entity, in the event of
default, the Company would be required to notify the DOT. If the Company
should draw against the LOC and subsequently default on repayment, it is not
certain what action LainBanka would take in the event the Company defaults.
LIQUIDITY AND CAPITAL RESOURCES
Upon completion of the Offering, assuming Net Proceeds in addition to
cash as of March 31, 1998, the Company will have cash and cash equivalents
of $5,152,230, total assets of $5,386,714 and total liabilities of $986,438.
Accordingly, the Company's debt to total capitalization ratio will be 1:5.
The Company expects to meet its short-term liquidity requirements from
the proceeds of the Offering, as herein stated, and from cash flow provided
by operating revenue when, and if, the Company commences its service on the
JFK - St. Petersburg route. From its operating revenues the Company intends
to retire its remaining total liabilities of $896,438 (net of $90,000
reserve from IPO proceeds, see "Use of Proceeds") within two years. Any
early calling for payment of these liabilities may not seriously impact the
Company's operations because the Company has a $6.2 million LOC operational
back up, which is an amount greater than total liabilities. If the Company
fails to meet the requirements necessary to make the $6.2 million LOC
available, any early calling for repayment of liabilities may impact the
Company's operations. For details of the requirements and the Company's
compliance with them, see "Consequences in the Event of Default on LainBanka
Line of Credit", supra. Of the March 31, 1998 total liabilities, $500,000
in accounts payable is owed to approximately 50 non-affiliated entities many
of whom will continue being suppliers to the Company when it becomes
operational and who have a vested interest in the Company's success
("Results During Development"), and the $250,000 Note Payable (Bridge Loan)
is programed to be paid from Proceeds at Closing. (See "Use of Proceeds")
Therefore, the Company does not expect early calling or the need to draw
against its LOC. The Company has no current plans to use the LOC.
Additional potential sources of financing include: (i) Over-Allotment
of $803,880 (after deducting Underwriting discounts and the 3% allowance),
(ii) up to $7,653,250 from the exercise of Warrants, (iii) up to $ 1,410,200
from the exercise of Underwriters' Warrants (including the exercise of the
underlying Warrants) and (iv) up to $4,640,000 from the exercise of Bridge
Warrants. The Company's international route authority may or may not have
resale value within the airline industry after one year's operation by the
Company. The Company has two registered trademarks: "BALTIA" and "VOYAGER
CLASS."
EFFECTS OF SEASONALITY OVER THE NORTH ATLANTIC
The Company's business is affected by seasonal factors. Airlines
serving routes over the North Atlantic are subjected to a pattern of
seasonal variation in traffic which the industry has termed the "North
Atlantic Seasonality" factor. In general, the traffic peaks during the
summer season and dips during the winter season. To mitigate this seasonal
trend, the Company intends a winter marketing program featuring St.
Petersburg's world-famous winter cultural activities of museums and world
class performances, such as the Hermitage Museum and the Marinsky Theater.
The Company has no specific plans, but has discussed with Air Exchange, Inc.
and other charter users the possibility of chartering the Company's aircraft
for use in opposite season markets during the days when the aircraft is not
on scheduled route service. For example, JFK-Caribbean is an opposite
season market to JFK-St. Petersburg because JFK-St. Petersburg traffic peaks
in summer and the JFK-Caribbean traffic peaks in winter.
[CHART depicting seasonal passenger traffic variation throughout
year varying approximately as follows: Jan -20%, Feb -25%, Mar -12%,
Apr -5%, May +3%, Jun +10%, Jul +23%, Aug +45%, Sep +14%, Oct -.5%,
Nov -10%, Dec -21%]
The above chart depicts monthly distribution of hypothetically 93,431
passengers, adjusted to the North Atlantic monthly seasonality variation
(data from AVMARK, industry analysts). Specific seasonal variation on the
JFK-St. Petersburg route may differ from the North Atlantic average
variation and cannot be specifically determined until the service has been
operated.
INFLATION
The Company belongs to a capital-intensive industry, and extended
periods of inflation could have a material adverse effect on the Company's
earnings by causing operating expenses to increase. If the Company is
unable to pass through increased costs, operating results of the Company
could be adversely affected. The Company intends to conduct a certain
amount of its transactions in foreign currencies, including Western
currencies and Russia and NIS currencies. The inflation rate of foreign
currencies has been more significant than domestic inflation. The Company
could be adversely impacted if inflation slowed general economic growth in
Russia enough to reduce traffic flying with the Company. The Company does
not intend to make material amounts of purchases in Russia. The Company
intends to purchase fuel in St. Petersburg from an Irish company, Aer
Rianta, in US dollars. Baltia's traffic is primarily US travelers but
Baltia will also sell tickets in Russia. Currency exchange fluctuation is
discussed in the subsequent paragraph.
CURRENCY EXCHANGE FLUCTUATIONS
For the foreseeable future, the Company expects that the majority of
its business will be transacted in US dollars, however a portion of the
transactions will be conducted in foreign currencies. In order to limit
significant impact due to possible fluctuations in currency exchange, the
Company has a policy which governs periodic price adjustments depending on
currency deviations from the US dollar. Because the Company's marketing
policy is to maintain an apparent pricing stability for its customers who
purchase the Company's services abroad using foreign currencies, pricing
adjustments are made at intervals, not continuously. Similarly, periodic
currency adjustments are expected to be made in the rates of those Company
employees who are compensated in non-US currency. The Company has no present
intent to engage in hedging currency transactions. Thus, a certain amount
of exchange risk is inherent. The Russian government began freeing prices
in 1992 which sparked devaluation of the Ruble.
INSURANCE COVERAGE AND EXPENSE
In 1997 AON Risk Services, Inc. of Virginia informed the Company that
current insurance costs associated with the Company's operating a B747
aircraft would total $1,100,000. This estimate includes hull insurance,
comprehensive airline liability coverage up to $500,000,000 any one
occurrence, and war risks. Comprehensive liability premium is coverage for
third party personal injury and property damage, general liability and
facilities, plus per seat passenger liability coverage. The Company intends
to pay the aggregate annual premium in monthly installments commencing after
the Company begins revenue service. The Company has no influence over
insurance rates which are known to fluctuate. Regardless of the insurance
costs, the Company intends to purchase coverage. Further, in the event of a
serious accident, there is no guaranty that claims would not exceed the
insurance coverage purchased.
BUSINESS
The Company was incorporated in the State of New York on August 24,
1989, as a US airline, with the objective to provide full-service
commercial, passenger, cargo and mail transportation from the US to the
republics of the former Soviet Union. Since 1989, the Company's management
has extensively traveled to Russia, the Baltics and other nations of the
former Soviet Union to conduct a market study, make operating arrangements,
and to evaluate first-hand the unfolding of the free market enterprise
system. In 1990, The Company's management predicted the separation of the
former Soviet Union into independent nations, and the subsequent emergence
of commercial opportunities for American business. In 1991, the Company's
Chief Executive Officer, Mr. Dmitrowsky, testified before the House Aviation
Subcommittee on the implementation of the new US-former USSR bilateral
agreement by US airlines. The Company's senior management team has been
approved by the DOT to operate a US flag airline (DOT Order 96-1-24 and
96-2-51).
In 1990, the Company competed with eleven carriers, American, TWA,
Continental, Delta, American Trans Air, Pan Am, Federal Express, United,
Alaska Airlines, UPS and Evergreen, for routes between the US and USSR. In
1991, the DOT granted the Company authority to provide scheduled service
non-stop from JFK to St. Petersburg and non-stop from JFK to Riga, with
online service to Minsk, Kiev and Tbilisi. Alaska Airlines was granted
authority to serve trans-Pacific routes to Magadan and Khabarovsk, which it
currently serves. Delta, which currently serves Moscow, was not awarded
routes in the competition but subsequently purchased the former Pan Am
routes (Docket 47149, DOT Order 91-6-2). In 1992, and preparing to commence
service on its authorized routes, the Company trained 30 pilots, 38 flight
attendants, 17 mechanics and 8 dispatchers and completed substantial tasks
toward its FAA air carrier certification requirements. However, the Company
did not commence flight operations at the time due to incomplete financing.
On August 14, 1995, the Company reapplied to the DOT to conduct JFK-St.
Petersburg scheduled air service.
In 1996, the DOT reissued the Company's authority to serve the JFK -
St. Petersburg route. The DOT authority is conditional upon the Company's
obtaining FAA Air Carrier Certification, obtaining liability insurance
coverage, and meeting the regulatory one-time DOT Financial Requirement to
have, upon commencement of flight operations, working capital equal to an
average three months operating expenses. Prior to commencement of its JFK -
St. Petersburg service, the Company will be required to complete its FAA Air
Carrier Certification in which the Company will submit manuals and train
crews to operate the B747-100. The Company will also have to perform a
mini-evacuation test and 50 hours of proving flights. With the proceeds
from this Offering, the Company intends to commence scheduled non-stop
flights on the New York - St. Petersburg route in 1998, providing full
passenger, cargo and mail service.
DESCRIPTION OF THE MARKET
In the opinion of the Company's management, a first-time visitor to St.
Petersburg would find many similarities with a first-time visitor to New
York, Paris or Rome. New York is a prime destination for international air
transportation due to the size of its population, the magnitude of its
port-of-entry position within the US, and its cultural, industrial and
commercial role in the nation. Considering these same fundamental
indicators, St. Petersburg is a prominent gateway to Russia and, indeed, to
all of Northern Europe. St. Petersburg is the leading maritime and surface
cargo center, and the Company expects it to become Russia's air cargo center.
The DOC, Bureau of the Census, reported in 1994 that air cargo traffic
from the US to Russia grew from 14,000,000 lbs in 1992 to 30,800,000 lbs in
1993, a 120% increase. Air cargo from Russia to the US grew from 1,540,000
lbs in 1992 to 3,740,000 lbs in 1993, a 143% increase. In 1993 IATA
forecast a 21.1% annual growth rate for freight traffic to and from Eastern
Europe in the period from 1993 to 1997. The actual statistics available in
1994 demonstrate that the growth rate between 1992 and 1993 in the US-Russia
air cargo traffic was 5.8 times greater than the IATA forecast. The Company
has received offers from two JFK-based cargo agents. Paramount Cargo
Marketing, Inc. projects shipments of 20 tons per flight, and RAF
International Sales projects shipments of 50 to 75 tons weekly to St.
Petersburg. See "SUMMARY, Company", para. 7.
According to the DOC, USTTA, in 1993 there were 478,950 American
passengers visiting Russia; and there were 126,158 Russian-originating
passengers who visited the United States. Because no 1993 city traffic
statistics were available, using US-Russia traffic, the Company projected
US-St Petersburg traffic to be 20% of 1994 US-Russia traffic. According to
CIC Research (DOC contractor), by 1995 actual traffic to St. Petersburg had
doubled the Company's traffic projection. The actual growth rate from 1995
to the present is not publicly available. St. Petersburg has a growing
number of private travel agencies that serve the new segment of affluent
Russian travelers who require quality service. IATA forecasts a 10.2% annual
growth rate in passenger traffic to and from Eastern Europe from 1993 to
1997. The Company surveyed fares of the leading foreign airlines that are
serving the US-Russia market. Over the past several years, fares in the
US-Russia market have remained stable and have incrementally risen (6% from
1993 to 1994, and 4% from 1994 to 1995).
The Bilateral Agreement restricts foreign airlines, excepting Russian
airlines, from providing non-stop service between the US and Russia.
Additionally, US airline offers non-stop service between JFK-St. Petersburg.
The most recent Bilateral Agreement limits the aggregate number of round
trips US carriers may make to Russian cities (frequencies). All frequencies
available under that Bilateral Agreement have been allocated by the DOT for
use by US carriers to serve Russian cities other than St. Petersburg. Thus,
the Company anticipates that it will offer the only US non-stop service with
a wide-body aircraft from New York to St. Petersburg. Unlike the domestic
flights, the international flights are conducted pursuant to bilateral
agreements between countries, and most countries are considered "limited
entry markets." The US-Russia market is a limited entry market because only
a restricted number of airlines from the two nations are authorized therein
to operate between the US and Russia. Furthermore, the number of foreign
airlines in the market is limited by restrictions in bilateral agreements
between their respective countries and both the US and Russia. The European
carriers who serve this market are required to stop at their national hubs
en route.
The Company has identified several market segments in the US-Russia
Market: (i) Business Travelers, (ii) General Tourism, (iii) Ethnic
Travelers, (iv) Special Interest Groups, (v) Professional Exchanges, and
(vi) Government and Diplomatic Travel.
Business and First Class
American business travelers generally choose reliable, high quality,
non-stop service and typically choose First, Business, and full fare Voyager
(coach) Class tickets. (Crane's, Feb. 21, 1994, Executive Travel) Business
travelers originate primarily from New York, Washington, Boston, Chicago and
Atlanta. (US DOC, USTTA)
General Tourism and Ethnic Travel
Americans traveling on leisure typically choose excursion fares,
individually or as part of wholesale air and ground tour packages. Americans
with ethnic ties to Russia and other former Soviet Republics, originating
largely in New York, Chicago and Los Angeles, generally book in advance and
choose excursion fares. This category also includes US-bound emigrants and
family visitors originating in Russia with tickets pre-paid in the US. (US
Census Data on Distribution of Ethnic Populations in the US)
Special Interest Groups
Special interest groups represent a relatively new and substantial
category of travelers which is generated by the US government, sister
cities, educational institutions, and cultural exchange programs.
Passengers typically originate in the US, but many also originate in Russia
using tickets pre-paid in the US. These exchange programs choose coach and
business fares. In 1993, 16,612 US-originating passengers attended
conventions in Russia, and 10,520 US-originating passengers studied in
Russia. (US DOC, BISNIS, Government Programs to Russia)
Professional Exchanges
American-Russian professional exchanges are sponsored by trade
associations, the US government, cities, hospitals, colleges, corporations,
and performing arts institutions. Example: In December 1993, the Provost,
Columbia University, NY, contacted the Company regarding transportation
needs of the Consortium consisting of 82 US and Russian Universities.
(Also, DOC, BISNIS, Internships and Professional Exchanges)
Government and Diplomatic Travel
The Fly America Act (41CFR301.3-6) requires US government and
diplomatic travelers to fly on a US carrier where one is available. They
generally originate in Washington, DC and New York. The State Department
and the US Counsel General in St. Petersburg last contacted the Company in
1995 about using its flights from JFK to St. Petersburg. At this time the
Company has no specific contacts with the Counsel General or the State
Department. As reported by the DOC BISNIS on-line information service,
among the agencies sending the most employees to Russia are: the Department
of State, the DOC, the Department of Agriculture. The DOC programs aimed at
Russia transported over 16,000 passenger in 1993.
On average, according to the DOC, USTTA, eight out of ten Americans
traveling to Russia visit St. Petersburg, the second largest city in Russia
with a population of 5 million.
MARKETING OBJECTIVE
The Company's objective is to establish itself as a leading quality
carrier in its market niche over the North Atlantic with operations that are
profitable over time. In order to accomplish this objective, Management
intends to compete for the passenger segments that require quality by
establishing and maintaining quality standards which will assure the
Company's lead in service among the leading European airlines that are
providing connecting flights to St. Petersburg. Although 40% dilution of
the average weighted fare is allocated for discount promotions, the Company
does not expect to be in direct competition with deep discount airlines,
including several East European airlines and the offspring of the former
Soviet airline Aeroflot, which also provide connecting flights to St.
Petersburg.
OVERALL MARKET STRATEGY
The Company intends to operate between two of the largest nations in
what Management believes to be one of the world's fastest growing markets
providing non-stop, wide-body passenger service with First, Business, and
Voyager Class accommodations. The Company's passenger market strategy is
tailored to particular preferences of the various segments of its customers
with marketing attention particularly focused on American business travelers
with interests in Russia who require high quality, non-stop service from the
US to Russia.
The Company's initial marketing strategy is based on selected travel
and business publications, supplemented by direct mailings to corporate
travel planners, and individual American businesses that are currently
involved in Russia. The Company plans to sponsor selected industry and
trade events in the US and in St. Petersburg, and to implement a controlled
frequent flyer program for frequent business travelers. Seawind Cruise
Lines and Hilton Hotels have expressed interest to conduct joint marketing
programs with the Company. The Company has no contractual relationships
with Seawind Cruise Lines, Hilton Hotels or other referenced businesses.
The Company also intends to advertise to the general public throughout the
US. In June 1997, the Company issued 65,000 shares to Trent Trading for the
purchase of $396,090 in media placements (advertising space in U.S. NEWS &
WORLD REPORT, BUSINESS WEEK and NEW YORK LAW JOURNAL).
In addition to the Company's schedules and tariffs listed in the
Official Airline Guide ("OAG"), and worldwide access to reservations on the
Company's flights through a Computer Reservations and Ticketing System
("CRS"), the Company intends to provide customer service and reservations
centers in New York and in St. Petersburg. With respect to the CRS service,
the Company has proposals from Pars Worldspan, Sabre and Apollo reservations
and ticketing systems. The Company intends to activate the reservations
service with the selected system when the DOT issues its order authorizing
the Company to sell advance tickets.
Marketing strategy relating to capacity and overall quality experienced
by passengers are important in the Company's aircraft choice. Four aircraft
types which are capable of flying non-stop on the JFK-St. Petersburg route,
B747, DC10-30, B767, and B777, reduce the travel time to approximately 8
hours. Of these, the Company's management believes that the cabin size of a
Boeing B747 aircraft offers the greatest degree of comfort and capacity for
the JFK-St. Petersburg market. Its dispatch reliability lies within the 97%
range contributing to passenger confidence in the Company's dependability
(Boeing Report ID:RM 23004). The Company's dependability is further
enhanced because B747, a four-engine aircraft, is not subject to ETOPS
regulations which could limit flights during certain weather conditions.
"ETOPS" is an acronym for Extended Range Twin Engine Operations which
generally requires that during year one a twin engine aircraft be operated
within 75 minutes from a suitable airport. If one of the airports on the
Great Circle route is snowed in, or otherwise unusable, a twin engine
aircraft would not receive dispatch clearance for a flight to St.
Petersburg. With B747 the Company intends to provide non-stop wide-body
cargo service from the JFK to St. Petersburg, offering containers, pallets,
and block space arrangements in the aircraft's cargo bay. Additionally, the
Company plans to market "Baltia Express", non-stop shipment of express
packages between the US and St. Petersburg. The Company also expects
revenues from diplomatic mail and cargo.
MARKETING PROMOTION
In addition to the above overall strategy and having its sales
specialists directly contact travelers and shippers, the Company intends to
have the following specialized marketing programs.
For the general tourism market, the Company plans to conduct promotion
through tour operators and wholesalers who specialize in tourism to Russia,
with attention to upscale tour packages. (Example: 1994 Harvard Alumni
Association's "Journey of the Czars" cruise between Moscow and St.
Petersburg) To promote the destination and the convenience of its non-stop
flights into St. Petersburg, the Company plans to organize periodic travel
agency familiarization trips, and to sponsor selected cultural and
performing arts events to emphasize the Company's policy to provide quality
of service. In 1992, and as part of its marketing strategy to associate the
Company's service with culture and quality and develop name recognition, the
Company sponsored the St. Petersburg Festival at the Metropolitan Opera in
New York. In addition, the Company established promotional contacts in the
St. Petersburg's performing arts community, including the conductor,
director and management of the Kirov Opera & Ballet, as well as management
of Hotel Astoria, Grand Hotel Europa, and the Pribaltiyskaya Hotel which the
Company believes has value in obtaining future Company publicity with the
performing artists. By being able to associate the Company's nonstop
service to St. Petersburg with quality art and performances, the inherent
quality of the arts are expected to be associated with the name and service
of the Company. Developing name recognition is important to the Company.
However there is no assurance that the Company will succeed in associating
its service with culture and quality and may not develop the name
recognition desired. The Company's Director of Public Relations and V.P. of
Marketing maintains these relationships presently, but no specific promotion
is currently conducted. The costs of future promotion of the arts in St.
Petersburg will not be paid from the marketing allocation set forth in the
"Use of Proceeds", but are expected to be paid from operating revenues.
Because the Company does not want to advertise its service prematurely, it
has not conducted recent promotion.
For the ethnic passenger market, the Company plans to advertise in selected
ethnic publications, and on ethnic radio broadcasts in the US. The Company
has planed direct mailings to ethnic organizations and travel agencies to
announce the service, and plans to offer limited introductory fares, group
travel packages, and US pre-paid ticket arrangements. In the US and in
Russia the Company plans to sponsor selected cultural and ethnic events to
promote interaction of people with like ethnic background between the two
countries.
For educational associations (example: American Teachers of Russsian,
Assn.) and colleges offering Russian studies and language programs,
mailings, limited introductory fares, group travel packages, and US pre-paid
ticket arrangements for Russian travelers are planned. In the US and in
Russia the Company plans to sponsor selected cultural and ethnic events. In
December 1993 the Company initiated contact with Columbia University which
oversees a US-Russian university consortium consisting of 82 US and Russian
colleges. Coordination with Columbia University and the other 82 US
universities and colleges in the US-Russia alliance programs expect to be
encouraged. In July 1996 the Company had its most recent contact with
Columbia University. Currently the Company has no contract but expects the
contacts to lead to group travel by students and faculty either through
contract or group rate fares. The Company's promotional materials may
describe this major academic and scientific exchange program featuring
Moscow and St. Petersburg universities as well as US Universities. For
special group professional passenger market, the Company plans direct
mailings to trade associations, foundations, educational institutions, and
government agencies.
DESCRIPTION OF THE INDUSTRY
Until the Airline Deregulation Act of 1978, the domestic airline
industry was economically regulated by the Civil Aeronautics Board ("CAB").
Deregulation brought numerous new carriers into the domestic scheduled
airline business challenging the industry fares, work rules, and wages.
Over the ensuing eighteen years, most of the new carriers either merged with
major carriers or left the business. Major carriers that could not adapt to
the changing times left the business, generally bringing to a close the
period of adjustment to jet travel under deregulation, and the Company
believes, setting the stage for a new era of profitability in the airline
industry. Generally, major US airlines are currently either making a profit
or decreasing their annual loss. (See generally
http://www.bts.gov/oia/indicators, Bureau of Transportation Statistics, U.S.
DOT)
History demonstrates that the industry is not uniform. While most
small new carriers went out of business, while some major US airlines had
been losing money in operations blaming each other for damaging price wars,
Southwest Airlines has consistently offered prices which are substantially
below the "low" prices offered by other airlines. Since 1973, Southwest has
been consistently profitable, with an operating profit to operating revenue
ratio as high as 21%. Air Transport World now uses Southwest's operating
results as a standard to which the operating results of other airlines are
compared. Additionally, Virgin Atlantic, North American Airlines, and Tower
Air all began operating a single aircraft and now may be deemed to be
significant airlines. (Air Transport World Magazine, Dec 1994. Also see
UPI, 8 Apr 1996, <UsouthwestURpNC-A@clarinet>)
COMPETITION
While the Company recognizes that it will commence revenue operations
with the only US non-stop service, nonetheless, the Company will face
non-stop competition from Aeroflot as well as one-stop and two-stop service
competition from the leading European airlines. The European airlines
provide connections to St. Petersburg through their European hubs. In 1996,
Delta ceased serving St. Petersburg and has since applied to the DOT for
authority to market St. Petersburg through code sharing with foreign carriers.
The Company's management does not take the Company's proposed non-stop
service advantage for granted. The Company's management is convinced that,
if and when the Company commences revenue service, it will have to compete
by using operating efficiency and by providing consistent quality service to
passengers and cargo shippers alike in order to establish the Company as a
commercial success in its market niche. The Company intends to provide
non-stop, wide-body, First, Business and Voyager class passenger service,
and a palletized and containerized service for cargo.
The following is a brief summary of the results of a survey the Company
conducted in 1997 of one and two stop services in the US - St. Petersburg
market. The respective airlines can change their flight schedules and
frequency. (April 1997 Official Airline Guide (OAG)generally confirms the
stated competition.) Note: Aeroflot commenced once weekly NY-St. Petersburg
non-stop service in the fall of 1997. This service did not exist when the
Company's survey was conducted and was not listed in the (OAG) as of
12/7/97, but was confirmed by telephone with an Aeroflot ticket office.
Finnair
Finnair flew between Helsinki and St. Petersburg daily. Five days a
week, to connect with its flights from US to Helsinki, a layover time of
1:15 hours was required east-bound, and 1:40 hours of layover was required
west-bound. Total en route time east-bound was 11 hours, and total en route
time west-bound was 11:30 hours. The other two days required a layover of 5
hours east-bound, and an overnight stay in Helsinki west-bound. Total en
route time east-bound was 19 hours, and west-bound 31 hours. The JFK -
Helsinki flight was on a wide-body MD11 aircraft. The connecting flight
from Helsinki to St. Petersburg was on a narrow-body DC9 aircraft. Finnair
did not have First Class service, and did not have palletized and
containerized cargo service into St. Petersburg. From the MD11, cargo must
be unpacked and manually loaded into the narrow-body DC9.
Scandinavian Airlines System (SAS)
SAS served St. Petersburg from Stockholm and Copenhagen daily. To
connect with its flights from the US at Stockholm or Copenhagen, east-bound
layover time was 1:30 hours, and west-bound required an overnight stay in
either Copenhagen or Stockholm. Total en route time east-bound was 10:30
hours, and total en route time west-bound was 30 hours through Stockholm and
31:30 hours through Copenhagen. The Newark - Stockholm or Newark -
Copenhagen flight was on a wide-body B767 aircraft. From Stockholm or
Copenhagen the connecting flight to St. Petersburg was on a narrow-body DC9
aircraft. SAS did not have First class service, and did not have palletized
and containerized cargo service into St. Petersburg. From the B767, cargo
must be unpacked and manually loaded into the narrow-body DC9.
Lufthansa
Lufthansa served St. Petersburg from Frankfurt daily. To connect with
its flights from the US at Frankfurt, East-bound layover time was 1:40
hours, and an overnight stay in Frankfurt was required on West-bound
flights. Total en route time East-bound was 13:10 hours, and total en route
time West-bound was 25:20 hours. The New York to Frankfurt flight was on a
wide-body A340 aircraft. From Frankfurt the connecting flight to St.
Petersburg was on a narrow-body A320 aircraft. Lufthansa had First,
Business and Couch seating, but did not have palletized and containerized
cargo service into St. Petersburg. From the A340, cargo must be unpacked
and manually loaded into the narrow-body A320.
KLM Royal Dutch Airlines
KLM served St. Petersburg from Amsterdam daily. To connect with its
flights from the US at Amsterdam, East-bound layover time was 1 hour, and
West-bound layover time was 1 hour. Total en route time East-bound was
12:30 hours, and total en route time West-bound was 15 hours. The New York
to Amsterdam flight was on a wide-body B747 aircraft. From Amsterdam the
connecting flight to St. Petersburg was on a narrow-body B737 aircraft. KLM
did not have First class seating, and did not have palletized and
containerized cargo service into St. Petersburg. From the B747, cargo must
be unpacked and manually loaded into the narrow-body B737.
British Airways, Air France, Austrian Airlines, and Swissair
British Airways served St. Petersburg through London twice weekly. The
return required overnight stay in London. Air France flew to St. Petersburg
through Paris twice weekly and required overnight stay in Paris on return.
Austrian Airlines flew to St. Petersburg through Vienna four times a week.
Swissair flew to St. Petersburg through Zurich three times a week.
Delta Air Lines (US carrier)
Delta Air Lines provided non-stop service to Moscow. In 1996 Delta
ceased providing service to St. Petersburg and has applied to the DOT for
authority to market St. Petersburg through code sharing with foreign
carriers.
Aeroflot (Russian carrier)
Aeroflot provides serviced to St. Petersburg through Moscow six times a
week. Aeroflot did not offer arrival and departure times for St.
Petersburg's connecting flight at Moscow. It estimated the layover times at
Moscow to be between 3 to 5 hours. Estimated total en route time East-bound
was 14 hours, and estimated total en route time West-bound was 15 hours. In
fall 1997 Aeroflot initiated round trip flights between St. Petersburg and
JFK.
Summary of Competition
Although Aeroflot has commenced non-stop service between St. Petersburg
and New York, Finnair and SAS remain the leading foreign airlines in the
US-Russia market. Finnair and SAS have fleets of airplanes capable of trans
Atlantic flight, offer service quality acceptable to Western travelers, and
have convenient intermediate stops in Helsinki, Stockholm and Copenhagen
(change of gauge points - hubs). Other foreign airlines have to fly more
circuitous routes through their hubs. A total of 36 world airlines provide
some form of connecting flights at varying levels of service from New York
City to St. Petersburg.
Excepting Aeroflot service, the Company intends to offer exclusive
non-stop, wide-body service in the market. The Company's JFK - St.
Petersburg non-stop block time is conservatively listed at 8 hours and 34
minutes (includes taxi times & estimated air traffic delays). The normal
JFK - St. Petersburg flying time is approximately 7 hours and 20 minutes.
INTERLINING AT JFK, LAGUARDIA AND NEWARK AIRPORTS
The Company intends to inaugurate its JFK - St. Petersburg service with
one round trip flight per week. Because its nonstop flight has shorter en
route time (relative to competing airlines), when operating, the Company
expects to be able to schedule departures and arrivals which, according to
the Company's survey, allows each Company flight to connect at JFK,
LaGuardia, and Newark airports with 131 in-bound flights prior to the
Company's departure for St. Petersburg and with 143 flights out-bound after
the Company's arrival from St. Petersburg. Each Company flight is expected
to meet with TWA, United Airlines, Continental, Delta, US Air, American and
US Air Shuttle flights to and from the following cities: Seattle, Chicago,
Denver, Phoenix, New Orleans, Pittsburgh, Miami, Washington DC, Boston,
Philadelphia, Dallas, Atlanta, Los Angeles, San Francisco, San Diego,
Orlando and Houston. Flights by airlines may be subject to change. In
calculating the number of connections, the Company counted flights which
permit adequate connecting time. The Company does not include flights
arriving and departing with less than the following minimum connecting
times: 45 minutes at JFK, 1:30 hours at LaGuardia, and 2 hours at Newark.
The Company believes that convenient connection times will maximize its
traffic pool in the continental US.
The Company's proposed schedule assuming one round trip per week is:
Depart JFK at 17:00 Mon
Arrive LED at 9:34 +1 Tue
Depart LED at 12:00 Thu
Arrive JFK at 13:31 Thu
As the market allows, the Company plans to increase frequency.
Ultimately, the Company expects to operate five round trips per week. The
Company's proposed schedule assuming five round trips per week is:
Depart JFK at 17:00 (Sun, Mon, Wed, Thu, Fri)
Arrive LED at 9:34 +1 (Mon, Tue, Thu, Fri, Sat)
Depart LED at 12:00 (Mon, Tue, Thu, Fri, Sat)
Arrive JFK at 13:31 (Mon, Tue, Thu, Fri, Sat)
"LED" is the three-letter identifier for St. Petersburg's Pulkovo Airport.
All times are local times and "+1" means next day. The Company may adjust
the time and frequency of its flights.
The Company's Director of Marketing and Sales has held interline
discussions with his counterparts of other airlines. Unlike some of its
competitors, the Company does not currently have interline agreements with
other airlines. The Company intends to sign interline agreements with other
airlines after the Company commences service, but there is no assurance that
the such agreement would contain discounts equal to those of its
competitors. Interline agreements allow participating carriers to reduce
the total cost of a multi-legged ticket involving two or more airlines, each
airline contributing a certain discount for the leg on which it provides
service in order to bring down the overall price of such a ticket. Prior to
the Company's signing interline agreements with other airlines, at their
local travel agent through the CRS, passengers will be able to purchase a
multi-leg ticket where the Company is one of the air carriers without
interline discount, but it may be more expensive that a multi-leg ticket on
a competitive airline that has interline agreements in place.
PRICING
The Company's calculation of year one results is based on: (i) the
number of passengers (93,431) multiplied by the Weighted Average Fare After
Dilution, plus (ii) the pounds of freight (2,800,000) multiplied by the rate
per pound. Thus, along with the passenger and cargo volume transported,
fares and cargo rates have a direct impact on revenues. In general, traffic
volume is driven by the intensity of commerce between two countries,
depending on the underlying economic, social and political factors. In
general, fares a re market driven, depending on demand for and supply of the
transportation in the particular market. Fares may also be influenced by
tradition and marketing objectives of airlines. All fares and cargo rates
are subject to change over time. For discussion on passenger and cargo
volume see "Management Discussion and Analysis - Forecast Results of Year
One Operation."
In 1997, the Company surveyed the price structures of Finnair, SAS,
Lufthansa, Delta and Swissair to compare the published market fares of
one-and two-stop connection to St. Petersburg, involving a change of gauge,
with the Company's non-stop, wide-body service from JFK to St. Petersburg.
The following table summarizes the 1996 published one-way fares (source:
Officia l Airline Guide,1997):
<TABLE>
<CAPTION>
PUBLISHED MARKET FARES (ONE-STOP, CHANGE OF GAUGE)
First Business Economy Discount
<S> <C> <C> <C> <C>
Finnair N/A $2,177 $ 850 $ 570
SAS N/A 2,302 1,227 594
Lufthansa 3,223 2,302 1,269 420
Swissair 3,223 2,302 850 670
$3,223 $2,270 $1,049 $563
Average stop-over fare
$2,715 $1,595 $1,193 $555
Company's non-stop fare
</TABLE>
For marketing reasons to reflect the Company's exclusive non-stop
service, excepting Aeroflot service, certain of the Company's published
fares are planned incrementally higher. The Company may periodically adjust
its fares. The Company focuses its marketing on the First class, Business
class and upscale tourism market, requiring non-stop, high quality service.
Business and First class travelers are currently paying between $1,707 to
$2,660 more than a discount fare. It is reasonable to expect that travelers
will prefer the Company's non-stop service. According to the DOC
statistics, 77% of all passengers visit one country.
Aeroflot periodically offers round trip discount fares below market
average. If and when the Company commences revenue service, it will use a
40% dilution factor, a dilution of the weighted average fare used in
forecasting revenues which results when passengers purchase a discounted
ticket. This percent of dilution is expected to allow the Company to
compete periodically with discount programs without compromising its revenue
forecasts. See fare calculation below.
The following table represents the seating configuration and class
occupancy ratio of 93,431 passengers forecast for year one:
<TABLE>
<CAPTION>
THE COMPANY'S INTENDED B747 SEATING CONFIGURATION AND AVERAGE OCCUPANCY
Available Passengers Percent Percent of
Seats per Flight Occupancy Passengers
<S> <C> <C> <C> <C>
First 16 6 $37.5% 3.3%
Business 32 17 53.1% 9.5%
Economy 64 37 57.8% 20.6%
Discounts 204 120 58.7% 66.6%
Total 316 180 56.9% 100.0%
</TABLE>
The JFK - St. Petersburg passenger market has had its most significant
growth in business travel since 1992. Consistent with SAS report (Jax Fax
Travel Marketing Magazine, Dec. 1993) that there has been substantial growth
specifically in business travel, 1994 DOC statistics report that between
1992 and 1993 the distribution of US passengers to Russia among First,
Business and Tourist and Economy Classes was 6%, 14%, and 80% respectively.
The ratio of First Class and Business Class fares to Tourist Fares impacts
the revenue earned from any given number of passengers. The more First
Class and Business Class tickets sold, the more revenue earned from that
given number of passengers. The Company calculates its fare revenues based
on a 3.3%, 9.5%, and 87.2% class distribution ratio among passengers.
However, recognizing the fact that in the market the requirement for First
and Business class service is strong, the Company will allocated appropriate
seating capacities for its First and Business classes (16 First, 32
Business, and 268 Economy and Discount class seats in Baltia's B747 layout).
The following table shows the Company's weighted average passenger fare
calculation.
<TABLE>
<CAPTION>
THE COMPANY'S JFK - ST. PETERSBURG FARE CALCULATION
Published Percent of Contrib. to
Fare Passengers Weighted Av.
<S> <C> <C> <C>
First $ 2,715 3.3% $ 90.66
Business 1,595 9.5% 150.91
Economy <FN1> 1,193 20.6% 245.67
Discount Fares 555 66.6% 369.67
Weighted Average Fare - Undiluted $ 856.91
Dilution Factor @ 40% for $ 342.76
promotion/discount $ 514.15<FN2>
<FN>
<FN1>
(1) Company trademark: "Voyager Class".
<FN2>
(2) Yield @ 3,900 NM (av. distance JFK-LED in nautical miles) is 13.18
cents per mile
</FN>
</TABLE>
PERSONNEL
The DOT Order 96-1-24 and 96-2-51 found the Company's management fit to
operate its scheduled international air service. See "Management." At
present eight staff members are actively working on the Company's financing
and aircraft acquisition; none are currently receiving compensation from the
Company. Upon receipt of financing from this Offering, a total of 26 staff
and managers will be actively working on air carrier certification and
marketing prior to commencing revenue service during which time they will be
paid salaries reduced by 50%. At 50% reduction, total 90-day salaries and
training allowances equal $196,000. Immediately prior to commencement of
service the Company intends to employ a total of 94 employees, including:
(i) 28 executive, administrative, and sales personnel, (ii) 33 station
personnel at JFK and St. Petersburg, (iii) 2 captains, 2 first officers, 2
chief stewards, and 18 stewards. Shortly after commencement of the JFK -
St. Petersburg service the Company intends to bring the total number of
employees to 131. Certain employees must be FAA qualified for specific
positions. The Company's policy is to hire and retain only the highest
quality personnel. The Company will neither pay very low nor excessively
high salaries. The Company's management has sole discretion as to the
number of employees and employment requirements and conditions.
FACILITIES
The Company presently subleases facilities on a month-to-month basis
from Iceland Air, a permanent tenant in the East Wing of the International
Arrivals Building ("IAB"), JFK International Airport, New York, at a rate of
$1,200 per month. Upon receipt of IPO proceeds the Company intends to have
an approximate date for commencing revenue service, and intends to sign a
written lease with Iceland Air for larger space as need requires with
increase in frequency (aircraft turn-around). Negotiations indicate that
the monthly rent presently charged will be replaced by a charge equal to
$750.00 per aircraft turn-around, i.e. one aircraft's landing, servicing and
departure. As the US carrier providing international service, the Company
is eligible for required gate space and other facilities at JFK and at
Pulkovo airport in St. Petersburg. Prior to leasing space from Iceland Air,
the Company leased office space from the Company's president at his
residence at $450 per month.
FAA AIR CARRIER CERTIFICATION
To assure that an airline, previously certified as fit by the DOT, uses
safe operating procedures, its operating procedures and personnel must be
certified by the FAA. The certification process begins with providing the
FAA with written documentation of the procedures to be used in its
operations. These written procedures, which include training procedures,
are reviewed by the FAA. After the FAA is satisfied with the documentation,
the airline trains its personnel according to its procedures under FAA
supervision. Finally the airline employees demonstrate their mastery of the
procedures to the FAA. Upon successful completion of demonstrations, an
airline receives its FAA Air Carrier Certification. The FAA will require
that the Company submit its manuals and other documentation, train crews for
B747, conduct a mini-evacuation demonstration, and complete 50 hours of
proving-flight demonstration from JFK to St. Petersburg (equivalent of 3
round trips). During the proving flights the Company is not permitted to
carry passengers but it may carry freight.
REGULATORY COMPLIANCE
The Company intends to operate as a Part 121 carrier, a heavy jet
operator. As such, following certification the Company is required to
maintain its air carrier standards as prescribed by DOT and FAA regulation
and as specified in the FAA approved Company manuals. As part of its
regulatory compliance the Company is required to submit periodic reports of
its operations to the DOT, which proprietary data is kept confidential for
two years. As a new airline, the Company is likely to be subjected to a
greater FAA scrutiny during the first year of its flight operations than an
established carrier. Failure to maintain compliance may cause suspension or
revocation of air carrier certificate.
US CARRIER OPERATIONS UNDER BILATERAL RIGHTS
Prior to the conclusion of the Bilateral Agreement, only PanAm and
Aeroflot were authorized to operate between their respective countries. All
flights between the US and the former Soviet Union were conducted between
New York and Moscow, with Washington and St. Petersburg (Leningrad) being
served on a limited level. In 1990, shortly after the United States and the
former USSR concluded a new expanded bilateral air transportation agreement,
the DOT invited US airlines to compete for the limited route rights under
the new bilateral agreement. A total of 12 US airlines were admitted in the
competition: the Company, American, Delta, Continental, United, TWA, PanAm,
Northwest, Alaska Airlines, American Trans Air, Federal Express, and
Evergreen. In 1991, the DOT awarded the Company rights (passengers, cargo
and mail) to fly from JFK to St. Petersburg, and to Riga non-stop; with
on-line service via Riga to Minsk, Kiev and Tbilisi. Alaska Airlines was
awarded the right to fly to Russia's Magadan and Khabarovsk in the US
Pacific, which routes Alaska Airlines currently serves.
After the USSR broke up, the Bilateral Agreement of 1994 was signed
reinforcing and expanding the former US-USSR Bilateral Agreement of 1990.
Under the Bilateral Agreement the designated US airlines enjoy certain
rights backed by the US Government. Russia has granted certain rights to
the United States and reciprocal rights were granted by the United States to
Russia. Among the most important of the bilateral rights the Company
considers the following: (i) the right to fly non-stop, (ii) the right of
change gauge in Russia for beyond service, and (iii) the ability to provide
its own service within Russia i.e. ground service of the aircraft, passenger
services, cargo service, etc. Other rights enable the Company to conduct
normal business practices between the US and Russia, including exemption
form duties on materials usable in the Company's business, and unimpeded
currency transfers. No other foreign country can be a party to the
Bilateral Agreement. Accordingly, other foreign airlines are excluded from
direct service between the US and Russia.
Unexpected political changes in Russia might affect the Company's
growth. Airline services under bilateral agreements typically continue even
between countries that are adversarial. A break in diplomatic relations
could be accompanied by interruption of air service, but such extended
occurrences are rare. However, adverse political direction in Russia could
impede the rapid growth in US-Russia commerce, i.e. it might slow the future
growth in traffic for the Company.
PENDING AIRCRAFT ACQUISITION
The Company's preference is to operate Boeing 747 aircraft on the
JFK-St. Petersburg route. The Company is currently in discussion with
Pegasus for a 3 to 5 year lease of one B747 to be delivered in 1998, with
additional ships available in 1999. The Company intends to acquire aircraft
that meet FAA air worthiness requirements. The Company may purchase or
lease aircraft depending upon the final arrangements available to the
Company at the time of aircraft acquisition. The Company has budgeted
$750,000 for an initial deposit for the aircraft. Monthly acquisition costs
are similar under both lease and purchase scenarios and will be paid from
operating revenue.
MANAGEMENT
The management of a US airline is subject to review by the DOT. Having
examined the Company's management, its background and qualifications, the
DOT found the Company's management fit to operate the proposed routes as a
US flag carrier. (DOT Order 96-1-24, and 96-2-51). In addition to meeting
requirements specific to the DOT, certain management personnel are also
qualified by the FAA for specific positions.
EXECUTIVE OFFICERS AND DIRECTORS
<TABLE>
<CAPTION>
The following table summarizes certain information with respect to the
executive officers and directors of the Company <FN1>:
NAME AGE POSITION
<S> <C> <C>
Igor Dmitrowsky 43 President, Chairman and Director of the Board
Michelle Jardine 42 Chief Financial Officer/Controller
Walter Kaplinsky 59 Secretary and Director of the Board
Andris Rukmanis 36 V.P. Europe and Director of the Board
Anita Schiff-Spielman 43 Director of the Board
Brian Glynn 52 Vice President Marketing
__________________
<FN>
<FN1>
(1) The Company's by-laws restrict the number of directors on the board to
a maximum of four, with a provision that an additional seat on the
board is created for the Underwriters' designee for a period of three
years, at the option of the Underwriters. Officers and Directors have
a one year term and are elected at, and after, the Annual Meeting in
August.
</FN>
</TABLE>
Igor Dmitrowsky has served as Chairman of the Board and President of
the Company since its inception in August 24, 1989. In 1990, he testified
before the House Aviation Subcommittee on the implementation of the United
States' authorities by US airlines, and was instrumental in 1991 in
obtaining the DOT authority to serve St. Petersburg, Riga, Minsk, Kiev and
Tbilisi, with backup authority for Moscow. In 1996 Mr. Dmitrowsky was
instrumental in the Company's obtaining authority to provide air service
from JFK to St. Petersburg. Mr. Dmitrowsky, a US citizen, born in Riga,
Latvia, attended the State University of Latvia from 1972 to 1974 and Queens
College from 1976 through 1979. In 1979, he founded American Kefir
Corporation, a dairy distribution company, which completed a public offering
in 1986, and from which he retired in 1987. Mr. Dmitrowsky has interests
and has financed aircraft and automotive projects, speaks fluent Latvian and
Russian, and together with the staff of the Company, has traveled
extensively in the republics of the former Soviet Union.
Michelle Jardine, a US citizen, serves as Chief Financial
Officer/Controller. She joined the Company in 1998. Ms. Jardine is a
Certified Public Accountant (CPA), and has a B.S. degree in Accounting from
Montana State University. From 1992 through 1998 Ms. Jardine was an
independent computer consultant. From 1990 through 1993 she served as
Controller for The Real Estate Equity Company, Englewood, NJ, Haband Outlet
Stores, Paterson, NJ, and Masco Sports, Union, NJ. From 1987 through 1989
Ms. Jardine was independent computer consultant specializing in inventory
control. Prior to 1987, she served as Controller for Polo/Ralph Lauren,
Colorado.
Walter Kaplinsky, a US citizen, has been with the Company since 1990.
In 1993, Mr. Kaplinsky became Secretary and a member of the board of
directors. Mr. Kaplinsky has worked on behalf of the Company in American -
Russian marketing, and financing. In 1979, together with Mr. Dmitrowsky,
Mr. Kaplinsky was one of the co-founders of American Kefir Corporation,
where from 1979 through 1982 Mr. Kaplinsky served as secretary and vice
president. Mr. Kaplinsky is the owner of Globe Enterprises, Brooklyn, NY, a
private company that exports to Russia.
Brian Glynn, a US citizen, is V.P. of Marketing and Service. He joined
the Company in 1990. Mr. Glynn has a background in marketing and public
relations. During the 1990 DOT Route Authority proceedings, he established
the Company's relations with business and ethnic communities, generating
public support for the Company's bid for routes to the former Soviet Union.
Mr. Glynn has also been active in the financing of the Company. From 1982
through 1989, Mr. Glynn was Vice President of American Kefir Corporation.
Andris Rukmanis, a citizen of Latvia, is the Company's Vice President
in Europe. Mr. Rukmanis joined the Company in 1989. Mr. Rukmanis
represents the Company and makes service arrangements for the Company in St.
Petersburg. During the Company's certification process in 1992, he worked
at the Company's JFK office to prepare the Company's overseas services. In
Latvia, Mr. Rukmanis has worked as an attorney specializing in business law.
From 1988 through 1989 he was Senior Legal Counsel for the Town of Adazhi
in Riga County, Latvia. From 1989 to 1990 he served as Deputy Mayor of Adazhi.
Anita Schiff-Spielman, a US citizen, serves as a member of the board of
directors. She has been associated with the Company since its inception in
1989. In 1992 she helped organize office systems at JFK and helped
formulate the Company's employment policy, passenger service standards, and
cost accountability. Ms. Schiff-Spielman has owned Schiff Dental Labs, New
York, NY, for the past fifteen years.
Significant Personnel
Nina Morozova, 47 years of age, a US citizen, serves as Director of
Accounting. She joined the Company in 1992. Prior to joining the Company,
from 1978 through 1991, Ms. Morozova was accounting manager at Pan American
Airways. From 1970 through 1978, Ms. Morozova was manager economics at
Scandinavian Airlines System.
Robert Hughes, 64 years of age, a US citizen, serves as Director of
Technical Services. He joined the Company in 1992. Prior to joining the
Company, Mr. Hughes operated Arel Aviation Service, Inc., an FAA approved
repair station which provided services in aircraft component repairs,
acceptance of large aircraft, inspection of records, maintenance review, and
aircraft appraisal. Mr. Hughes was one of the co-founders of New York Air
and, from 1980 to 1982, served as vice president of operations. >From 1978
through 1989, Mr. Hughes was the director of product support and purchasing
at Seaboard World Airlines.
Jonathan Hill, 44 years of age, a US citizen, is Director of Sales and
Reservations. He joined the Company in 1992. Prior to joining the Company,
from 1988 to 1992, Mr. Hill was Marketing Manager for Aeroflot, USA. Since
1985, Mr. Hill has also been a lecturer teaching PARS Computer Reservations
System (CRS) to airline reservations specialists at the Travel and Tourism
Department of Kingsborough College.
Victoria Charlton, 54 years of age, a citizen of UK, is Director of
Promotion & Advertising. She joined the Company in 1992. Ms. Charlton has
a background in international promotions. In 1992, she organized the
Company's promotional sponsorship of the St. Petersburg Festival at the Met.
During various periods from 1975 through 1992, Ms. Charlton served as
executive director of Gateway Projects representing merchandising rights for
Paramount Studios, LCA (Warner), MCA (Universal Studios, and De Laurentis
Studios). Ms. Charlton has presented exhibitions from the Hermitage Museum
in St. Petersburg, and organized performances for Russian artists and the
leading companies in the US. In 1993 she organized a lecture tour for
Mikhail Gorbachev in England.
Captain Glen Johnmeyer, 40 years of age, a US citizen, will serve as
the Company's Director of Flight Standards, pending completion of the
Company's financing. Presently, he maintains his professional
qualifications with United Parcel Service. Mr. Johnmeyer has more than
10,000 hours as pilot in command of jets which includes more than 1,350
hours as pilot in command of the B-747 aircraft. Between 1968 and 1972,
Mr. Johnmeyer was an Honor Graduate of the Fixed Wing Aviator Course,
Aircraft Commander, Instructor Pilot, and Standards Pilot for the U.S. Army.
Since then he has been employed as Captain, First Officer, Instructor, and
Director of Operations in U.S. commercial aviation.
COMPENSATION
The board of directors approves salaries for the Company's executive
officers as well as the Company's overall salary structure. For year one
following the closing of this Offering, the rate of compensation for the
Company's executive officers is: (i) President $186,000, (ii) Vice President
Marketing $82,000, and (iii) Vice President Europe $68,000. Pursuant to
written agreement dated July 7, 1996, the President's and Vice Presidents'
salaries will be reduced to an amount equal to 50% of budgeted salary during
the period prior to commencing revenue service. Upon commencement of flight
services 100% of respective budgeted salaries will be paid. To this date,
the Company has paid officers no salaries, nor otherwise have compensated
officers. Board directors are not presently compensated and shall receive no
compensation prior to commencement of revenue service.
The following table identifies executive compensation to be paid. The
board of directors has established the compensation. No individual
personnel contracts exist. The officers have been working on behalf of the
Company in their respective offices for six years. No executive salaries
have been paid to date, nor will be paid until funds are received at the
Closing, but normal salaries have been treated as capital contributions.
See footnote 6(G) of the Company's Financial Statement and "Contributed
capital". To preserve the IPO proceeds designated working capital , these
officers have agreed to continue in their offices at reduced salaries for
the period prior to commencing of revenue operations. Reduced salaries will
not commence until proceeds are available from this Offering. The
executive officers have provided written affirmation that each will
continue in his respective position at reduced salary for the three months
following the Closing.
NAME POSITION SALARY
Igor Dmitrowsky President $186,000
Brian Glynn Vice President Marketing 82,000
Andris Rukmanis Vice President Europe 68,000
PRINCIPAL STOCKHOLDERS
<TABLE>
<CAPTION>
The following table sets forth, as of the date of this Prospectus, the
ownership of the Company's Common Stock by (i) each director and officers of
the Company, (ii) all executive officers and directors of the Company as a
group, and (iii) all other persons known to the Company to own more than 5%
of the Company's Common Stock. Each person named in the table has sole
voting and investment power with respect to all shares shown as beneficially
owned by such person. The percentage owned after the Offering reflects the
sale of 1,100,000 Shares and the exercise of 1,100,000 Warrants <FN1>.
Common Shares
Beneficially Percent of Percent of
Owned After Total Before Total After
the Offering Offering Offering<FN1>
<S> <C> <C> <C>
DIRECTORS AND OFFICERS
Igor Dmitrowsky 1,517,100 62.1% 42.8%
63-26 Saunders St., Suite 7I
Rego Park, NY 11374
Walter Kaplinsky 73,250 3.0% 2.1%
2000 Quentin Rd.
Brooklyn, NY 11229
Brian Glynn 50,000 2.0% 1.4%
148 Claremont Rd.
Bernardsville, NJ 07924
Andris Rukmanis 25,500 1.0% 0.7%
Kundzinsala, 8 Linija 9.
Riga, Latvia LV-1005
Anita Schiff-Spielman 2,250 0.10% 0.1%
1149 Kensington Rd.
Teaneck, NJ 07666
COUNSEL
Steffanie J. Lewis 190,000 7.80% 5.4%
3511 North 13th St.
Arlington, VA 22201
All directors, officers, 1,858,050 76.00% 52.5%
and counsel (Six people)
<FN>
<FN1>
(1) Does not reflect the exercise of Warrants, Bridge Warrants,
Over-Allotment Warrants or Underwriters' Warrants.
</FN>
</TABLE>
AUDIT REVIEW BY THE BOARD
New Nasdaq standards require: (1) a minimum of 2 independent directors;
and, (2) an audit committee, a majority of which are independent directors.
The Company has a small Board consisting of four Directors, two of which are
independent, plus one independent additional directorship position reserved
for the Underwriters' designee, at the Underwriters' option. A Committee of
three Directors, two of which are independent, is responsible for reviewing
the results and scope of the audit and other services provided by the
Company's independent accountants and all transactions between the Company
and any of its officers, directors or principal stockholders.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
No officers or directors hold Company shares purchased since March 4,
1995, i.e. within one year of the Company's filing its initial registration
of this Offering. In June 1997, Steffanie Lewis, legal counsel, was issued
150,000 common shares at par in exchange for the total legal fees due to her
in the amount of $1,628,432 for services performed since 1989 in connection
with various certifications, authorities and financial matters. On June 23,
1997, Mr. Dmitrowsky, President, Mr. Walter Kaplinsky, and Mr. Andris
Rukmanis, Vice President, relinquished the amount due them for back-pay
totaling $270,928. All Securities previously purchased by officers and
directors were purchased for fair market value at the time they were
purchased. Excepting the Company's renting office space from its president,
no other transaction exists between officers and the Company or affiliates
of either, and there are no incentive plans or options for delayed
compensation.
DESCRIPTION OF SECURITIES
The authorized capital stock of the Company consists of 100,000,000
shares of Common Stock, $.0001 par value per share, and 15,000 shares of
Preferred Stock, $1.00 par value. At the Effective Date, a total of
2,442,500 shares of Common Stock are issued and outstanding and held by over
100 shareholders. No shares of Preferred Stock are issued and outstanding.
COMMON STOCK
All outstanding shares of Common Stock are, and the shares offered
hereby will be, duly authorized, validly issued, fully paid and
non-assessable. Holders of Common Stock are entitled to receive dividends,
when and if declared by the board of directors, out of funds legally
available therefore and, subject to prior rights of holders of any Preferred
Stock then outstanding, if any, to share rateably in the net assets of the
Company upon liquidation. Holders of Common Stock do not have preemptive or
other rights to subscribe for additional Shares, nor are there any
redemption or sinking fund provisions associated with the Common Stock. The
Certificate of Incorporation does not provide for cumulative voting. Shares
of Common Stock have equal voting, dividend, liquidation and other rights,
and have no preference, exchange or appraisal rights.
LACK OF CONTROL BY MINORITY SHAREHOLDERS
Holders of shares of Common Stock are entitled to one vote per Share on
all matters requiring a vote of stockholders. Since the Common Stock does
not have cumulative voting rights in electing directors, the holders of a
majority of the outstanding shares of Common Stock voting for the election
of directors can elect all of the directors, excepting one board seat
reserved for the Underwriter's nominee for three years.
STOCK TRANSFER AGENT
The Transfer Agent and Registrar for the shares of Common Stock is
Continental Stock Transfer and Trust Company, 2 Broadway, New York, NY
10004, telephone: (212) 509-4000.
WARRANTS
In this Offering the Company will issue 1,100,000 Warrants. Each
Warrant entitles the holder to purchase one share of Common Stock at $6.05
commencing six months after the Effective Date until the fifth anniversary
of the Effective Date of this Prospectus. The Company may redeem
outstanding Warrants, once they become exercisable at a price of $.10 per
Warrant on not less than 30 days written notice, provided the closing bid
quotations of the Shares have exceeded $10 for 20 consecutive trading days
ending on the third day prior to the date on which notice is given. Baltia
intends to redeem the Warrants at the earliest opportunity. Warrants may
not be exercised following redemption. Therefore, the IPO investor may have
to exercise the Warrant earlier than he or she intended. If the Warrants
are called for redemption by the Company, an investor may have to exercise
the Warrants before maximum profit can be gained. The Warrants expire five
years after the Effective Date, or sooner if the Warrants are called for
redemption. The Prospectus will become stale nine months following the
Effective Date. The Company will try to maintain, and at such time as it
may call for redemption will provide, a current prospectus, but the Company
assumes no obligation to maintain a current prospectus otherwise. Warrants
may not be exercised or redeemed in the absence of a current prospectus, and
the Company's Warrant and Transfer agents are forbidden to accept Warrants
unaccompanied by a current prospectus.
WARRANT EXERCISE PROCEDURE
Warrants may be exercised by mailing or delivering a duly executed and
completed Warrant Subscription Certificate together with payment in full of
the subscription price of $6.05 per share of Common Stock. Except as
described herein under "Late Delivery of Warrants," Warrant Subscription
Certificates must arrive on or before the Expiration Date and any
subscriptions received after the Expiration Date will not be honored.
Payment must be made in US dollars in cash or by bank certified or cashier's
check, or by wire transfer of good funds payable to the order of the Warrant
Agent. Once a holder has exercised a Warrant, the exercise is irrevocable.
Certificates representing the shares of Common Stock purchased upon the
exercise of Warrants will be delivered to the purchasers as soon as
practicable after receipt of the Subscription Agreement and funds.
The Warrant Agent is Continental Stock Transfer and Trust Company, 2
Broadway, New York, NY 10004, telephone: (212) 509-4000.
The instructions in the Warrant Subscription Certificate should be read
carefully and followed in detail. Do not send Warrant Subscription
Certificates or payment to the Company or to the Underwriters. Except as
described herein under "Late Delivery of Warrants," no subscriptions will be
accepted until the Warrant Agent has received delivery of a duly executed
Warrant Subscription Certificate and payment of the subscription price. The
risk of delivery of Warrant Subscription Certificates and payments to the
Warrant Agent will be borne by the holders of Warrants and not by the
Company or the Warrant Agent. If the mail is used to exercise Warrants, it
is recommended that insured, registered mail be used. Any questions or
requests for assistance concerning the method of subscribing for shares or
for additional copies of this Prospectus should be directed to the Warrant
Agent.
All questions as to the validity, form, eligibility and acceptance of
any exercise of Warrants will be determined by the Company at its sole
discretion. The Company may waive any defect or irregularity, permit a
defect or irregularity to be corrected within such time as it may determine,
or reject any exercise of a Warrant which it determines to have been made
improperly.
LATE DELIVERY OF WARRANTS
If on or before the Warrant Expiration Date the Warrant Agent receives
the full subscription price for the shares of Common Stock, together with a
letter or telegraphic guaranty from a bank or trust company which is a
member of the New York Clearing House (or is a correspondent of such a bank)
or a member firm of the New York Stock Exchange or American Stock Exchange
or Nasdaq, that the Warrant Subscription Certificate to which it relates
will be surrendered to the Warrant Agent within five business days after the
Expiration Date, the subscription will be accepted subject to receipt of the
duly executed Warrant Subscription Certificate within the five business days.
PURCHASE AND SALE OF WARRANTS
The Warrants are immediately tradable. The Company has applied for the
Nasdaq listing symbol BALTW for Warrants. No assurance can be given that a
trading market for the Warrants will develop, or if one does develop,
whether it will sustain or at what price the Warrants will trade. Prior to
this Offering, there has been no public market for the Warrants.
UNDERWRITERS' WARRANTS
At the Closing of this Offering the Company will sell to the
Underwriters, for a total purchase price of $100.00, Warrants entitling the
Underwriters to purchase up to 110,000 shares of Common Stock at $6.05 per
Share (110% of initial public offering price) and 110,000 Warrants at $.11
per Warrant (110% of initial public offering price). Warrants underlying
the Underwriters' Warrants differ from the Warrants offered to the public
hereunder to the extent that the underlying Warrants are non-redeemable by
the Company. The exercise prices of the Underwriters' Warrants and
underlying Warrants are subject to anti-dilution adjustment under certain
conditions. The Underwriters' Warrants are exercisable during the four-year
period commencing one year form the date of this Prospectus, and the
Warrants are non-transferable for one year except to the officers of the
Underwriters, members of the underwriting group and their respective
officers or partners. The Securities issuable upon the exercise of the
Underwriters' Warrants have been reserved by the Company and have been
included in the Registration Statement of which this Prospectus is a part.
PREFERRED STOCK
The Company has authorized 15,000 Preferred Shares which may be issued
from time to time, as authorized by the board of directors. Preferred
shares have $1 par value and no voting rights. As of the present date
thereof, no shares of Preferred Stock are outstanding and the Company has no
present plans to issue any shares of Preferred Stock.
COMMON STOCK AVAILABLE FOR FUTURE SALE
The Company and more than 95% of its present shareholders, representing
2,320,375 shares, have entered into a 24-month lock up written agreement
with the Underwriters preventing the sale of insider held common stock for
two years without written permission from the Underwriters. Whether to
grant permission lies within the Underwriters' discretion. At Closing there
will be 3,542,500 shares of Common Stock, Over-Allotment can contribute up
to 165,000 additional Shares and 165,000 additional Warrants (equivalent to
165,000 Shares if fully exercised). Common Stock and Warrants purchased in
the Offering will be immediately detachable and separately tradable.
Warrants are exercisable commencing six months after the Effective Date of
the Public Offering until five years after the Effective Date of the
Offering (unless Warrants are redeemed sooner by Company). If all Warrants
are exercised, up to an additional 1,100,000 Shares of Common Stock will be
freely tradable. The Company has issued Warrants to the Underwriters to
purchase up to 110,000 Shares and up to 110,000 Warrants totaling 220,000
Shares assuming full exercise of all Warrants.
In February 1998 the Company issued 250,000 warrants ("Class B Bridge
Warrants") in connection with a Bridge Loan for $250,000. These warrants
are exercisable during the four-year period commencing one year form the
Effective Date. Otherwise, terms of these warrants are identical to
Warrants offered to the public in the Offering. The holder of the Class B
Bridge Warrants is being registered as a Selling Securityholder
simultaneously with the Offering.
In June 1998 the Company issued 575,000 warrants ("Class A Bridge
Warrants") in connection with a series of Bridge Loans in the aggregate
amount of $575,000. The terms of these warrants are the same as the
Warrants offered to the public in the Offering. The holders of the Class A
Bridge Warrants are being registered as a Selling Securityholder
simultaneously with the Offering. (See "Notes to Financial Statements")
Following the two-year lock up, 2,442,500 Insider Shares of Common
Stock will be freely tradable without registration or other restrictions in
accordance with Rule 144. Upon petition from a shareholder, the
Underwriters have discretion to waive the lock up restriction on the sale of
that petitioner's Insider Shares during the two-year lock up. No notice of
such a waiver will be given other shareholders. If written waiver is
granted, that petitioner's Insider Shares can be sold pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated in accordance with Rule 144) who has
beneficially owned "restricted shares" (defined generally as shares acquired
from the issuer or an affiliate in a non-public transaction) for the last
two years, as well as any person who purchases unrestricted shares on the
open market who may be deemed "affiliate" of the Company (as defined in the
Securities Act), would be entitled to sell within any three-month period a
number of shares of Common Stock that does not exceed the greater of 1% of
the then outstanding number of shares of Common Stock or the average weekly
trading volume of the shares of Common Stock during the four calendar weeks
preceding such sale. After shares of Common Stock are held for three years,
a person who is not deemed an "affiliate" of the Company is entitled to sell
such shares of Common Stock under Rule 144 without regard to volume
limitations. As defined by Rule 144, an "affiliate" of an issuer is a
person that directly or indirectly, through the use of one or more
intermediaries, controls, or is controlled by, or is under common control
with, such issuer.
With the Offering the Company is registering the 110,000 shares of
Common Stock underlying the Underwriter's Warrants (assuming full exercise
of underlying Warrants). The Securities underlying the Underwriter's
Warrants may be traded on any exchange or public market upon which the
Company's Common Stock is traded.
Prior to the Offering, there has been no public market for the Common
Stock and the effect, if any, that future market sales will have on the
market price prevailing from time to time, cannot be predicted. Sales of a
substantial number of shares, or the perception that such sales may occur,
could adversely affect prevailing market prices for the shares of Common Stock.
UNDERWRITING
The Underwriters named below for whom Hornblower & Weeks, Inc. and
Madison Capital Markets Corp are acting as co-managing underwriters, acting
severally and not jointly, have agreed, subject to the terms and conditions
of the Underwriting Agreement, to purchase from the Company a total of
1,100,000 shares of Common Stock and 1,100,000 Warrants at the public
offering price, less the underwriting discounts and commissions, set forth
on the cover page of this Prospectus. The number of Securities which each
such Underwriter has agreed to purchase is set forth opposite its name:
Underwriter Number of Shares Number of Warrants
Hornblower & Weeks, Inc. . . . . . .
Madison Capital Markets Corp. . . .
___________________________. .
Total . . . . . . . . . . . . . 1,100,000 1,100,000
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to approval of certain legal matters by counsel and
certain other conditions precedent, and that the Underwriters are obligated
to purchase all of the Securities offered in this Prospectus (other than the
Securities covered by the Over-Allotment Option described below), if any are
purchased.
The Underwriters have advised the Company that the Underwriters propose
to offer the Securities to the public at the initial offering prices set
forth on the cover page of this Prospectus, and to certain dealers at such
price less a concession not in excess of $ ______ per share of Common Stock
and $ ______ per Warrant. After the initial public offering, the public
offering price, concessions, and other selling terms may be changed by the
Underwriters.
The Company has agreed to pay underwriting discounts and commissions in
the aggregate of 10% of the IPO price of the Securities offered hereby
(including the sale of any Securities sold under the Over-Allotment Option).
The Company has also agreed to pay to the Underwriters an expense allowance
on a non-accountable basis equal to 3% of the gross proceeds derived from
the sale of the Securities underwritten (including the sale of any
Securities sold under the Over-Allotment Option). Any Underwriters'
expenses in excess of the expense allowance will be borne by the
Underwriters. To date, the Company has advanced the Underwriters $50,000
with respect to non-accountable expense allowance. The Company has also
agreed to pay all expenses in connection with qualifying the Securities
offered hereby for sale under the laws of such states as the Underwriters
may designate.
The Company has granted to the Underwriters an option, exercisable
during the 45-day period after the date of this Prospectus, to purchase up
to an aggregate of 165,000 additional shares of Common Stock and 165,000
additional Warrants at the Offering price, less underwriting discounts and
commissions (set forth on the cover of this Prospectus) and the
non-accountable expense allowance, for the sole purpose of covering
over-allotments, if any.
In connection with this Offering, the Company has agreed to sell to the
Underwriters (or designees), for a total purchase price of $100, the
Underwriters' Warrants to purchase up to an aggregate 110,000 shares of
Common Stock and/or 110,000 Warrants ("Underwriters' Warrants"). The
Underwriters' Warrants are exercisable at a price equal to 110% of the
initial public offering price of the Securities for a period of four years
commencing one year from the date of this Prospectus. The Securities
purchasable upon exercise of the Underwriters' Warrants are identical to
those offered hereby, except for non-redeemability. The Underwriters'
Warrants cannot be transferred, sold, assigned or hypothecated during the
one-year period following the date of this Prospectus, except to officers of
the Underwriters and to selected dealers and their officers and partners.
The number of Shares and underlying Warrants covered by the Underwriters'
Warrants and the exercise price are subject to adjustment upon certain
events to prevent dilution.
In connection with the Offering, the Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions
that stabilize, maintain or otherwise affect the market price of the Common
Stock and Warrants. Such transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M, pursuant
to which such persons may bid for or purchase Common Stock or Warrants for
the purpose of stabilizing their market prices. The Underwriters may also
create a short position for the account of the Underwriters by selling more
Securities in connection with the Offering than they are committed to
purchase form the Company and in such case may purchase Securities in the
open market following completion of the Offering to cover all or a portion
of such short position. The Underwriters may also cover all or a portion
of such short position, up to 165,000 additional Shares and 165,000
Warrants, by exercising the Over-allotment Option. Any of the transactions
described in this paragraph may result in the maintenance of the Securities
at a level above that which might otherwise prevail in the open market.
None of the transactions described in this paragraph is required, and, if
they are undertaken, they may be discontinued at any time.
In connection with the Offering the Underwriters and selling group
members (if any) and their respective affiliates may also engage in passive
market making transactions in the Stock and Warrants on The Nasdaq SmallCap
Market immediately prior to the commencement of sales in this Offering, in
accordance with Rule 103 under Regulation M. Passive market making consists
of displaying bids on The Nasdaq Small Cap Market limited by the bid prices
of independent market makers for a security and making purchases of a
security which are limited by such prices and effected in response to order
flow. Net purchases by a passive market maker on each day are limited to a
specified percentage of the passive market maker's average trading volume in
the Securities during a specified prior period and must be discontinued when
such limit is reached. Passive market making may stabilize the market price
of the Securities at a level above that which might otherwise prevail and,
if commenced, may be discontinued at any time.
INDEMNIFICATION
The Underwriting Agreement provides for reciprocal indemnification
between the Company and the Underwriters against certain liabilities in
connection with the Registration Statement, including liabilities under the
Securities Act. Insofar as indemnification for liabilities arising under
the Securities Act may be provided to the officers, directors or persons
controlling the Company, the Company has been informed that in the opinion
of the SEC, such indemnification is against public policy and is therefore
unenforceable.
BOARD OF DIRECTORS
The Company has granted to the Underwriters the right to designate a
member of the Company's board of directors for a period of three years or,
in the alternative, to designate a person to attend all board of directors
meetings and to receive all notices or communications to directors during
such three year period, all at the expense of the Company.
DETERMINATION OF PUBLIC OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock and Warrants. The IPO price for the Securities and the exercise price
of the Warrants have been determined by negotiations between the Company and
the Underwriters. Among the factors considered in the negotiations were an
analysis of the areas of activity in which the Company is engaged, the
present state of the Company's management and the general condition of the
securities market at the time of this Offering. See "Risk Factors - No
Assurance of Public Market." The public offering price of the Securities
does not bear any relationship to assets, earnings, book value or other
criteria of value applicable to the Company.
LOCK-UP AGREEMENTS
Prior to the date of this Prospectus, 95% of the holders of the
Company's Common Stock have signed written agreements not to sell, assign or
transfer any of their shares of the Company's securities without the
Underwriters' prior written consent for a period of 24 months from the
Prospectus date. Whether to grant permission lies within the discretion of
the Underwriters. In addition, the Company has agreed not to issue any
shares of its capital stock for a period of 24 months from the closing of
the Offering without the consent of the Underwriters.
SUBSCRIBER'S FLIGHT COUPON
As a means of introducing its non-stop JFK - St. Petersburg service to
IPO shareholders, the Company will issue Subscriber's Flight Coupons. For
each 1,500 Shares purchased, the subscriber receives one Subscriber's Flight
Coupon. By surrendering one coupon, the subscriber is entitled to purchase
for $650 two Voyager Class round-trip tickets from JFK to St. Petersburg.
By surrendering two coupons the subscriber is entitled to purchase for $650
two Business Class round-trip tickets. By surrendering three coupons, the
subscriber is entitled to purchase for $650 two First Class round-trip
tickets. Subscriber may purchase tickets by presenting the coupon[s] at the
Company's JFK ticket counter or by mailing the coupon[s] and check in the
stated amount to Baltia Air Lines, Inc., Reservation Center, East Wing
Building 51, JFK International Airport, Jamaica, NY 11430. Subscriber's
Flight Coupons expire December 31, 1998. The Subscriber's Flight Coupon is
offered as a marketing promotion only, is issued in the name of the
Securities purchaser, has a set value, is not transferrable, and is not a
security.
LEGAL MATTERS
Steffanie Lewis, Esq., The International Business Law Firm, PC,
Arlington, VA 22201-4907, is the Company's General Counsel since 1989, and
has passed upon the validity of the Securities offered hereby. Steffanie
Lewis owns 190,000 Shares of the Company and will be compensated $150,000
for legal services in connection with the Company's IPO which is due and
payable at closing, no interest is assessed, and payment is contingent upon
the IPO closing. Spinelli & Associates, 120 Wall Street, 28th Floor, New
York, NY 10005 has acted as legal counsel to the Underwriters in this
Offering.
EXPERTS
The financial statements of the Company appearing in this Prospectus
and Registration Statement at December 31, 1997 and for the year then ended,
and December 31, 1996 and the year then ended, have been audited by J.R.
Lupo, P.A. CPA, Verona, NJ, independent certified public accountants, as set
forth in their report thereon appearing elsewhere herein and in the
Registration Statement, and are included in reliance upon such report given
upon the authority of such firm as experts in accounting and auditing.
Airline Economics, Inc., Arlington, VA, industry analysts, were
consultants to the Company in the preparation of the Company's traffic and
financial projections for the JFK - St. Petersburg market (and Riga, Minsk,
Kiev and Tbilisi markets) and testified as expert witness for the Company in
the DOT route proceedings.
AVAILABLE INFORMATION
The Company has filed with the SEC a Registration Statement under the
Securities Act with respect to the Securities being offered by this
Prospectus. This Prospectus does not contain all information set forth in
the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is made to the Registration Statement and exhibits thereto. The
Company is currently filing periodic reports under the Securities Exchange
Act of 1934 ("Exchange Act"), as amended.
All reports and other information, including all of these documents,
may be inspected and copied at the public reference facilities of the SEC in
Washington, DC, and at the SEC's regional office at 7 World Trade Center,
New York, NY 10048. Copies may be obtained from the Public Reference
Section of the SEC, Washington, DC 20549 at prescribed rates. Copies of the
Registration Statement are available from the SEC. Statements contained in
this Prospectus concerning the provisions of documents filed with the
Registration Statement as exhibits are necessarily summaries of such
documents, and each such statement is qualified in its entirety by reference
to the copy of the applicable document filed with the SEC.
The Company is an electronic filer. The SEC maintains a Web site that
contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC at
(http://www.sec.gov).
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by independent certified public
accountants following the end of each fiscal year.
BALTIA AIR LINES, INC.
FINANCIAL STATEMENTS
TABLE OF CONTENTS
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
Contents Page
Independent Auditors' Report F-2
Financial Statements:
Balance Sheets - December 31, 1997 and
(Unaudited) March 31, 1998 F-3
Statement of Operations - Years ended
December 31, 1997 and 1996 and (Unaudited)
the three months ended March 31, 1998 and
1997 and August 24, 1989 (Inception) through
March 31, 1998 F-4
Statement of Cash Flows - Years ended
December 31, 1997 and 1996 and (Unaudited)
the three months ended March 31, 1998 and
1997 and August 24, 1989 (Inception) through
March 31, 1998 F-5 - F-6
Statement of Changes in Stockholders'
Deficit - Years ended December 31, 1997
and 1996 and (Unaudited) the three months
ended March 31, 1998 and 1997 and the
balance at December 31, 1992 and (not covered
by Auditors' Report) the years ended December
31, 1993, 1994 and 1995 F-7 - F-8
Notes to the Financial Statements F-9 - F-20
F-1
Independent Auditors' Report
To the Shareholders of and the Board of Directors of
Baltia Air Lines, Inc.
We have audited the balance sheet of Baltia Air Lines, Inc. (A
Development Stage Company) as of December 31, 1997 and the related
statements of operations, cash flows, and changes in stockholders'
deficit for the years ended December 31, 1997 and 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
also 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 Baltia
Air Lines, Inc. as of December 31, 1997 and the results of its
operations and its cash flows for the years ended December 31, 1997
and 1996, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
the Company will continue as a going concern. As shown in the
financial statements, the Company has not generated any revenues
and has incurred losses in excess of $6,500,000 since its incep-
tion. In addition, the Company has a capital deficit and sub-
stanial excess of current liabilities over current assets. These
factors, and the others discussed in Note 1 (C), raise substantial
doubt about the Company's ability to continue as a going concern.
Management's plans in respect to these matters are referenced in
Note 1 (C). The financial statements do not include any
adjustments relating to the recoverability and classification of
recorded assets, or the amounts and classification of liabilities
that might be necessary in the event the Company cannot continue in
existence.
J.R. Lupo, P.A. CPA
Verona, NJ
June 4, 1998
F-2
<TABLE>
<CAPTION>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
March 31,
1998 December 31,
(Unaudited) 1997
<S> <C> <C>
Assets
Current Assets:
Cash $ 26,703 $ 3,135
Property & Equipment (net) 35,511 0
Other Assets:
Deferred financing costs 200,000 0
Total Assets $ 262,214 $ 3,135
Liabilities and Stockholders' Deficit
Current Liabilities:
Accounts payable $ 544,654 $ 571,154
Accounts payable to
stockholders 38,318 65,318
Accrued interest 2,466 0
Notes payable 250,000 0
Notes payable to stock-
holders 151,000 303,572
Total current liabilities 986,438 940,044
Commitments and contingencies
Stockholders' deficit:
Preferred stock - no par value;
15,000 shares authorized, 0
shares issued and outstand-
ing at March 31, 1998 and
December 31, 1997, respectively 0 0
Common stock - $.0001 par
value; 100,000,000 shares
authorized, 2,442,500 shares
issued and outstanding at
March 31, 1998 and December 31,
1997, respectively 245 245
Additional paid-in capital 6,257,425 5,846,442
Prepaid media costs ( 396,090) ( 396,090)
Deficit accumulated during
development stage (6,585,804) (6,387,506)
Total stockholders'
deficit ( 724,224) ( 936,909)
Total liabilities and
stockholders' deficit $ 262,214 $ 3,135
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-3
<TABLE>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
<CAPTION>
Three Months Ended August 24, 1989
March 31, Years Ended (Inception) to
1998 1997 December 31, March 31, 1998
(Unaudited) 1997 1996 (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues $ 0 $ 0 $ 0 $ 0 $ 0
Expenses
General and
Administrative 101,832 39,230 84,512 92,749 2,328,715
Professional
fees 44,000 0 58,625 77,817 2,028,945
Service
contributions 0 0 0 0 1,352,516
Training Expense 0 0 0 0 225,637
Abandoned fixed
assets 0 0 0 0 205,162
Total expenses 145,832 39,230 143,137 170,566 6,140,975
Interest expense 52,466 5,382 0 68,120 444,829
Net loss $(198,298) $(44,612) $(143,137) $(238,686) $(6,585,804)
Net loss per
common share -
basic and
diluted $(0.08) (0.02) $(0.06) $(0.11) $(2.70)
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-4
<TABLE>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended August 24, 1989
March 31, Years Ended (Inception) to
1998 1997 December 31, March 31, 1998
(Unaudited) 1997 1996 (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss $( 198,298) $(44,612) $(143,137) $(238,686) $(6,585,804)
Adjustment to
reconcile net
loss to net cash
provided by oper-
ations:
Depreciation 516 0 0 0 219,926
Amortization of
deferred financing
costs 50,000 0 0 0 50,000
Stock issued for
interest 0 0 0 0 63,500
Contributed services 0 0 0 0 1,352,516
Increase(Decrease) in
accounts payable( 26,500) 28,217 17,749 24,407 2,349,098
Increase in
accrued interest 2,466 0 0 0 2,466
Net cash
(used) for
operating
activities ( 171,816) (16,395) (125,388) (214,279) (2,548,298)
Cash flows from invest-
ing activities:
Purchase of
equipment ( 36,027) 0 0 0 ( 255,437)
Net cash (used)
for investing
activities ( 36,027) ( 0) ( 0) 0 ( 255,437)
Cash flows from
financing activities:
Proceeds from
shareholder
loans (net) ( 18,589) 18,803 128,183 207,706 1,332,984
Proceeds from
notes payable 250,000 0 0 0 250,000
Proceeds from
issuance of
common stock 0 0 0 0 1,133,214
Increase
paid-in
capital 0 0 0 0 614,240
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-5
<TABLE>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
<CAPTION>
Three Months Ended August 24, 1989
March 31, Years Ended (Inception) to
1998 1997 December 31, March 31, 1998
(Unaudited) 1997 1996 (Unaudited)
<S> <C> <C> <C> <C> <C>
Purchase and
retirement
of treasury
stock $ 0 $ 0 $ 0 $ 0 $( 500,000)
Net cash
provided from
financing
activities 231,411 18,803 128,183 207,706 2,830,438
Net increase (decrease)
in cash 23,568 2,408 2,795 ( 6,573) 26,703
Cash at begin-
ning of period 3,135 340 340 6,913 0
Cash at end
of period $ 26,703 $ 2,748 $ 3,135 $ 340 $ 26,703
Supplemental Cash
Flow Information
Cash paid for
interest $ 0 $ 0 $ 0 $ 0 $ 0
Cash paid for
income taxes $ 380 $ 0 $ 776 $ 52 $ 3,437
Non-Cash Items:
Acquisition of prepaid
media costs $ $ 0 $ 396,090 $ 0 $ 396,090
Deferred financing
costs $ 250,000 $ 0 $ 0 $ 0 $ 250,000
Conversion
of liabilities $ 160,983 $ 0 $3,130,437 $ 0 $ 3,291,420
Reclassification of
redeemable
common stock $ 0 $ 0 $ 0 $ 0 $( 400,000)
Surrender of rights
to redeem common
stock $ $ 0 $ 400,000 $ 0 $ 400,000
Contributed
services $ $ 0 $ 270,928 $ 0 $ 1,081,588
Stock issued
for interest $ 0 $ 0 $ 0 $ 0 $ 63,500
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-6
<TABLE>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<CAPTION>
Deficit
Common Accumulated
Stock Additional During the Prepaid Total
Par Paid-in Development Media Stockholders'
Shares Value Capital Stage Costs Deficit
<S> <C> <C> <C> <C> <C> <C>
August 24,
1989 (Inception)
through
Dec 31,1992
(Unaudited) 558,200 $ 56 $ 978,484 $(4,190,584)$ 0 $(3,212,044)
1993 *;
Issuance
of Common
Stock 1,368,675 137 42,199 0 0 42,336
Net Loss 0 0 0 ( 266,889) 0 ( 266,889)
1994 *;
Issuance
of Common
Stock 95,050 10 $ 1,892 0 0 1,902
Contributed
Capital 0 0 457,250 0 0 457,250
Net Loss 0 0 0 ( 638,160) 0 ( 638,160)
1995 *;
Issuance
of Common
Stock 140,575 14 107,834 0 0 107,848
Issuance
of Common
Stock as
non-refund-
able prepaid
interest 12,500 1 63,499 0 0 63,500
Reclassification
of redeemable
Common Stock 0 0 ( 400,000) 0 0 ( 400,000)
* - Not covered by accompanying Auditors' Report.
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-7
<TABLE>
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
<CAPTION>
Deficit
Common Accumulated
Stock Additional During the Prepaid Total
Par Paid-in Development Media Stockholders'
Shares Value Capital Stage Costs Deficit
<S> <C> <C> <C> <C> <C> <C>
Contributed
Capital 0 $ 0 $ 397,856 $ 0 $ 0 $ 397,856
Net Loss 0 0 ( 910,050)$ 0 ( 910,050)
Balance at
December
31, 1995 2,175,000 $218 $ 1,649,014 $(6,005,683)$ 0 $(4,356,451)
Net Loss 0 $ 0 $ 0 $( 238,686)$ 0 $( 238,686)
Balance at
December
31, 1996 2,175,000 $218 $ 1,649,014 $(6,244,369)$ 0 $(4,595,137)
Net Loss 0 $ 0 $ 0 $( 143,137)$ 0 $( 143,137)
Acquisition of
prepaid
media costs 32,500 3 396,087 0 (396,090)
0
Conversion of
liabilities 235,000 24 3,130,413 0 0 3,130,437
Contributed
capital 0 0 270,928 0 0 270,928
Surrender of
rights to
redeem common
Stock 0 0 400,000 0 0 400,000
Balance at
December 31,
1997 2,442,500 $245 $ 5,846,442 $(6,387,506)$(396,090) $( 936,909)
(Unaudited)
Net Loss 0 $ 0 $ 0 $( 198,298)$ 0 $( 198,298)
Deferred
financing
costs 0 0 250,000 0 0
250,000
Conversion of
liabilities 0 0 160,983 0 0 160,983
Balance at March
31, 1998 2,442,500 $245 $ 6,257,425 $(6,535,804)$(396,090) $( 724,224)
The accompanying notes are an integral part of the financial statements.
</TABLE>
F-8
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF OPERATIONS, GOING CONCERN CONSIDERATIONS
(A) Organization
The Company was incorporated under the laws of the state of New York on
August 24, 1989.
(B) Nature of Operations
The Company was formed to provide commercial, passenger, cargo and mail
air transportation between New York and Russia.
Since inception, the Company's primary activities have been the raising of
capital, obtaining financing and obtaining Route Authority and approval from
the U.S. Department of Transportation. The Company has not yet commenced
revenue producing activities. Accordingly, the Company is deemed to be a
Development Stage Company.
The Company currently maintains office space at J.F.K. Airport, New York.
(C) Going Concern Considerations
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation of
the Company as a going concern. However, the Company has not generated any
revenues and sustained substantial losses during the development stage since
its inception and has an accumulated deficit at March 31, 1998 and December 31,
1997 of $6,535,804 (unaudited) and $6,387,506, respectively.
The Company's ability to continue as a going concern is dependent on its
ability to raise sufficient capital and/or obtain sufficient financing, to be
used for the commencement of operations and the satisfaction of current
obligations and ultimately to achieve profitable operations.
If the Company is unable to raise sufficient capital and/or obtain
sufficient financing, such as described in Note 9 (D), Proposed Public
Offering, it is doubtful that it will be able to commence scheduled air line
service. Management believes that if it is able to commence operations it will
be able to generate operating revenues, which in its judgement, shall be
adequate to fund all current expenses and retire currently outstanding debt.
As of March 31, 1998 the Company has not yet commenced its scheduled air
line service.
2. ACCOUNTING POLICIES
(A) Cash and Equivalents
The Company considers cash and cash equivalents to be all short-term
investments which have an initial maturity of three months or less.
(B) Prepaid Media Costs
On June 23, 1997 the Company entered into an agreement with Kent Trading,
Inc., a media placement company whereby, the Company exchanged 32,500 common
F-9
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Continued)
(B) Prepaid Media Costs (Continued)
stock shares, as negotiated with the management of the Company, for future
media placements in various international and national media publications, with
a current value of $396,090 as based on the related publications published
advertising rates. Kent Trading, Inc. may terminate the Agreement if the
closing of the proposed Public Offering has not occurred prior to August 30,
1998. The Company has recorded prepaid media costs as a reduction to equity,
in a manner similar to accounting for a stock subscription receivable. At such
time the Company utilizes the media placements, the Company will charge off the
related costs to expense.
The Company retains the right to resell the media placements to third
parties, although it has no current plans to do so. Although as current market
rates for media placements are stable, if rates were to decline the Company
could realize a loss on resale. To the extent that the carrying amount is
determined not to be realizable, it will be charged off to expense.
(C) Property and Equipment
The cost of property and equipment is depreciated over the estimated use-
ful lives of the related assets. Leasehold improvements are depreciated over
the lesser of the term of the related lease or the estimated lives of the
assets. Depreciation is computed on the straight line method for
financial reporting purposes and modified accelerated recovery method for
tax purposes.
(D) Start-up Activities
On July 5, 1990, the Company filed an application for a Certificate of
Authority to engage in foreign scheduled air transportation between New York
and St. Petersburg, Russia.
On March 28, 1991, the U.S. Department of Transportation granted to the
Company an exclusive Route Authority to fly between New York and Russia. The
Order found the company to be fit, willing and able to conduct scheduled
passenger service. However, the Order stipulated that if scheduled passenger
service did not commence within one year from the date of the Fitness
determination, March 28, 1991, the Route Authority would be revoked.
On September 20, 1991, the U.S. Department of Transportation granted the
Company an extension of time to commence operations, through April 1, 1992.
On April 14, 1992, the U.S. Department of Transportation granted a further
extension of time to commence operations, through August 31, 1992.
On April 8, 1993, the Company again requested an extension of time to commence
operations however, the U.S. Department of Transportation denied
the request.
On August 14, 1995, the Company re-filed its application with the U.S.
Department of Transportation for the Certificate of Route Authority.
On January 22, 1996, the U.S. Department of Transportation issued an Order
F-10
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Continued)
(D) Start-up Activities (Continued)
of Show Cause, whereby, they tentatively concluded that the Company is fit,
willing and able to provide scheduled air transportation between New York and
Russia and, should be issued a Certificate of Public Convenience and Necessity
authorizing such operations.
On February 26, 1996, the U.S. Department of Transportation issued a Final
Order thereby, authorizing the Company to engage in foreign scheduled air
transportation between New York and St. Petersburg, Russia.
On February 6, 1997, the U.S. Department of Transportation granted the Company
an extension of time to commence operations, through August 7, 1997.
On September 10, 1997, the U.S. Department of Transportation granted the
Company an extension of time to commence operations, through February 7, 1998.
On February 11, 1998, the U.S. Department of Transportation granted the Company
an extension of time to commence operations, through August 7, 1998.
Obtaining Federal Aviation Administration air carrier certification and meeting
Department of Transportation financial requirements are prerequisites to the
Company's commencement of revenue service.
Costs associated with the development and approval of the authorized route,
such as legal and consulting fees, have been written off in the period in which
the expense was incurred.
(E) Income Taxes
Deferred income taxes arise from temporary differences between the recording of
assets and/or liabilities reported for financial accounting and tax purposes
in different periods. Deferred taxes are classified as current or non-current,
depending on the classification of the assets and liabilities to which they
relate. Deferred taxes arising from temporary differences that are not related
to an asset or liability are classified as current or non-current depending on
the periods in which the temporary differences are expected to reverse. To
the extent the total of deferred tax assets are not realized, a reserve is
established.
(F) Accounting Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
(G) Fair Value of Financial Instruments
The Company considers the carrying value of its financial instruments (cash and
liabilities) to approximate their fair value.
F-11
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY and EQUIPMENT
Property and equipment at March 31, 1998 (Unaudited) consisted of the
following;
Office equipment $ 12,586
Automobiles 23,441
Total 36,027
Less, accumulated depreciation ( 516)
Total Property and Equipment $ 35,511
Depreciation expense charged to operations for the (Unaudited) three months
ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996
was $516, $0, $0 and $0, respectively.
The useful lives of property and equipment for purposes of computing
depreciation are;
Office equipment 5 - 7 years
Automobiles 5 years
4. DEFERRED FINANCING COSTS
(A) Bridge Loan
On February 27, 1998 the Company borrowed $250,000, a Bridge Loan (see Note 7)
and in consideration issued two-hundred fifty thousand (250,000) Warrants, to
be designated as "Class B Bridge Warrants". The Company has estimated the fair
value of the Warrants to be $250,000 as based on the Black-Scholes model of
option-pricing. The Company shall amortize deferred financing costs based on
the Interest Method, over a period of five (5) months beginning March 1, 1998
and ending July 31, 1998, the estimated period the loan will be outstanding.
For the three months ended March 31, 1998 (Unaudited) the Company charged
$50,000 to interest expense.
(B) Additional Bridge Loan
In June 1998, the Company anticipates borrowing $550,000, an "additional"
Bridge Loan (see Note 7) and in consideration plans to issue five-hundred fifty
thousand (550,000) Warrants, to be designated as "Class A Bridge Warrants".
The Company estimates the fair value of the Warrants to be $600,000 as based on
the Black-Scholes model of option-pricing. The Company shall amortize
deferred financing costs based on the Interest Method, over a period of two
(2) months beginning June 1998 and ending July 1998, the estimated period the
loan will be outstanding.
5. RELATED PARTY TRANSACTIONS
The Company's legal counsel, Steffanie Lewis, of the International Business
Law Firm, P.C. owns 190,000 shares of common stock at December 31, 1997 or
approximately 7.78% of the Company's issued and outstanding common stock. Ms.
Lewis was issued 150,000 common shares in June 1997 in exchange for legal work
performed in connection with various certifications, authorities and
financial
F-12
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS (Continued)
matters. She was previously issued 40,000 of common shares in exchange for the
first six months preparation of the 1990 application to the Department of
Transportation for Air Line Fitness Certification.
For the period beginning January 1990 through December 31, 1997 the total legal
costs incurred in the amount of $1,760,062 were for legal work performed by
Steffanie Lewis for the Company in connection with various certifications,
authorities and financial matters.
Legal costs incurred and charged to professional fees for the (Unaudited)
three months ended March 31, 1998 and 1997 and the years ended December 31,
1997 and 1996 total $21,500 $0, $4,875, $2,100, respectively.
At March 31, 1998 and December 31, 1997 the account payable to this shareholder
totals $0 and $0, respectively.
On June 30, 1997, Steffanie Lewis was issued 150,000 common shares, as
negotiated with the management of the Company, in exchange for the total due to
her, in the amount of $1,628,432.
Legal costs associated with the proposed Public Offering, as described in Note
9 (D) totaling $150,000 have not been accrued and are only payable in the event
of a successful offering and shall be charged against the Offering proceeds.
Additionally, other current accounts payable to shareholders at March 31, 1998,
(unaudited) and December 31, 1997, total $38,318 and $65,318, respectively.
On June 23, 1997, Airline Economics International, Inc., a shareholder, was
issued 10,000 common shares, as negotiated with the management of the Company,
in exchange for the total due them, in the amount of $110,695.
See Note 6 relating to Other Liabilities to shareholders.
On June 23, 1997, Igor Dmitrowsky, President of the Company and a shareholder,
relinquished the amount due to him totaling $22,142. Accordingly, the Company
has recorded Contributed Capital in the amount of $22,142.
On March 30, 1998, various shareholders including Igor Dmitrowsky, President of
the Company relinquished the amounts due to them totaling $160,983.
Accordingly, the Company recorded Contributed Capital in the amount of
$160,983.
6. NOTES PAYABLE - STOCKHOLDERS
In 1992 the Company issued Promissory Notes to certain shareholders in exchange
for $1,048,000. The Notes were due on demand and all interest was payable upon
principal repayment, at an annual rate of six and one half percent (6 1/2%),
from the date of issuance to the date of repayment.
On June 24, 1997 certain shareholders were issued 75,000 common shares, as
negotiated with the management of the Company, in exchange for the total due
them, in the amount of $1,369,168, inclusive of principal of $1,048,000 and
accrued interest of $321,168.
F-13
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. NOTES PAYABLE - STOCKHOLDERS (Continued)
Interest expense related to the above incurred for the (Unaudited) three months
ended March 31, 1998 and 1997 and the years ended December 31, 1997 and 1996,
totaled $0, $0, $0 and $68,120, respectively.
At March 31, 1998 (Unaudited) and December 31, 1997, interest expense related
to the above incurred since inception totals $321,168, $321,168, respectively.
In 1997 and 1996 the Company borrowed net $128,183 and $207,706, respectively,
from certain shareholders. The net borrowings are non-interest bearing and are
due on demand.
In 1995 the Company issued a short-term Promissory Note to a certain
shareholder in exchange for $50,000. The Company issued to this shareholder,
12,500 shares of common stock as a non-refundable prepayment of interest from
the date of the loan through repayment of the loan.
For the year ended December 31, 1995, the Company charged $63,500 to interest
expense for the shares issued in connection with the non-refundable interest
prepayment, based on an average price per share of $5.08.
7. NOTES PAYABLE
(A) Bridge Loan
On February 27, 1998 the Company borrowed $250,000, a Bridge Loan, from Hobbs
Melville & Co., Inc. The Note is due and payable in full on the date of and at
the time as, the closing of the proposed public offering of securities, at an
annual rate of interest of ten (10) percent per annum.
For and in consideration of the Bridge Loan, the Company has issued to Hobbs
Melville & Co., Inc. two-hundred fifty thousand (250,000) Warrants, to be
designated as "Class B Bridge Warrants", each entitling them to purchase one
share of Common Stock for $6.05 during the four (4) year period commencing one
year from the date of the closing of the proposed public offering. The Company
may redeem outstanding Warrants, once they become exercisable, at a price of
$.10 per warrant on a less than thirty (30) day prior notice, provided the
closing bid quotations of the common shares shall have exceeded $10 for ten
(10) consecutive trading days ending on the third day prior to the date on
which notice is given. (See Note 4)
In the event the Company fails to secure, maintain full force and effect, any
required license, permission, franchise, consent, approval,contract, lease
agreement, or other material requirement to operate its proposed airline
passenger service and/or fails to close the proposed public offering on or
before June 30, 1998, the Note shall become immediately due and payable.
(B) Additional Bridge Loan
In June 1998, the Company anticipates borrowing $550,000, an "additional"
Bridge Loan, from various private investors. The Notes shall be due on the
earlier of ninety (90) days from the date of the Note or the first break
F-14
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. NOTE PAYABLE
(B) Additional Bridge Loan (Continued)
of escrow on the Company's proposed public offering of securities, at an annual
rate of interest of ten (10)percent per annum.
For and in consideration of the "additional" Bridge Loan, the Company plans to
issue to the private investors five-hundred fifty thousand Warrants in
aggregate, designated as "Class A Bridge Warrants", each entitling them to
purchase one share of Common Stock for $6.05 during a five ( 5) year period
commencing six (6) months from the date of the closing of the proposed public
offering. The Company may redeem outstanding warrants, once they become
exercisable, at a price of $.10 per warrant on a less than thirty (30) day
prior notice, provided the closing bid quotations of the common shares shall
have exceed $10 for ten (10) consecutive trading days ending on the third day
prior to the date on which notice is given. (See Note 4)
In the event the Company fails to timely make any payments on the "additional"
Bridge Loan, defaults, ceases to carry on business on a regular basis, enters
into an agreement to sell substantially all of its assets, merges or
consolidates with or is acquired by any other business, makes an assignment for
the benefit of creditors, makes any election to wind up, or dissolves, the
"additional" Bridge Loan shall become immediately due and payable.
In the event the Company fails to make any amount payable under the
"additional" Bridge Loan before the Due Date, then such amount will bear
interest from and after the Due Date until paid at an annual rate of interest
equal to or greater of fifteen (15) percent, the advance rate to member banks
as established by the Federal Reserve Bank of New York plus five (5) percent or
the maximum rate permitted by law. In addition the Company shall pay a late
payment processing fee in an amount each month equal to six (6) percent of the
amount due. In addition, the Company will also pay the lender each month that
the note is in default a penalty of five thousand (5,000) shares of the
Company's common stock.
8. INCOME TAXES
At December 31, 1997, the Company has a net operating loss carryforward of
$5,072,844, which is available to offset future taxable income. The carry
forwards expire between the year 2006 and 2013. The Company is still liable
for certain minimum state taxes.
As of December 31, 1997, a net deferred tax benefit has not been reflected to
record temporary differences between the amount of assets and liabilities
recorded for financial reporting and income tax purposes due to the
establishment of a 100% valuation allowance relating to the uncertainty of
recoverability.
9. STOCKHOLDERS' DEFICIT
(A) Stock Options
In 1992, the Company granted options to purchase 52,300 shares of common stock,
at $66.67 per share, to certain private investors. These options
F-15
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (Continued)
(A) Stock Options (Continued)
expire upon the passing of thirty full calendar months after the Company has
made a public sale of securities in compliance with the Securities Act of 1933,
as amended, or the passing of twenty years from the date of said agreements,
whichever is earlier. As of March 31, 1998, no options have been exercised.
(B) Retirement of Stock
On November 4, 1992, the Company issued 12,500 shares of stock for $500,000 to
a private investor. On November 24, 1992, these shares were repurchased for
the same amount from the investor and subsequently retired.
(C) Reverse Stock Split
On August 24, 1995, the Board of Directors authorized and the majority of the
current shareholders ratified a ten for one reverse stock split of the
Company's $.0001 par value common stock.
On December 30, 1997, the Board of Directors authorized and the majority of the
current shareholders ratified a two for one reverse stock split of the
Company's $.0001 par value common stock.
All references in the accompanying financial statements to the number of
common shares and per share amounts have been restated to reflect the reverse
stock splits.
(D) Proposed Public Offering
In 1996 the Company had engaged an underwriter to underwrite the Company's
Initial Public Offering on a best-efforts basis. The Offering did not raise the
required minimum of $6,000,000 and was withdrawn. Subsequently, the Company
received an offer from Hornblower & Weeks, Inc. to underwrite the Company's
proposed Public Offering on a firm-commitment basis.
In June 1998, the Company entered into an agreement with Hornblower & Weeks,
Inc. to act as the Managing Underwriter and Madison Capital Markets Corp. as
the Co-Manager Underwriter, in connection with a proposed firm- commitment
Public Offering of securities and plans to file an amended registration
statement with the Securities Exchange Commission, as is described in Note 10
(A) (2).
The Company intends to offer for sale 1,100,000 shares of common stock of
$.0001 par value, at a price of $5.50 per share and 1,100,000 Redeemable Common
Stock Purchase Warrants at $.10 per Warrant. Each Warrant entitles the holder
to purchase one Share for $6.05 during the five (5) year period commencing six
months from the date of the proposed Public Offering.
The Agreement with the Underwriter sets forth that on the Effective Date,
before giving effect to all shares of Common Stock and Warrants to be sold in
the proposed public offering, the Common Stock issued and outstanding shall not
exceed 2,442,500 common shares.
F-16
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' DEFICIT (Continued)
(E) Stock Buy-Back Requirements
As of December 31, 1997 the Company was required to buy-back 25,000 shares at
$16 per share, from certain current investors, if in the event said investor
wanted to sell his/her common stock within the two (2) year Lock-up period and
was denied such a waiver by the Underwriter.
On June 23, 1997 all current investors with redemption options referred to
above surrendered their redemption options. Accordingly, the Company recorded
Additional Paid-in Capital in the amount of $400,000.
(F) Contributed Capital
The Company has recorded service contributions from certain key officers who
have worked for and on behalf of the Company. The service contribution amounts
have been calculated based on a normal rate of compensation, on either a full
or part time basis, as based on the number of hours worked by each individual.
The Company maintains no obligation, present or future, to pay or repay for
any and all service contributions received. Accordingly, the Company has not
recorded a liability for, accrued for, and/or accounted for any monetary
reserves in connection with the service contributions.
On June 23, 1997, certain of the Company's management relinquished the amount
due them for back-pay totaling $270,928. Accordingly, the Company has recorded
Contributed Capital in the amount of $270,928.
(G) Stock Issuance
The following schedule summarizes common shares issued for cash;
Year Number Range of
Issued of Shares Amounts Per Share
1989 250,000 $ 0.2000 to $ 0.2000
1990 136,300 $ 0.9766 to $ 20.0000
1991 32,700 $ 2.0000 to $ 20.0000
1992 139,200 $ 2.0000 to $ 20.0000
1993 1,368,675 $ 0.0040 to $ 20.0000
1994 95,050 $ 2.0000 to $ 20.0000
1995 140,575 $ 0.2000 to $ 15.7616
The following schedule summarizes common shares issued in non-cash
exchanges (See Notes 2 (B), 5 and 6).;
Year Number Range of
Issued of Shares Amounts Per Share
1995 12,500 $ 5.0800 to $ 5.0800
1997 267,500 $ 10.8562 to $ 18.2556
F-17
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES
(A) Commitments
(1) Lease Obligations
In October, 1995 the Company entered into a lease with Iceland Air, J.F.
Kennedy Airport, New York, to occupy space. The lease term is on a month to
month basis.
Currently, the Company is leasing space from Iceland Air for $1,200 per month
at J.F. Kennedy Airport, New York. Rent expense charged to operations for the
(Unaudited) three months ended March 31, 1998 and 1997 and years ended December
30, 1997 and 1996 totaled $9,600, $0, $12,000 and $13,200, respectively.
In January 1993, the Company leased office space from its President at his
residence. The lease term is on a month to month basis through December 31,
1998. Rent expense charged to operations for the (Unaudited) three months
ended March 31, 1998 and 1997 and years ended December 30, 1997 and 1996
totaled $957, $273, $5,215 and $5,392, respectively.
(2) Underwriter - Proposed Public Offering
In June 1998, the Company entered into an agreement with Hornblower & Weeks,
Inc. to act as the Managing Underwriter and Madison Capital Markets Corp as the
Co-Managing Underwriter, in connection with a proposed Public Offering of
securities.
The Agreement sets forth the following terms and conditions;
(a) The Managing Underwriter shall receive a dealer's concession of ten
percent (10%) of the proposed Public Offering price.
(b) The Managing Underwriter shall receive at closing of the proposed Public
Offering a non-accountable expense allowance of three percent (3%) of the total
offering. In June 1998, the Underwriter received a ten thousand ($10,000)
dollar non-refundable advance against the non-accountable expense
allowance.
Upon filing
of the registration statement in connection with the proposed public offering,
the Underwriter shall receive an additional advance of forty thousand ($40,000)
dollars.
(c) The Company shall sell to the Managing Underwriter five (5) year warrants
to purchase such number of shares of Common Stock and/or Warrants as shall
equal ten (10) percent of the number of shares of Common Stock and Warrants
(excluding the overallotment option) being underwritten for the account of the
Company at a price of the lesser of $.001 each or $100 in aggregate. The
Warrants shall be exercisable at any time during a period of four (4) years
commencing at the beginning of the second year after their issuance and sale at
a price equaling 110% of the respective initial public offering price.
F-18
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (Continued)
(3) Line of Credit
On March 16, 1998, the Company was granted a credit line in the amount of
$6,200,000 through December 31, 1998, with a foreign bank. Monies are
available as follows;
(a) When the Company registers a subsidiary in the Republic of
Latvia, pursuant to local applicable regulations and, opens
an account with the bank.
(b) This credit facility cannot be utilized for primary funding of
capital investments.
(c) Terms of the borrowing's will be determined at the borrowing
date. Upon receipt of a written notice furnished by the Company.
Such notice must be received fourteen days (14) in advance of the
requested borrowing date.
(d) The interest rate will be between ten (10) to fourteen (14) percent
per annum.
(B) Contingencies
(1) Scandinavian Airline Systems
The Company will be liable to Scandinavian Airline Systems (SAS), for expenses
incurred by SAS on behalf of the Company should the Company eventually purchase
an aircraft from SAS.
In 1992, the Company forwarded a deposit to SAS for the purchase of a Boeing
767 aircraft, which the Company has since forfeited. SAS incurred costs
totaling $114,000 beyond the initial deposits for the preparation of the
aircraft for the delivery and subsequent demodification back to SAS upon the
Company's failure to obtain financing. SAS has agreed to collect these amounts
at the time of any aircraft sale to the Company should such a sale occur.
Should no sale occur, the Company will not be liable to SAS for the $114,000
(2) Transaction Management, Inc.
On October 11, 1991, the Company was required by an arbitrator to pay
Transaction Management, Inc. (TMI) an unspecified "finders fee". The Company
refused to pay TMI and on December 1994 filed a motion to Reconsider, citing 17
substantial errors In Fact, in the prior court's Order.
On November 2, 1995, the court ordered that the Company's motion for
Reconsideration be denied.
In October 1996 the Federal Court of Appeals of the District of Columbia
released the Company from all TMI threat of liability and dismissed the
case.
F-19
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
10. COMMITMENTS AND CONTINGENCIES (Continued)
(B) Contingencies (Continued)
(3) Subscribers' Flight Coupon - Proposed Public Offering
At the closing, the Company will issue Flight Coupons to the subscribers in
its proposed Public Offering. For each 1,500 shares of common stock purchased,
the subscriber receives on Flight Coupon. One Flight Coupon plus $650 will
purchase two (2) Voyager Class round- trip tickets. Two (2) Flight Coupons
plus $650 will purchase two (2) Business Class round-trip tickets. Three (3)
flight Coupons plus $650 will purchase two (2) First Class round-trip tickets.
An estimate of the value of such a commitment by the Company cannot be
determined at this time. However, upon completion of the proposed Public
Offering, the Company will record deferred revenues and offset its costs of
rasing capital for all Subscribers' Flight Coupons issued.
(4) Compensation
The Board of Directors approves salaries for the Company's executive officers
as well as the Company's overall salary structure. For year one following the
closing of the proposed Public Offering, the rate of compensation for the
Company's executive officers is: (i) President $186,000, (ii) Vice-President
Marketing $82,000, and (iii) Vice-President Europe $68,000. Pursuant to
written agreement, during the 90-day period commencing once the offering
proceeds are released to the Company from the escrow account, the President and
the Vice Presidents will receive compensation reduced to an amount equal to 50%
of budgeted salaries. Upon commencement of flight services 100% of respective
budgeted salaries will be paid. To this date, the Company has paid officers no
salaries, nor otherwise have compensated officers. Board Directors are not
presently compensated and shall receive no compensation prior to commencement
of revenue service.
The following table identifies executive compensation to be paid. No executive
salaries have been paid to date and reduced salaries will not commence until
proceeds are available from the proposed Public Offering closes.
Name Position Salary
Igor Dmitrowsky President $186,000
Brian Glynn Vice-President Marketing 82,000
Andris Rukmanis Vice-President Europe 68,000
Inasmuch as the Company does not provide written individual contracts with its
personnel, for clarification purposes, the executives' agreement for the
temporarily reduced salaries was documented.
F-20
No dealer, salesman, or other person has been authorized to give any
information or to make any representations in connection with this Offering
other than those contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company, or by the Underwriters. This Prospectus does not
constitute an offer to buy any security other than the Securities offered by
this Prospectus, or an offer to sell or a solicitation of an offer to buy
any securities by any person in any jurisdiction in which such offer or
solicitation is not authorized or is unlawful. The delivery of this
Prospectus shall not, under any circumstances, create any implication that
the information herein contained is correct as of any time subsequent to the
date of this Prospectus.
TABLE OF CONTENTS
Page
Prospectus Summary
Risk Factors
Use of Proceeds
Dilution
Dividend Policy
Capitalization
Selected Financial Data
Management s Discussion and Analysis
of Financial Condition and Plan of Operations
Business
Management
Principal Stockholders
Certain Transactions
Description of Securities
Common Stock Eligible for Future Sale
Underwriting
Legal Matters
Experts
Available Information
Index to Financial Statements
Until , 1998 (25 days after the date of this
Prospectus), all dealers affecting transactions in the Common
Stock and the Warrants, whether or not participating in this
distribution, 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
allotments or subscriptions.
BALTIA AIR LINES
The New Way to Europe (Nasdaq)
1,100,000 Shares of Common Stock
and
1,100,000 Redeemable Common Stock Purchase Warrants
PROSPECTUS
Hornblower & Weeks, Inc.
_________________________________________
June , 1998
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Company's Bylaws, Article IV(19)&(20), provide that except for
willful negligence or intentional criminal conduct, the Company shall
indemnify its Directors, Chairman & President, Secretary, Officers and
Counsel against third party liability, including shareholder and/or
regulatory actions. Additionally, Sections 722-725 of the New York Business
Corporation Law provide for indemnification by the Company or the New York
State. There are no indemnification provisions contained in the Company's
Certificate of Incorporation. The Underwriting Agreement provides for
reciprocal indemnification for the Underwriter and the Company within the
meaning of Section 15 of the Securities Act.
Item 25. Other Expenses of Issuance and Distribution
The estimated expenses in connection with this offering are as follows:
SEC registration fee . . . . . . . . . . . . . . . . . . . .$ 10,163
NASD filing fee . . . . . . . . . . . . . . . . . . . . . . . 3,296
Nasdaq listing . . . . . . . . . . . . . . . . . . . . . . . 5,000
Transfer Agent's fees . . . . . . . . . . . . . . . . . . . . 1,000
Printing and engraving cost* . . . . . . . . . . . . . . . . . 4,320
Legal fees and expenses* . . . . . . . . . . . . . . . . . . 150,000
Accounting fees and expenses* . . . . . . . . . . . . . . . .45,000
Blue Sky fees and expenses* . . . . . . . . . . . . . . . . .10,000
Miscellaneous expenses* . . . . . . . . . . . . . . . . . . . 6,221
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 235,000
______________
* Indicates expenses that have been estimated for the purpose of filing.
Item 26. Recent Sales of Unregistered Securities
During the past five years, commencing 1/1/93, the Company sold
1,604,300 unregistered shares of common stock as stated below for cash,
using no underwriter, commissions, or underwriter discounts. Legends were
placed in the margin of all certificates sold setting forth the restriction
on transferability and sale.
Accredited investors purchased 297,813 shares for $3,311,860 under
exemption 4(6) of the Securities Act of 1933. In June 1997 the Company
converted $2,786,432 in liabilities owed to existing accredited shareholders
into 235,000 shares; and exchanged 32,500 shares for $400,000 in pre-paid
media placements with an accredited investor. In August 1993 the Company
sold 1,563 shares to an accredited investor for $25,000. From August through
December 1995, the Company sold 28,750 shares to eight accredited investors
for $100,428. The Company relied upon written notarized statements of net
worth from accredited investors in determining eligibility for such
exemption.
Small private investors, qualified as sophisticated and immediate
family, purchased 1,586,488 shares for $82,661 under exemption 4(2) of the
Securities Act of 1933 . From August 1994 through August 1995, five foreign
residents and nationals purchased 23,500 shares for $470 through one of the
Company's directors. The offers were made on a one-to-one personal basis to
five persons. In three periods, form April through August 1993, from July
through August 1994, and from January 1995 through March 1996, the Company's
officers, directors and significant employees purchased 1,566,363 shares for
$77,051 and six of their close friends purchased 6,625 shares for $5,140.
In February 1998, the Company issued 250,000 warrants ("Class B Bridge
Warrants") in connection with a Bridge Loan for $250,000. These warrants are
exercisable during the four-year period commencing one year form the
Effective Date. Otherwise terms of these warrants are identical to Warrants
offered to the public in the Offering. The holder of the Class B Bridge
Warrants is being registered with the Offering as a Securityholder.
In June 1998 the Company issued 575,000 warrants ("Class A Bridge
Warrants") in connection with a series of Bridge Loans in the aggregate
amount of $575,000. The terms of these warrants are the same as the
Warrants offered to the public in the Offering. The holders of the Class A
Bridge Warrants are being registered with the Offering as Securityholders.
The following is a list of persons to whom the Company sold securities
in each of the transactions listed:
Exemption 4(6)
Airline Economics, Inc.
Robert Long
Leonard Becker
Michael Pisani
Walter Comer
Michael & Mary Ries
Darrel Fox
Edward Taxin
Kent Trading, Inc.
David Yellis
Robert Krieble
Exemption 4(6) Issued in Connection with Bridge Loans
Hobbs Melville & Co., Inc.
Neil Jones
Socrates Skiadas
T.H. Holloway
Ron Rust
Hart Rotenberg
Metro Consulting
M.S. Arden Inc.
Brian Sly
Russell Development Association
Richard Charbit
David Marston
J. Walker Clark
Arian Jacob
Joseph Rotenberg
Harvey DeLott
Michael Ostro
Exemption 4(2)
Igor Dmitrowsky
Robert Hughes
Aina Dmitrowsky
Steffanie (Parker) Lewis
Emanuil Gelfand
Jennifer (Parker) Budde
Brian Glynn
Kathleen McGuire
Rita Gurvich
Nina Morozova
Walter Kaplinsky
Andris Rukmanis
Ellery Kaplinsky
Anita Schiff/Spielman
Olga Kaplinsky
Andris Shaurins
Regina Kaplinsky
Samuel Yellis
Exemption 4(6) private foreign investors
Olga Klasons
Alla Romanov
Ilona Priedite
Talivaldis Stinkurs
Harijs Rassa
Item 27. Exhibits
Exhibit No. Description of Exhibit
1.1 Underwriting Agreement - updated *
1.2 Selected Dealer Agreement (Included in Exhibit 1)
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Underwriters' Warrant (Included in Exhibit 1)
4.2 Warrant Agreement (Included in Exhibit 1)
4.3.1 Form of Common Stock
4.3.2 Warrant certificates
4.4 Insider lockup agreement with Underwriters (Included
in Exhibit 1)
5.1 Opinion re: legality - updated*
10.1 DOT Order 96-1-24 and Final Order 96-2-51
10.1.1 DOT Order 97-9-11
10.1.2 DOT Order 91-6-2, page 1
10.1.3 DOT Letter - extension 2-11-98*
10.2 Registered Trademarks "Baltia" and "Voyager Class"
10.3 W.R. Lazard
10.4 LATEKO - updated
10.4.1 Clearance by Secretary re: LATEKO
10.5 United Airlines' B747-100
10.6 Pegasus' B747-100*
10.7 LainBanka*
10.8 Financial Consulting Agreement (contained
in Exhibit 1)
10.09.1 February 1998 Bridge Loan Agreement*
10.09.2 June 1998 Bridge Loan Agreement used for each June 1998 Bridge
Loan*
10.10 Executive agreements for three months salary reduction
23.1 Consent of J.R. Lupo, P.A. CPA, auditors - updated*
23.2 Consent of Steffanie Lewis, Counsel (included in
Exhibit 5) - updated*
23.3 Consent of Airline Economics, industry analysts
- updated*
28.1 Evaluation of registrant's forecast by Airline Economics
Int'l, Inc.
28.2 Evaluation of JFK-LED route by Airline Economics Int'l,
Inc.
28.3 Dept. of Commerce profile on St. Petersburg
28.4 Baltia's Fares JFK-LED
28.5 Passenger Traffic calculation (includes Dept. of
Commerce statistics)
28.6 IATA forecast growth rates 1993-97 (Commercial Aviation
Report)
28.7 SAS report on its 93/94 North American traffic
28.8 Bureau of the Census air cargo statistics
28.9 Letters from cargo forwarders
28.10 B747-100 dispatch reliability study by Boeing
28.11 Letters on fuel availability at JFK and LED
28.12 Route Map
Except those specifically marked with an asterisk, all exhibits are current
as previously filed in SB-2 (File No. 333-2006-NY) and pre-effective
amendments No. 1, 2, 4 and 5 thereto, or with the current SB-2 registration,
File No. 333-37409.
Item 28. Undertakings
(a) The undersigned 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 undersigned registrant will:
(1) File, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement: (i) Include any
prospectus required by Section 10(a)(3) of the Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually or
in the aggregate, represent a fundamental change in the information set
forth in the registration statement;
(iii) Include any additional or changed material information on the plan
of distribution;
(2) For determining liability under the Securities Act, treat each such
post-effective amendment as a new registration statement of the securities
offered, and the offering of such securities at the time shall be deemed to
be the initial bona fide offering;
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(c) Indemnification. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers or
controlling persons of the registrant pursuant to the provisions referred to
in Item 24 of this registration statement or otherwise, the registrant has
been advised that in the opinion of the Securities Exchange Commission such
indemnification is against public policy as expressed in the Securities 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 or the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(d) Rule 430A. The undersigned registrant will:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in the form
of a prospectus filed by the small business issuer under Rule 424(b)(1) or
(4) or 497(h) under the Securities Act as part of this registration
statement as of the time the Commission declared it effective.
(2) For any liability under the Securities Act, treat each post-effective
amendment that contains a form of prospectus as a new registration statement
for the securities offered in the registration statement, and that the
offering of the securities at that time as the initial bona fide offering of
those securities.
(e) Request of Acceleration of Effective Date. The Company may elect to
request acceleration of the registration statement under Rule 461 of the
1933 Act.
As filed with the Securities and Exchange Commission
on October 8, 1997
Registration No. 333-37409
___________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
Baltia Air Lines, Inc.
Exhibits
Baltia Air Lines, Inc.
Exhibit Index
Exhibit No. Description of Exhibit
1.1 Underwriting Agreement - updated *
1.2 Selected Dealer Agreement (Included in Exhibit 1)
3.1 Articles of Incorporation
3.2 Bylaws
4.1 Underwriters' Warrant (Included in Exhibit 1)
4.2 Warrant Agreement (Included in Exhibit 1)
4.3.1 Form of Common Stock
4.3.2 Warrant certificates
4.4 Insider lockup agreement with Underwriters (Included
in Exhibit 1)
5.1 Opinion re: legality - updated*
10.1 DOT Order 96-1-24 and Final Order 96-2-51
10.1.1 DOT Order 97-9-11
10.1.2 DOT Order 91-6-2, page 1
10.1.3 DOT Letter - extension 2-11-98*
10.2 Registered Trademarks "Baltia" and "Voyager Class"
10.3 W.R. Lazard
10.4 LATEKO - updated
10.4.1 Clearance by Secretary re: LATEKO
10.5 United Airlines' B747-100
10.6 Pegasus' B747-100*
10.7 LainBanka*
10.8 Financial Consulting Agreement (contained
in Exhibit 1)
10.09.1 February 1998 Bridge Loan Agreement*
10.09.2 June 1998 Bridge Loan Agreement used for each June 1998
Bridge Loan*
10.10 Executive agreements for three months salary reduction
23.1 Consent of J.R. Lupo, P.A. CPA, auditors - updated*
23.2 Consent of Steffanie Lewis, Counsel (included in
Exhibit 5) - updated*
23.3 Consent of Airline Economics, industry analysts
- updated*
28.1 Evaluation of registrant's forecast by Airline Economics
Int'l, Inc.
28.2 Evaluation of JFK-LED route by Airline Economics Int'l,
Inc.
28.3 Dept. of Commerce profile on St. Petersburg
28.4 Baltia's Fares JFK-LED
28.5 Passenger Traffic calculation (includes Dept. of
Commerce statistics)
28.6 IATA forecast growth rates 1993-97 (Commercial Aviation
Report)
28.7 SAS report on its 93/94 North American traffic
28.8 Bureau of the Census air cargo statistics
28.9 Letters from cargo forwarders
28.10 B747-100 dispatch reliability study by Boeing
28.11 Letters on fuel availability at JFK and LED
28.12 Route Map
Except those specifically marked with an asterisk, all exhibits
are current as previously filed in SB-2 (File No. 333-2006-NY)
and pre-effective amendments No. 1, 2, 4 and 5 thereto,
or with the current SB-2 registration, File No. 333-37409.
1,100,000 SHARES OF COMMON STOCK
AND
1,100,000 REDEEMABLE COMMON STOCK PURCHASE WARRANTS
BALTIA AIR LINES, INC
UNDERWRITING AGREEMENT
New York, New York
June __, 1998
Hornblower & Weeks Inc.
(As Representative of the Several Underwriters
Named in Schedule I as Attached Hereto)
110 Wall Street
New York, New York 10005
Dear Sirs/Madams:
BALTIA AIR LINES, INC., a New York corporation (the "Company"),
proposes to issue and sell to Hornblower & Weeks Inc. ("you" or the
"Representative") and the other underwriters named in Schedule I hereto (you
and such other underwriters, each being herein individually referred to as
an "Underwriter" and collectively referred to as the "Underwriters", which
term shall also include any waiver), pursuant to this Underwriting
Agreement (the "Agreement"), an aggregate of 1,100,000 shares of common
stock par value $.01 per share(the "Shares" or "Common Stock"), of the
Company, and 1,100,000 redeemable common stock purchase warrants (the
"Warrants")(collectively the "Securities"). Each Warrant shall entitle the
holder thereof to purchase one share (a "Warrant Share") of Common Stock on
the terms and subject to the conditions of that certain Warrant Agreement,
of even date herewith (the "Warrant Agreement"), among the Company and you.
The Warrant Agreement is incorporated herein by reference hereto. In
addition, solely to cover over-allotments, if any, the Company proposes to
grant to the Underwriters the option (the "Over-Allotment Option") referred
to in Paragraph 2(b) hereof to purchase all or any part of an aggregate of
150,000 additional Securities on the terms and subject to the conditions
therein provided
For the purposes of this Agreement, the "Company" shall mean
BALTIA AIR LINES, INC., a New York corporation, together with each
subsidiary of the Company, and the term "Representative" shall mean
Hornblower & Weeks.
You have advised the Company that, as Representative of the
several Underwriters named in Schedule I hereto, the Underwriters, acting
severally and not jointly, desire to purchase the Securities in the amounts
set forth opposite their respective names in Schedule I hereto. The Company
confirms the agreements made by the Company with respect to the purchase of
the Securities by the Underwriters, as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with the Representative and the
several Underwriters thatt:
(a) A registration statement (File No.: 333-37409) on Form
SB-2 relating to the public offering of the Securities, including a
preliminary form of prospectus, copies of which have heretofore been
delivered to the Underwriters, has been prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the rules and regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder, and
has been filed with the Commission under the Act. The Company has prepared
in the same manner and proposes to file, prior to the effective date of such
registration statement, one or more additional amendments to such
registration statement, including a final form of prospectus, copies of
which shall be delivered to you. For purposes of this Agreement,
"Preliminary Prospectus" shall mean each prospectus filed pursuant to Rule
430 of the Rules and Regulations. For purposes of this Agreement, the
registration statement (including all financial schedules and exhibits) as
amended at the time it becomes effective and the final prospectus included
therein are respectively referred to herein as the "Registration Statement"
and the "Prospectus", except that (i) if the prospectus first filed by the
Company pursuant to Rule 424(b) of the Rules and Regulations shall differ
from said prospectus as then amended, the term "Prospectus" shall mean the
prospectus first filed pursuant to Rule 424(b), and (ii) if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and
prior to the Option Closing Date (as hereinafter defined), the terms
"Registration Statement" and "Prospectus" shall include such registration
statement and prospectus as so amended, and the term "Prospectus" shall
include the Prospectus as so supplemented, or both, as the case may be.
(b) At the time the Registration Statement becomes effective
and at all times subsequent thereto up to the Option Closing Date:
(i) the Registration Statement and Prospectus will
in all respects conform to the requirements of the Act and the Rules and
Regulations; and
(ii) neither the Registration Statement nor the
Prospectus will include any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to make
statements therein not misleading; provided, however, that the Company makes
no representations, warranties or agreements as to information contained in
or omitted from the Registration Statement or Prospectus in reliance upon,
and in conformity with, written information furnished to the Company by or
on behalf of the Underwriters specifically for use in the preparation
thereof, it being understood and agreed that the statements set forth in the
Prospectus on page __ with respect to stabilization, under the heading
"Underwriting," ["RISK FACTOR -- LACK OF EXPERIENCE OF REPRESENTATIVE"] and
the identity of counsel to the Underwriters under the heading "Legal
Matters" constitute 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.
(c) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with full power and authority (corporate
and other) to own its properties and conduct its business as described in
the Prospectus and is duly qualified to do business as a foreign corporation
and is in good standing in all other jurisdictions in which the nature of
its business or the character or location of its properties requires such
qualification, except where failure to so qualify will not, singly or in the
aggregate, materially affect the Company's business, properties or financial
condition.
(d) The authorized, issued and outstanding capital stock of
the Company as of December 31, 1997 is as set forth in the Prospectus under
"Capitalization;" all of 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 securities have been issued and 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 Company have been granted or entered into by the
Company, except as described in the Registration Statement; and the Common
Stock and Warrants conform to all statements relating thereto contained in
the Registration Statement and Prospectus.
(e) The Shares and Warrants Shares are duly authorized, and
when issued and delivered pursuant to this Agreement and/or Warrant
Agreement, as the case may be, will be duly authorized, validly issued,
fully paid and non-assessable and free of preemptive rights of any security
holder of the Company or any other third party, and the holders of any of
the Shares or Warrant Shares are not and will not be subject to personal
liability by reason of being such holders. Neither the filing of the
Registration Statement nor the offering or sale of the Securities as
contemplated in this Agreement gives rise to any rights, other than those
which have been waived or satisfied, for or relating to the registration of
any shares of Common Stock or other securities of the Company, except as
described in the Registration Statement.
(f) This Agreement has been duly and validly authorized,
executed and delivered by the Company and, assuming due execution of this
Agreement by the other parties hereto, constitutes a valid and binding
obligation of the Company enforceable against the Company in accordance with
its terms; and the Over-Allotment Option, Warrant Agreement, [LIST OTHER
AGREEMENTS HERE] have been duly and validly authorized, by the Company and,
assuming due execution of the Over-Allotment Option, Warrant Agreement,
[LIST OTHER AGREEMENTS HERE] by the Company, Representative and all other
parties to each of said agreements, will constitute valid and binding
obligations of the Company enforceable against the Company in accordance
with their respective terms, except as enforceability may be limited by
bankruptcy, insolvency or other laws affecting the rights of creditors
generally and the application of general principals of equity and equitable
remedies. The Company has full power and lawful authority to authorize,
issue and sell the Securities, and the Shares and Warrants comprising the
Securities (including the Warrant Shares issuable upon exercise of the
Warrants included in the Securities) to be sold by it hereunder on the terms
and conditions set forth herein, and no consent, approval, authorization or
other order of any governmental authority is required in connection with
such authorization, execution and delivery, except such as may be required
under the Act or state securities laws.
(g) Except as described in the Prospectus, the Company is not
in violation, breach or default of or under, and consummation of the
transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach of, any of the terms
or provisions of, or constitute a default under, or result in the creation
or imposition of any lien, charge or encumbrance upon any of the property or
assets of the Company pursuant to the terms of, any indenture, mortgage,
deed of trust, loan agreement or other agreement or instrument to which the
Company is a party or by which the Company is a party or by which the
Company may be bound or to which any of the property or assets of the
Company is subject, nor will such action result in any violation of the
provisions of the Certificate of Incorporation or By-laws of the Company, as
amended to the date hereof, or any statute or any order, rule or regulation
applicable to the Company of any court or regulatory authority or other
governmental body having jurisdiction over the Company.
(h) Subject to the qualifications stated in the Prospectus,
the Company has good and marketable title to all properties and assets
described in the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances or restrictions, except such as are not, singly or in
the aggregate, materially significant or important in relation to its
business; all of the material leases and subleases under which the Company
is the lessor or sublessor of properties or assets or under which the
Company holds properties or assets as lessee or sublessee as described in
the Prospectus are in full force and effect, and, except as described in the
Prospectus, the Company is not in default in any material respect with
respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company as lessor, sublessor, lessee or sublessee under any of the leases or
subleases mentioned above, or affecting or questioning the right of the
Company to continued 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 owns or leases all such properties
described in the Prospectus as are necessary to its operations as now
conducted and, except as otherwise stated in the Prospectus, as proposed to
be conducted as set forth in the Prospectus.
(i) JR Lupo, P.A. CPA who have given their report 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.
(j) The financial statements of the Company, together with
related notes and schedules, set forth in the Registration Statement and
Prospectus present fairly the financial position and results of operations
and changes in financial position of the Company on the basis stated in the
Registration Statement, at the respective dates and f or the respective
periods to which they apply. Said statements and related notes have been
prepared in accordance with generally accepted accounting principles applied
on a basis which is consistent during the periods involved. No other
financial statements are required by Form SB-2 or otherwise to be included
in the Registration Statement and Prospectus.
(k) Subsequent to the respective dates as of which information
is given in the Registration Statement and Prospectus, the Company has not
incurred any liabilities or obligations, direct or contingent, not in the
ordinary course of business, or entered into any transaction not in the
ordinary course of business, which is material to the business of the
Company, and there has not been any change in the capital stock of, or any
incurrence of long-term debt by, the Company or any issuance of options,
warrants or other rights to purchase the capital stock of the Company or any
adverse change or any development involving, so far as the Company can now
reasonably foresee, a prospective adverse change in the condition (financial
or otherwise), net worth, results of operations, business, key personnel or
properties of the Company which would be material to the business or
financial condition of the Company and the Company has not become a party
to, and neither the business nor the property of the Company have become the
subject of, any material litigation whether or not in the ordinary course of
business.
(l) Except as set forth in the Prospectus, there is not now
pending or, to the knowledge of the Company, threatened, any action, suit or
proceeding to which the Company is a party before or by any court or
governmental agency or body, which might result in any material adverse
change in the condition (financial or otherwise), business prospects, net
worth, or properties of the Company, nor are there any actions, suits or
proceedings related to environmental matters or related to discrimination on
the basis of age, sex, religion or race; and no labor disputes involving the
employees of the Company exist or are imminent which might be expected to
adversely affect the conduct of the business, property or operations or the
financial condition or earnings of the Company.
(m) Except as disclosed in the Prospectus, the Company has
filed all necessary federal, state and foreign income, corporate and
franchise tax returns and has paid all taxes shown as due thereon; and there
is no tax deficiency which has been or to the knowledge of the Company could
reasonably be asserted against the Company.
(n) The Company has sufficient licenses, permits and other
governmental authorizations currently required for the conduct of its
business or the ownership of its property as described in the Prospectus and
is in all material respects complying therewith and owns or possesses
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade-names, trademark registrations, service
mark registrations, copyrights and licenses necessary for the conduct of
such business and has not received any notice of conflict with the asserted
rights of others in respect thereof. No default exists, and no event has
occurred which, with notice or lapse of time or both, would constitute a
default in the due performance and observance of any material term, covenant
or condition of any material license, indenture, mortgage, deed of trust,
lease or other agreement or instrument to which the Company is a party or by
which the Company or any of its properties is bound or may be affected in
any material adverse respect with regard to the property, business or
operations of the Company. To the best knowledge of the Company, none of
the activities or business of the Company are in violation of, or cause the
Company to violate, any law, rule, regulation or order of the United States,
any state, province, county or locality, or of any agency or body of the
United States, or of any state, province, county or locality, or any
jurisdiction in which it operates or does business, the violation of which
would have a material adverse impact, singly or in the aggregate, upon the
condition (financial or otherwise) , business, property, prospective results
of operations, or net worth of the Company.
(o) The Company has not, directly or indirectly, at any time:
(i) made any contributions 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 or foreign
governmental officer or official, or other person charged with similar
public or quasi-public duties, other than payments or contributions required
or allowed by applicable law. The Company's internal accounting controls
and procedures are sufficient to cause the Company to comply in all material
respects with the Foreign Corrupt Practices Act of 1977, as amended.
(p) On the Closing Dates (hereinafter defined), all transfer
or other taxes, (including franchise, capital stock or other tax, other than
income taxes, imposed by any jurisdiction) if any, which are required to be
paid in connection with the sale and transfer of the Securities, and the
Shares and Warrants comprising the Securities, to the Underwriters hereunder
will have been fully paid or provided for by the Company and all laws
imposing such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which
are, under the Rules and Regulations, required to be filed as exhibits to
the Registration Statement have been so filed.
(r) The Company has not, directly or indirectly, taken any
action designed to cause or result in, or which has constituted or which
might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the
sale or resale of the Securities offered hereby and/or the Shares and
Warrants comprising the Securities.
(s) The Company has no subsidiaries.
(t) The Company is in compliance with all federal and state
laws, rules and regulations relating to consumer protection, occupational
safety and health and to the storage, handling or transportation of
hazardous or toxic materials and the Company has received all permits,
licenses or other approvals required of the Company under applicable federal
and state occupational safety and health and environmental laws and
regulations to conduct its business and the Company is in compliance with
all terms and conditions of any such permit, license or approval, except any
such violation of law or regulation, failure to receive required permits,
licenses or other approvals which would not, singly or in the aggregate,
result in a material adverse change in the condition (financial or
otherwise), business, net worth or results of operations of the Company,
except as may be described in or contemplated by the Prospectus.
(u) No labor dispute with the employees of the Company exists
or is threatened or imminent that could result in a material adverse change
in the condition (financial or otherwise), business, net worth or results of
operations of the Company, except as may be described in or contemplated by
the Prospectus.
(v) Except as may be disclosed in the Prospectus, the Company
has not maintained or contributed to any deferred compensation, profit
sharing, savings, retirement, pension or other benefit plan or arrangement
with or for the benefit of any person resulting from a relationship with the
Company ("Pension Plans"); there has been no violation of the reporting and
disclosure requirements imposed either under the Employees Retirement Income
Security Act of 1974, as amended ("ERISA"), or the Internal Revenue Code of
1986, as amended (the "Code"), for which a penalty has been or may be
imposed with respect to such Pension Plan, if any exists; there is no
litigation, arbitration, claim, governmental or other proceeding (formal or
informal), or investigation pending, threatened, or in prospect (or any
reasonable basis therefore known to the Company) with respect to any of such
Pension Plan or with respect to any fiduciary, administrator, or sponsor (in
its capacity as such) of any of such Pension Plans, if any exists; each of
such Pension Plans, if any exists, is in compliance with ERISA and the Code
and there is no material pending or threatened litigation relating to said
plan and the Company has not engaged in any transaction with respect to any
of such Pension Plans which could subject the Company to a tax or penalty
under the Code or ERISA; and no liability under ERISA has been or is
expected to be incurred by the Company with respect to any of such Pension
Plans.
(w) The Company has not entered into any agreement pursuant to
which any person is entitled either directly or indirectly to compensation
from the Company for services as a finder in connection with the proposed
public offering.
(x) The Securities, Shares and Warrants have been approved for
quotation on the Nasdaq Small Cap Market ("Nasdaq") and Boston Stock
Eschange ("BSE").
(y) Except as disclosed in the Prospectus, no officer,
director or shareholder of the Company, or any "affiliate" or "associate"
(as these terms are defined in Rule 405 promulgated under the Rules and
Regulations) of any of the foregoing persons or entities has or has had,
either directly or indirectly, (i) an interest in any person or entity which
(A) currently furnishes or sells services or products which are furnished or
sold or are proposed to be furnished or sold by the Company, or (B)
purchases from or sells or furnishes to the Company and goods or services,
or (ii) a beneficial interest in any contract or agreement to which the
Company is a party or by which it may be bound or affected, which in any
such case is required to be so disclosed. There are no existing agreements,
arrangements, understandings or transactions, or proposed agreements,
arrangements, understandings or transactions, between or among the Company
on the one hand, and any officer, director or shareholder owing in excess
of 5% of the Common Stock of the Company, or any affiliate or associate of
any of the foregoing persons or entities, on the other hand, required by the
Rules and Regulations to be disclosed in the Prospectus, except as disclosed
therein.
(z) The minute books of the Company contain a complete summary
of all meetings, and actions of the directors and shareholders of the
Company, since the time of its incorporation, and reflect all transactions
referred to in such minutes accurately in all respects and true and complete
copies of such minutes have been delivered to the representative.
(aa) No holders of any securities of the Company or of any
options, warrants or other convertible or exchangeable securities of the
Company has any anti-dilution rights with respect to any securities of the
Company except as described in the Prospectus.
(bb) The Company has entered into the Warrant Agreement
substantially in the form filed as an exhibit to the Registration Statement
with American Stock Transfer and Trust Company (the "Warrant Agreement").
The Warrant Agreement has been duly and validly authorized by the Company
and, assuming due execution by the parties thereto other than the Company,
constitutes a valid and legally binding agreement of the Company,
enforceable against the Company in accordance with its terms, except (i) as
such enforceability may be limited by bankruptcy, insolvency, reorganization
or similar laws affecting creditors' rights generally; (ii) as
enforceability of any indemnification provisions may be limited under the
Federal and state securities laws, and (iii) that the remedy of specific
performance and injunctive and other forms of equitable relief may be
subject to equitable defenses and to the discretion of the court before
which any proceeding therefore may be brought.
(cc) The Company (i) has not filed a registration statement
which is the subject of any pending proceeding or examination under Section
8 of the Securities Act, or is the subject of any refusal order or stop
order thereunder; (ii) is not subject to any pending proceeding under Rule
261 of the Securities Act or any similar rule adopted under Section 3(b) of
the Securities Act, or to an order entered thereunder; (iii) has not been
convicted of any felony or misdemeanor in connection with the purchase or
sale of any security or involving the making of any false filing with the
Commission; (iv) is not subject to any order, judgment, or decree of any
court of competent jurisdiction temporarily, preliminarily or permanently
restraining or enjoining, the Company from engaging in or continuing any
conduct or practice in connection with the purchase or sale of any security
or involving the making of any false filing with the Commission; or (v) is
not subject to a United States Postal Service false representation order
entered under Section 3005 of Title 39, United States Code; or a temporary
restraining order or preliminary injunction entered under Section 3007 of
Title 39, United States Code, with respect to conduct alleged to have
violated Section 3005 of Title 39, United States Code. None of the
Company's directors, officers, or beneficial owners of five percent (5%) or
more of any class of its equity securities (i) has been convicted of any
felony or misdemeanor in connection with the purchase or sale of any
security involving the making of a false filing with the Commission, or
arising out of the conduct of the business of an underwriter, broker,
dealer, municipal securities dealer, or investment advisor; (ii) is subject
to any order, judgment, or decree of any court of competent jurisdiction,
temporarily, preliminarily or permanently enjoining or restraining, such
person from engaging in or continuing any conduct or practice in connection
with the purchase or sale of any security, or involving the making of a
false filing with the Commission, or arising out of the conduct of the
business of an underwriter, broker, dealer, municipal securities dealer, or
investment adviser; (iii) is subject to an order of the Commission entered
pursuant to section 15(b), 15B (a) or 15B (c) of the Securities Exchange Act
of 1934 (the "1934 Act"), or is subject to an order of the Commission
entered pursuant to Section 203 (e) or (f) of the Investment Advisers Act of
1940; (iv) is suspended or expelled from membership in, or suspended or
barred from association with a member of, an exchange registered as a
national securities exchange pursuant to Section 6 of the 1934 Act, an
association registered as a national securities association under Section
15A of the 1934 Act, or a Canadian securities exchange or association for
any act or omission to act constituting conduct inconsistent with just and
equitable principles of trade; or (v) is subject to a United States Postal
Service false representation order entered under Section 3005 of Title 39,
United States Code; or is subject to a restraining order or preliminary
injunction entered under Section 3007 of Title 39, United States Code, with
respect to conduct alleged to have violated Section 3005 of Title 39, United
States Code.
(dd) None of the Company's obligations to any third party are
secured by any of the Company's outstanding securities.
2. Purchase, Delivery and Sale of the Securities.
(a) Subject to the terms and conditions of this Agreement, and
upon the basis of the representations, warranties, and agreements herein
contained, the Company agrees to issue and sell to the several Underwriters,
and the Underwriters, severally and not jointly, agree to buy from the
Company the number of Securities set forth opposite their respective names
of Schedule I hereto, at $5.50 per Share (less a discount/commission of ten
(10%) percent), at the place and time hereinafter specified, an aggregate of
1,100,000 Shares (the "First Shares") and $.10 per Warrant (less a
discount/commission of ten (10%) percent), at the place and time hereinafter
specified, an aggregate of 1,100,000 Warrants (the "First
Warrants")(collectively "First Securities").. The initial Public Offering
price shall be $5.50 per Share.
Delivery of the First Securities, against payment therefore, shall
take place at the offices of the Representative, 110 Wall Street, New York,
New York 10005 (or at such other place as may be designated by agreement
between you and the Company) at 10:00 a.m., New York time, on June __, 1998,
or at such later time and date as you may designate, but in no event later
than 10:00 a.m. on June ____, 1998, such time and date of payment and
delivery for the First Securities being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and
agreements herein contained, the Company hereby grants the Over-Allotment
Option to the several Underwriters to purchase, severally and not jointly,
all or any part of an aggregate of an additional 150,000 Securities (the
"O/A Option Securities") at the same price per Securities as the
Underwriters shall pay for the First Securities being sold pursuant to the
provisions of Paragraph 2(a) hereof. The Over-Allotment Option may be
exercised within 45 days after the effective date of the Registration
Statement upon notice by the Representative to the Company advising as to
the amount of O/A Option Securities as to which the Over-Allotment Option is
being exercised, the names and denominations in which the certificates for
the Shares and Warrants constituting such O/A Option Securities are to be
registered and the time and date when such certificates are to be delivered.
Such time and date shall be determined by the Representative but shall not
be earlier than four nor later than ten full business days after the
exercise of the Over-Allotment Option, nor in any event prior to the First
Closing Date, and such time and date is referred to herein as the "O/A
Option Closing Date." Upon exercise of the Over-Allotment Option as
provided herein, the Company shall become obligated to sell to the
Underwriters and, subject to the terms and conditions herein set forth, the
Underwriters shall become obligated to purchase from the Company the same
percentage of the total number of the O/A Option Securities as to which the
Underwriters are then exercising the Over-Allotment Option as such
Underwriters are obligated to purchase of the aggregate number of First
Securities, as adjusted by the Representative in such manner as the
Representative deems advisable to avoid fractional Securities. If the
Over-Allotment Option is exercised as to all or any portion of the O/A
Option Securities, one or more certificates in definitive form for the
Shares and Warrants constituting such O/A Option Securities, and payment
therefore, shall be delivered on the related O/A Option Closing Date in the
manner, and upon the terms and conditions, set forth in Paragraph 2(a)
hereof, except that reference therein to the First Securities and the First
Closing Date shall be deemed, for purposes of this Paragraph 2(b), to refer
to such O/A Option Securities and O/A Option Closing Date, respectively.
Delivery of the O/A Option Securities, against payment therefore, shall take
place at the offices of the Representative, 110 Wall Street, New York, New
York 10005. The Over-Allotment Option granted hereunder may be exercised
only to cover over-allotments in the sale by the Underwriters of the First
Securities referred to in Paragraph 2(a) above.
(c) The Company will make the certificates for the Shares and
warrants comprising the Securities to be purchased by the Underwriters
hereunder available to the Representative for checking at least one full
business days prior to the First Closing Date or O/A Option Closing Date
(which are collectively referred to herein as the "Closing Dates"). The
certificates shall be in such names and denominations as you may request,
provided that such request is given at least three full business days prior
to the respective Closing Dates. Time shall be of the essence and delivery
at the time and place specified in this Agreement is a further condition to
the obligations of the Underwriters.
Definitive certificates in negotiable form representing the Shares
and Warrants comprising the Securities to be purchased by the Underwriters
hereunder will be delivered by the Company to you for the Underwriters'
respective accounts on the Closing Dates, against payment of the applicable
purchase price by the respective Underwriters, by certified or bank
cashier's checks in New York Clearing House funds, payable to the order of
the Company.
You have advised the Company that each Underwriter has authorized
you to accept delivery of the Securities such Underwriter has agreed to
purchase hereunder, to make payment and to deliver a receipt therefore.
You, individually and not as the Representative of the Underwriters, may
(but shall not be obligated to) make payment for any Securities to be
purchased by any Underwriter whose funds shall not have been received by you
by the Closing Date for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
It is understood that the Underwriters propose to offer the
Securities to be purchased hereunder to the public upon the terms and
conditions set forth in the Registration Statement, after the Registration
Statement becomes effective. Immediately upon effectiveness of the
Registration Statement, the Underwriters shall make a public offering of the
Securities (other than to residents of or in any jurisdiction in which
qualification of the Securities is required and has not become effective) at
the price and upon the other terms set forth in the Prospectus. The
Representative may from time to time increase or decrease the public
offering price after distribution of the Securities has been completed to
such extent as the Representative, in its sole discretion deems advisable.
The Underwriters may enter into one or more agreements as the Underwriters,
in each of their sole discretion, deem advisable with one or more Board of
Directors who shall act as dealers in connection with such public offering.
3. Covenants of the Company. The Company covenants and agrees with
the Representative and Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement to become effective and upon notification from the
Commission that the Registration Statement has become effective, will so
advise you and will not at any time, whether before or after the effective
date, file any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you or your shall have objected in writing or which
is not in compliance with the Act and the Rules and Regulations. At any
time prior to the later of (I) the completion by the Underwriters of the
distribution of the Securities contemplated hereby (but in no event more
than nine months after the date on which the Registration Statement shall
have become or been declared effective) and (ii) 25 days after the date on
which the Registration Statement shall have become or been declared
effective, the Company will prepare and file with the Commission, promptly
upon the request of the Representative, any amendments or supplements to the
Registration Statement or Prospectus which, in the Representative's opinion,
may be necessary or advisable in connection with the distribution of the
Securities.
(b) As soon as the Company is advised thereof, the Company
will advise you, and confirm the advice in writing, of (i) the receipt of
any comments of the Commission, (ii) the effectiveness of any post-effective
amendment to the Registration Statement, (iii) the filing of any supplement
to the Prospectus or any amended Prospectus, (iv) any request made by the
Commission for amendment of the Registration Statement, supplementing of the
Prospectus or additional information with respect to the Registration
statement or Prospectus, or (v) the issuance by the Commission or any state
or regulatory body of any stop order or other order suspending the
effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or the suspension of the
qualification of the Securities for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its
best efforts to prevent the issuance of any such order, and, if issued, to
obtain as soon as possible the lifting or withdrawal thereof.
(c) The Company has caused to be delivered to the
Underwriters copies of each Preliminary Prospectus, and the Company has
consented and hereby consents to the use of such copies for the purposes
permitted by the Act. The Company authorizes the Underwriters and dealers
to use the Prospectus in connection with the sale of the Securities for such
period as in the opinion of counsel to the Underwriters the use thereof is
required to comply with the applicable provisions of the Act and the Rules
and Regulations. In case of the happening, at any time within such period
as a Prospectus is required under the Act to be delivered in connection with
sales by any of the Underwriters or a dealer of any event of which the
Company has knowledge and which materially affects the Company or the
securities of the Company, or which in the opinion of counsel for the
Company or counsel for the Underwriters should be set forth in an amendment
of the Registration Statement or a supplement to the Prospectus in order to
make the statements therein not then misleading, in light of the
circumstances existing at the time the Prospectus is required to be
delivered to a purchaser of the Securities or the Shares or Warrants, or in
case it shall be necessary to amend or supplement the Prospectus to comply
with law or with the Rules and Regulations, the Company will notify the
Underwriters promptly and forthwith prepare and furnish to the Underwriters
copies of such amended Prospectus or of such supplement to be attached to
the Prospectus, in such quantities as each of the Underwriters may
reasonably request, in order that the Prospectus, as so amended or
supplemented, will not contain any untrue statement of a material fact or
omit to state any material facts necessary in order to make the statements
in the Prospectus not misleading. The preparation and furnishing of any
such amendment or supplement to the Registration Statement or amended
Prospectus or supplement to be attached to the Prospectus shall be without
expense to the Underwriters. The Company will comply with the Act, the
Rules and Regulations and the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and the rules and regulations thereunder in connection
with the offering and issuance of the Securities.
(d) The Company will use its best efforts to qualify to
register the Securities, and the Shares and Warrants comprising the
Securities, for sale under the securities or "blue sky" laws of such
jurisdictions as the Representative may designate and will make such
applications and furnish such information as may be required for that
purpose and to comply with such laws, provided the Company shall not be
required to qualify as a foreign corporation or a dealer in securities or to
execute a general consent of service of process in any jurisdiction for any
action other than one arising out of the offering or sale of the Securities.
The Company will, from time to time, prepare and file such statements and
reports as are or may be required to continue such qualification in effect
for so long a period as the Representative may reasonably request.
(e) If the sale of the Securities provided for herein is not
consummated for any reason caused by the Company, the Company shall pay all
costs and expenses incident to the performance of the Company's obligations
hereunder, including, but not limited to, all of the expenses itemized in
Section 8 hereof, including the accountable expenses of the Representative.
(f) The Company will use its best efforts to cause a
registration statement under the Exchange Act to be declared effective
concurrently with the effectiveness of the Registration Statement.
(g) For so long as the Company is a reporting company under
either Section 12(g) or 15(d) of the Exchange Act, the Company will, at its
expense, furnish to its stockholders an annual report (including financial
statements audited by independent public accountants), in reasonable detail
and, at its expense, will furnish to you, during the period ending five
years from the date hereof, (i) as soon as practicable after the end of each
fiscal year, a balance sheet of the Company and any of its subsidiaries as
at the end of such fiscal year, together with statements of operations,
stockholders' equity, cash flows, surplus and source and application of
funds of the Company and any subsidiaries for such fiscal year, all in
reasonable detail and accompanied by a copy of the certificate or report
thereon of independent accountants; (ii) as soon as they are available, a
copy of all reports (financial or other) mailed to security holders; (iii)
as soon as they are available, a copy of all non-confidential reports and
financial statements furnished to or filed with the Commission; (iv) copies
of every press release and every material news item or article of interest
to the financial community in respect of the Company or its affairs which
was released or prepared by or on behalf of the Company; (v) such other
information as you may from time to time reasonably request; and (vi) as
soon as practicable after the end of each fiscal quarter, quarterly
unaudited financial statements including both a balance sheet and statement
of income of the Company and its subsidiaries consolidated. Additionally,
during the period ending five years from the First Closing Date, the Company
will pay all stock transfer fees assessed by the Company's transfer agent on
all stock transfers which may be made by any of the holders of the Common
Stock.
(h) In the event the Company has an active subsidiary or
subsidiaries, such financial statements referred to in Paragraph 2(g) above
will be on a consolidated basis to the extent the accounts of the Company
and its subsidiary or subsidiaries are consolidated in reports furnished to
its stockholders generally.
(i) The Company will deliver to the Representative at or
before the First Closing Date two signed copies of the Registration
Statement including all financial statements and exhibits filed therewith,
and of all amendments thereto, and will deliver to the Underwriters such
number of copies of the Registration Statement, including such financial
statements but without exhibits, and of all amendments thereto, as the
Underwriters may reasonably request. The Company will deliver to or upon
the order of each of the several Underwriters, from time to time until the
effective date of the Registration Statement, as many copies of any
Preliminary Prospectus filed with the Commission prior to the effective date
of the Registration Statement as each of the several Underwriters may
reasonably request. The Company will deliver to each of the several
Underwriters on the effective date of the Registration Statement and
thereafter for so long as a Prospectus is required to be delivered under the
Act, from time to time, as many copies of the Prospectus, in final form, or
as thereafter amended or supplemented, as each of the several Underwriters
may from time to time reasonably request.
(j) The Company will make generally available to its security
holders and deliver to you as soon as it is practicable to do so, but in no
event later than 45 days following the end of the twelve month period
beginning on the day after the end of its current fiscal quarter (90 days,
in the event that the end of the current quarter is the end of the Company's
fiscal year), an earnings statement (which need not be audited) covering a
period of at least twelve consecutive months beginning after the effective
date of the Registration Statement, which shall satisfy the requirements of
Section 11(a) of the Act.
(k) The Company will apply the net proceeds from the sale of
the Securities solely for the purposes set forth under "Use of Proceeds" in
the Prospectus, and will file such reports with the Commission with respect
to the sale of the Securities and the application of the proceeds therefrom
as may be required pursuant to Rule 463 under the Act.
(l) The Company will, promptly upon request of the
Representative, prepare and file with the Commission any amendments or
supplements to the Registration Statement, Preliminary Prospectus or
Prospectus and take any other action which, in the reasonable opinion of
Spinelli & Associates, counsel to the Underwriters, may be necessary or
advisable in connection with the distribution of the Securities, and will
use its best efforts to cause the same to become effective as promptly as
possible.
(m) The Company will maintain, for a minimum period of one
year, its "Key Man" Life Insurance on the life of Igor Dmitrowsky in the
coverage amount of no less than $5,000,000, naming the Company as
beneficiary of such insurance policy(ies).
(n) For a period of [TWO YEARS] from the [EFFECTIVE DATE] or
such longer period of time as may be required by any state, authority or
agency, no executive officer, director or five (5%) percent or greater
stockholder of the Company, other than the Representative and the Chairman
of the Board of Directors of the Representative, will offer, sell or dispose
of, directly or indirectly, any of the Company's securities without the
prior written consent of the Representative.
(o) Upon the earlier of the First Closing Date or the
effective date of the Registration Statement, the Company will make all
filings required, including registration of the Common Stock under the
Exchange Act, to obtain and effect the listing of the Securities, Common
Stock and Warrants on the Nasdaq Market ("Nasdaq"), and will effect and
maintain, so long as the Company meets Nasdaq's maintenance requirements,
such registration and listings for at least five years from the date of this
Agreement.
(p) The Company represents that it has not taken and agrees
that it will not take, directly or indirectly, any action designed to or
which has constituted or which might reasonably be expected to cause or
result in the stabilization or manipulation of the price of the Securities,
Common Stock of Warrants or to facilitate the sale or resale of the
Securities, Shares or Warrants.
(q) On the First Closing Date and simultaneously with the
delivery of the Securities, the Company shall grant to the Representative,
individually and not as Representative of the Underwriters, the RPO Option
to purchase up to 100,000 Securities and, in connection therewith, execute
and deliver to the Representative the RPO Agreement substantially in the
form of the RPO Agreement filed as an exhibit to the Registration Statement.
(r) Prior to and during the 180 day period commencing on the
First Closing Date, the Company will not, without the prior written consent
of the Representative, grant options to purchase shares of Common Stock at a
per share exercise price less than the greater of: (i) the initial public
offering price of a Share as set forth on the cover page of the Prospectus
(assigning, for the purposes of this Paragraph (r) only, no value to the
warrants included in a Security) and (ii) the per share market price of the
Common stock on the date of grant of such options.
(s) For a period of twelve months following the First Closing
Date, the Company shall make no amendments, supplements or other changes to
such employment agreements, or supersede any of such employment agreements,
except with the consent of the Representative.
(t) On the First Closing Date and simultaneously with the
delivery of the Securities, the Company shall execute and deliver to the
Representative, individually and not as Representative of the Underwriters,
the M/A Agreement regarding mergers, acquisitions, joint ventures and
certain other forms of transactions, substantially in the form of the M/A
Agreement filed as an exhibit to the Registration Statement.
(u) On the Effective Date and for a period of five years
thereafter, the Company's Board of Directors will include two persons
reasonably acceptable to the Representative and who shall not otherwise be
affiliated or associated with the Company. For the purposes of this
Paragraph 3(u) [LIST PERSONS] are deemed to be acceptable to the
Representative.
(v) For a period of four years from the Effective Date, the
Company, at its cost and 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 fiscal quarters
of each fiscal year of the Company prior to the announcement of quarterly
financial information, the filing of the Company's Quarterly Report on Form
10-Q with the SEC and Nasdaq and the mailing of any quarterly financial
information to stockholders and the Representative.
(w) For a period of three years from the Effective Date, the
Company, will not engage in, permit, agree, consent or cooperate with any
offering of any of the Company's securities pursuant to Regulation S under
the Act nor will it take any action to facilitate any such an offering.
(x) As soon as practicable following the Effective Date, the
Company shall secure, at its own cost and expense, the Company's listing in
those manuals published by Standard & Poor's and such other reporting
manuals (the "Reporting Manuals") as the Representative may designate
containing the information required by the Uniform Securities Act for use of
the manual exemption in non-issuer, secondary trading transactions. The
Company shall use its best efforts to maintain such listing for a period of
not less than four years after the initial publications in such manuals.
(y) For at least three years following the First Closing Date
and if requested in writing by the Representative, the Company will engage a
financial public relations firm acceptable to the Representative.
(z) On the First Closing Date, the Company will engage counsel
acceptable to the Representative to prepare and provide the Underwriters
with a Blue Sky Memorandum setting forth those jurisdiction in which shares
of Common Stock and Warrants may be traded in the "after-market" based upon
publication of Company information in the Reporting Manuals.
(aa) For a period of four years from the Effective Date, the
Company, as to clause (iv) below, will:
(i) furnish the Representative and the Company's
stockholders with Annual Reports meeting the requirements of the Exchange Act;
(ii) furnish the Representative with copies of the daily
transfer sheets prepared by the Company's transfer agent and warrant agent;
(iii) furnish the Representative with lists of the
Company's stockholders and warrant holders, promptly upon request; and
(iv) recommend and use each of their best efforts to
elect or appoint, as the case may be, [A] [_____] DESIGNEE[S] of the
Representative as a member of or, at the sole option of the Representative,
a nonvoting advisor to the Company's Board of Directors; such designee[S],
if elected or appointed, shall be entitled to attend all meetings of the
Board of Directors. The Representative's designee[S] shall receive no more
or less compensation than is paid to other non-management directors of the
Company and shall be entitled to receive reimbursement for all reasonable
costs incurred in attending such meetings including, but not limited to,
food, lodging and transportation. To the extent permitted by law, the
Company will agree to indemnify the Representative and its designee[S] for
the actions of such designee[S] as [A] director[S] or advisor[S] of the
Company, as the case may be. In the event the Company maintains a liability
insurance policy affording coverage for the acts of its officers and
directors, it will agree, if possible, to include each of the Representative
and its Board designee[S] as an insured under such policy. If the
Representative does not exercise its option to designate [A] member[S] of or
[AN] advisor[S] to the Company's Board of Directors, the Representative
shall nevertheless have the right to send a representative (who need not be
the same individual from meeting to meeting) to observe each meeting of the
Board of Directors. The Company agrees to give the Representative notice of
each such meeting and to provide the Representative with an agenda, all
documents prepared for and distributed in connection with and the minutes of
such meetings no later than the Company gives such notice and provides such
items to all other directors of the Company.
(bb) For a period of five years from the effective date of the
Registration Statement, the Company shall grant, and shall obtain the
agreement of each of its then executive officers and directors and those
other stockholders owning as of the effective date of the Registration
Statement, beneficially or otherwise, five (5%) percent or more of the
outstanding Common Stock granting, the Representative, individually and not
as Representative of the Underwriters, a right of first refusal with respect
to the public or private sales of any securities of the Company to be made
by the Company, any of its subsidiaries or such executive officers,
directors and five (5%) percent or greater stockholders. In connection with
such right, the Company covenants and agrees to furnish the Representative
with the terms and conditions of any bona fide proposed sale of securities
to be made by it, its subsidiaries or any of the other foregoing identified
persons, and the name and address of the underwriter, broker or dealer
proposing to effectuate such sale, together with all compensation terms.
The Representative shall have the right within 30 days from such
notification by the Company to notify the Company or the security holders,
as the case may be, whether the Representative will exercise its right to
effect such proposed financing. In the event the Representative declines to
exercise its right of first refusal, such action shall only relate to the
financing and terms and conditions contained in the specific notice
furnished to the Representative and not to any other proposed financing
thereafter.
(cc) In addition to the provisions of Paragraph 4(bb) above,
during the two-year period following the date hereof, the Representative,
individually and not as the representative of the Underwriters, shall have
the right to purchase for the Representative's account or to sell for the
account of the Company's officers and directors any securities sold pursuant
to Rule 144 under the Act. Each of the officers and directors (each a "144
Seller") has agreed to consult with the Representative with regards to any
such sales and to offer the Representative the exclusive opportunity to
purchase or sell such securities on terms at least as favorable to the 144
Sellers as they can secure elsewhere. If the Representative fails to accept
in writing any such proposal for sale by the 144 Sellers within five
business days after receipt of a copy of the proposal, you shall be deemed
to have released any claim or right with respect to any such sales contained
in the proposal. If thereafter, the proposal is modified in any material
respect, the 144 Sellers shall adopt the procedure set forth in this
Paragraph 4(cc) with respect to the modified proposal.
(dd) During the period of time commencing on the date hereof
and terminating on the fifth anniversary of the effective date of the
Registration Statement, excluding any commitments or obligations of the
Company existing on the date of this Agreement, the Company shall not sell,
transfer or otherwise dispose of any shares of its Common Stock, issue any
securities convertible into or exchangeable for shares of Common Stock for a
consideration per share less than eighty percent of the fair market value
(as defined in the next following sentence) of said securities on the date
the Board of Directors authorizes the issuance or sale without the
affirmative vote of three-fourths (3/4ths) of the members of the Company's
Board of Directors, including the affirmative vote of the Company's Director
selected by the Representative as its designee[S] pursuant to Paragraph aa
above, unless said designee-director[S] fail[S] to attend or participate in
such a meeting following five business day's written notice of such a
meeting. For the purposes of this Paragraph Section 3(cc) , "fair market
value" shall mean the average of the last reported sale prices for the sixty
trading days preceding the date of the relevant action taken by the
Company's Board of Directors, as officially reported by the national
securities exchange on which the Common Stock is principally trading, or, if
the Common Stock is not listed or admitted to trading on any national
securities exchange or if any such exchange on which the Common Stock is
listed is not its principal trading market, then by the National Association
of Securities Dealers, Inc. ("NASD") if the Common Stock is principally
traded on the Nasdaq Small Cap Market System ("Nasdaq/SCM), or if the Common
Stock is not principally traded on either a national securities exchange or
Nasdaq/SCM, then the average bid quotation on such days as furnished by the
NASD through its Automated Quotation System.
(ee) On or before the effective date of this Registration
Statement, the Company shall provide the Representative with true copies of
duly executed, legally binding and enforceable agreements pursuant to which
for a period of 18 months from the effective date of the Registration
Statement (or for such longer period not to exceed 36 months as may be
required under applicable state blue sky laws) each of the Company's
[shareholders] owning at least two percent (2%) of the Common Stock
outstanding prior to the public offering, agrees that he, she or it will not
directly or indirectly, issue, offer to sell, grant an option for the sale
of, assign, transfer, pledge, hypothecate or otherwise encumber or dispose
of any shares of Common Stock or securities convertible into, exercisable or
exchangeable for or evidencing any right to purchase or subscribe for any
shares of Common Stock (either pursuant to Rule 144 of the Rules and
Regulations or otherwise) or dispose of any beneficial interest therein
without the prior written consent of the Representative (collectively, the
"Lock-up Agreements"). On or before the Closing Date, the Company shall
deliver instructions to the transfer agent authorizing it to place
appropriate legends on the certificates representing the securities subject
to the Lock-up Agreements and to place appropriate stop transfer orders on
the Company's ledgers.
(ff) The Company shall timely file all such reports, forms or
other documents as may be required (including, but not limited to a Form SR
as may be required pursuant to Rule 463 under the Act) from time to time,
under the Act, the Exchange Act, and the Rules and Regulations, and all such
reports, forms and documents filed will comply as to form and substance with
the applicable requirements under the Act, the Exchange Act, and the Rules
and Regulations.
(gg) Until the completion of the distribution of the
Securities but in no event more than 25 days after the effective date of the
Registration Statement, the Company shall not without prior written consent
of the Representative, issue, directly or indirectly any press release or
other communication or hold any press conference with respect to the Company
or its activities or the offering contemplated hereby.
(hh) That any and all future transactions between the Company
and its officers, directors, principal shareholders and the affiliates of
the foregoing persons will be on terms no less favorable to the Company than
could reasonably be obtained in arm's length transactions with independent
third parties, and that any such transactions also be approved by a majority
of the Company's outside independent directors disinterested in the
transaction, if any.
[INSERT OTHER CONDITIONS AS PROVIDED IN LETTER OF INTENT]
4. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Securities which the Underwriters
have agreed to purchase hereunder, are subject to the accuracy (as of the
date hereof, and as of the Closing Dates) of and compliance with the
representations and warranties of the Company herein, to the performance by
the Company of its obligations hereunder, and to the following conditions:
(a) (i) The Registration Statement shall have become effective
and you shall have received notice thereof not later than 4:00 p.m., New
York time, on the date of this Agreement, or at such later time or on such
later date as to which you may agree in writing; (ii) on or prior to the
Closing Dates no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that or similar
purpose shall have been instituted or shall be pending or, to your knowledge
or to the knowledge of the Company, shall be contemplated by the commission;
(iii) any request on the part of the Commission for additional information
shall have been complied with to the reasonable satisfaction of Spinelli &
Associates, counsel to the Underwriters, and (iv) no stop order shall be in
effect denying or suspending effectiveness of such qualification nor shall
any stop order proceedings with respect thereto be instituted or pending or
threatened under such law.
(b) At the First Closing Date, you shall have received the
opinion dated as of the First Closing Date, of the International Business
Law Firm (the "Company Counsel"), counsel for the Company, in form and
substance satisfactory to counsel for the Underwriters, to the effect that:
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation with full corporate power and authority to
own its properties and conduct its business as described in the Registration
Statement and Prospectus and is duly qualified or licensed to do business as
a foreign corporation and is in good standing in each other jurisdiction in
which the ownership or leasing of its properties or conduct of its business
requires such qualification;
(ii) To the best knowledge of the Company Counsel, (A)
the Company has obtained all licenses, permits and other governmental
authorizations necessary to the conduct of its business as described in the
Prospectus, (B) such licenses, permits and other governmental authorizations
obtained are in full force and effect and (C) the Company is in all material
respects complying therewith;
(iii) (A) The authorized capitalization of the Company as
of December 31, 1997 is as set forth under "Capitalization" in the
Prospectus; (B) all shares of the Company's outstanding stock have been duly
authorized, validly issued, are fully paid and non-assessable and conform to
the description thereof contained in the Prospectus; (c) the outstanding
shares of Common Stock and other capital stock of the Company have not been
issued in violation of the preemptive rights of any stockholder and the
stockholders of the Company do not have any preemptive rights or other
rights to subscribe for or to purchase the Securities or the Shares and
Warrants constituting the Securities, nor are there any restrictions upon
the voting or transfer of any of the Shares; (D) the Securities, Shares,
Common Stock, Warrants, Warrant Agreement [LIST ALL OTHER AGREEMENTS]
conform to the respective descriptions thereof contained in the Prospectus;
(E) the Securities, Shares and Warrants and the Warrant Shares to be issued
upon exercise Warrants (including Underwriter Warrants and Shares), upon
issuance in accordance with the respective terms, have been duly authorized
and, when issued and delivered, will be duly and validly issued, fully paid,
non-assessable, free of preemptive rights and no personal liability will
attach to the ownership thereof; (F) the application for the Securities,
Common Stock and Warrants for quotation on Nasdaq has been duly authorized
by the Company; (G) a sufficient number of shares of Common Stock have been
reserved for issuance upon exercise of the Underwriter Warrants and all of
the Warrants; and (H) to the best of the Company Counsel's knowledge,
neither the filing of the Registration Statement nor the offering or sale of
the Securities as contemplated by this Agreement gives rise to any
registration rights or other rights, other than those which have been waived
or satisfied for or relating to the registration of any shares of capital
stock of the Company, except as may be described in the Registration Statement;
(iv) This Agreement and all other agreements, including,
[LIST OTHER AGREEMENTS] have been duly and validly authorized, executed and
delivered by the Company and, assuming due execution and delivery of this
Agreement by the Representative, are the valid and legally binding
obligations of the Company subject to bankruptcy, insolvency or other laws
affecting the rights of creditors generally and the application of general
principles of equity, except that no opinion need be expressed as to the
enforceability of Paragraph 3(cc), the indemnity provisions contained in
Section 6 and the contribution provisions contained in Section 7 of this
Agreement;
(v) The certificates evidencing the Shares and Warrants
are in valid and proper legal form;
(vi) The Company Counsel knows of no (A) pending or
threatened legal proceeding or (B) pending or threatened governmental
proceeding to which the Company is a party which could materially adversely
affect the business, property, financial condition or operations of the
Company; which question the validity of the Securities, Shares, Warrants,
this Agreement, the Warrant Agreement [LIST OTHER AGREEMENTS] or of any
action taken or to be taken by the Company pursuant to this Agreement, and
no such proceedings are known to the Company Counsel to be contemplated
against the Company;
(vii) The Company Counsel knows of no governmental
proceedings or regulations required to be described or referred to in the
Registration Statement which are not so described or referred to;
(viii) The Company is not in violation of or in default
under, nor will the execution and delivery of this Agreement, the Warrant
Agreement, [LIST OTHER AGREEMENTS] and the incurrence of the obligations
herein and therein set forth and the consummation of the transactions herein
or therein contemplated, result in a violation of, or constitute a default
under, the Certificate of Incorporation or By-laws of the Company, or, to
the best knowledge of the Company 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, lease, joint venture or other
agreement or instrument to which the Company is 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,
governmental instrumentality or court, domestic or foreign;
(ix) (A) The Registration Statement has become effective
under the Act, and to the best of the Company Counsel's knowledge, no stop
order suspending the effectiveness of the Registration Statement is in
effect, and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; and (B) the Registration
Statement and the Prospectus (except for the financial statements and other
financial data contained therein, or omitted therefrom, as to which the
Company Counsel need express no opinion) comply as to form in all material
respects with the applicable requirements of the Act and the Rules and
Regulations;
(x) All descriptions in the Registration Statement and
the Prospectus, and any amendment or supplement thereto, of contracts and
other documents are accurate in all material respects, and the Company
Counsel is familiar with all contracts and other documents referred to in
the Registration Statement and the Prospectus and any such amendment or
supplement or filed as exhibits to the Registration Statement, and the
Company Counsel does not know of any contracts or documents of a character
required to be summarized or described therein or to be filed as exhibits
thereto, pursuant to Item 601(a) of Regulation SB, which are not so
summarized, described or filed;
(xi) To the best of the Company Counsel's knowledge, no
default exists, and no event has occurred which, with notice or lapse of
time or both, would constitute a default in the due performance and
observance of any term, covenant or condition of any indenture, mortgage,
deed of trust, lease or other agreement or instrument to which the Company
is a party or by which the Company or its properties is bound or which could
reasonably be expected to result in any material adverse affect on the
property, business or operations of the Company;
(xii) to the best of the Company Counsel's knowledge, the
Company owns, possesses or has the right to use all licenses, patents,
patent applications, trademarks, service marks, trade names, trademark
registrations, service mark registrations, copyrights, licenses and
confidential information currently employed in connection with the business
of the Company, contemplated to be employed in connection with the Company's
business or necessary in order to conduct the Company's business as
presently conducted, or as proposed, and the Company has not received, or
has no reason to believe that it may receive, any notice of infringement of
or conflict with asserted rights of any third party or otherwise with
respect to any of the foregoing which, singly or in the aggregate, could
reasonably be expected to result in a material adverse change in the
condition (financial or otherwise), business prospects, net worth or results
of operations of the Company, except as described in or contemplated by the
Prospectus;
(xiii) No authorization, approval, consent, or license of
any governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or delivery of
the Securities by the Company, in connection with the execution, delivery
and performance of this Agreement and the Warrant Agreement [LIST OTHER
AGREEMENTS] by the Company or in connection with the taking of any action
contemplated herein, or the issuance of the Warrants or Underwriter
Warrants, or the securities underlying the Warrants, other than
registrations or qualifications under applicable state or foreign securities
or Blue Sky laws and registration under the Act;
(xiv) The Company is in compliance with any and all
applicable foreign, federal, state and local laws and regulations relating
to the protection of consumers, human health and safety, the storage,
handling or transportation of hazardous or toxic substances or wastes,
pollutants or contaminants, except to the extent failure to comply would not
have a material adverse effect on the Company;
(xv) (A) The Company is not subject to ERISA or the
Company has not violated the reporting or disclosure requirements imposed
either under ERISA or the Code with respect to the Pension Plans, if any;
(B) there is no litigation, arbitration, claim, governmental or other
proceeding (formal or informal, or investigation pending, threatened, or in
prospect (or any basis therefore known to such counsel) with respect to such
Pension Plans or with respect to any fiduciary, administrator, or sponsor
(in its capacity as such) of such Pension Plans; (C) such Pension Plans are
in compliance with ERISA and the Code and there is no material pending or
threatened litigation relating to such Pension Plans and, to the best of the
Company Counsel's knowledge the Company has not engaged in any transaction
with respect to such Pension Plans which could subject the Company to a tax
or penalty under the Code or ERISA; (D) no liability under ERISA has been or
is expected to be incurred by the Company with respect to such Pension Plan;
and
(xvi) The statements in the Registration Statement under
the captions "the Company," "Use of Proceeds," "Business," "Management's
Discussion and Analysis of Financial Condition and Results of operations,"
"Management," "Principal stockholders," "Selling Stockholders," "Shares
Eligible for Resale," "Certain Transactions" and "Description of Securities"
have been reviewed by the Company Counsel and, insofar as they refer to
descriptions of agreements, statements of law, descriptions of statutes,
licenses, rules or regulations or legal conclusions, are correct and
complete in all material respects; and
(xvii) The Securities, Common Stock and Warrants have
been accepted for quotation on the Nasdaq and BSE.
The Company Counsel shall also state that it has participated in
the preparation of the Registration Statement and the Prospectus and nothing
has come to the attention of the Company Counsel, to cause the Company
Counsel to have reason to believe that the Registration Statement or any
amendment thereto at the time it became effective contained any untrue
statement of a material fact required to be stated therein or omitted to
state any material fact required to be stated therein or necessary to make
the statements therein not misleading or that the Prospectus or any
supplement thereto contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make statements therein not
misleading (except, in the case of both the Registration Statement and any
amendment thereto and the Prospectus and any supplement thereto, for the
financial statements, notes thereto and other financial information and
statistical data contained therein or omitted therefrom, as to which such
counsel need express no opinion);
The foregoing opinion shall also cover such matters incident to
the transactions contemplated hereby as the Underwriters or counsel for the
Underwriters shall reasonably request. In rendering such opinion, the
Company Counsel may rely upon certificates of any officer of the Company or
public officials as to matters of fact; and may rely as to all matters of
law other than the law of the United States, the State of New York or upon
opinions of counsel satisfactory to you. A separate opinion relating to all
matters subject to clause 4(b)(xii) above shall be rendered by Company
Counsel or such other counsel as the Representative may agree to, provided
in either event such counsel is named in and consents to be so named in the
Registration Statement and the Prospectus, and in which case the opinion of
the Company Counsel shall state that they have no reason to believe that you
are not entitled to so rely.
(c) At the First Closing Date and the Option Closing Date,
Spinelli & Associates, counsel for the Underwriters, shall furnish to the
Underwriters their written opinion, dated as of the date of its delivery,
with respect to the sufficiency of all such corporate proceedings and other
legal matters relating to this Agreement, the Warrant Agreement and the
transactions contemplated hereby and thereby as the Underwriters and such
counsel may agree upon, and the Company shall have furnished to Spinelli &
Associates such documents as they may have reasonably requested for the
purpose of enabling them to pass upon such matters.
(d) You shall have received a letter prior to the effective
date of the Registration Statement and again on and as of the First Closing
Date from JR Lupo, P.A. CPA, independent public accountants for the Company,
substantially in the form approved by you, counsel to the Underwriters.
(e) At the First Closing Date:
(i) the representations and warranties of the Company
contained in this Agreement shall be true and correct with the same effect
as if made on and as of the First Closing Date and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions
on its part to be satisfied at or prior to such First Closing Date;
(ii) the Registration Statement and the Prospectus and any
amendments or supplements thereto shall contain all statements which are
required to be stated therein in accordance with the Act and the Rules and
Regulations, and shall in all material respects conform to the requirements
thereof, and neither the Registration Statement or the Prospectus, or any
amendment or supplement thereto, shall 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 not misleading;
(iii) there shall have been since the respective dates as of
which information is given, no material adverse change in the business,
properties, condition (financial or otherwise), results of operations,
capital stock, long-term or short-term debt or general affairs of the
Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement,
and the Company shall not have incurred any material liabilities or entered
into any agreement not in the ordinary course of business other than as
referred to in the Registration Statement and Prospectus;
(iv) except as set forth in the Prospectus, no action, suit
or proceeding at law or in equity shall be pending or threatened against the
Company which would be required to be set forth in the Registration
Statement, and no proceedings shall be pending or threatened against the
Company before or by any commission, board or administrative agency in the
United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property,
condition (financial or otherwise) , results of operations or general
affairs of the Company; and
(v) you shall have received a certificate signed by each of
the Chairman of the Board or the President and the principal financial or
accounting officer of the Company, dated as of the First Closing Date,
evidencing compliance with the provisions of this Paragraph 4(e).
(f) Upon exercise of the Over-Allotment Option, the obligation of the
Underwriters to purchase and pay for the Option Shares referred to therein
will be subject (as of the date hereof and as of the O/A Option Closing
Date) to the following additional conditions:
(i) The Registration Statement shall be effective
at the Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose shall
have been instituted or shall be pending, or, to the knowledge of the
Representative and to the knowledge of the Company, shall be contemplated by
the Commission, and any reasonable request on the part of the Commission for
additional information shall have been complied with to the satisfaction of
Spinelli & Associates, counsel to the Underwriters;
(ii) At the O/A Option Closing Date, there shall have
been delivered to you the signed opinion of the Company Counsel, dated as of
the O/A Option Closing Date, in form and substance satisfactory to Spinelli
& Associates, counsel to the Underwriters, which opinion shall be
substantially the same in scope and substance as the opinion furnished to
you at the First Closing Date pursuant to Paragraph 4(b) above, except that
such opinion, where appropriate, shall cover the O/A Securities;
(iii) At the O/A Option Closing Date, there shall have
been delivered to you a certificate of the Chairman of the Board or the
President and the principal financial or accounting officer of the Company,
dated the O/A Option Closing Date, in form and substance satisfactory to
counsel to the Underwriters, substantially the same in scope and substance
as the certificate furnished to you at the First Closing Date pursuant to
Clause 4(e)(v) above.
(iv) At the Option Closing Date there shall have been
delivered to you letters in form and substance satisfactory to you from JR
Lupo, P.A. CPA dated the Option Closing Date and addressed to the
Underwriters confirming the information in their letter referred to in
Section 4(d) hereof and stating that nothing has come to their attention
during the period from the ending date of their review referred to in said
letter to a date not more than five business days prior to the Option
Closing Date, which would require any change in said letter if it were
required to be dated the Option Closing Date;
(vi) All proceedings taken at or prior to the O/A Option
Closing Date in connection with the sale and issuance of the [O/A Option
Securities] shall be satisfactory in form and substance to the Underwriters,
and the Underwriters and Spinelli & Associates, counsel to the Underwriters,
shall have been furnished with all such documents, certificates, and
opinions as the Underwriters may request in connection with this transaction
in order to evidence the accuracy and completeness of any of the
representations, warranties or statements of the Company or its compliance
with any of the covenants or conditions contained herein.
(g) No action shall have been taken by the Commission or NASD,
the effect of which would make it improper, at any time prior to the Closing
Dates, for members of the NASD to execute transactions (as principal or
agent) in the Common Stock or Warrants and no proceedings for the taking of
such action shall have been instituted or shall be pending, or, to the
knowledge of the Underwriters or Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it
has no knowledge that any such action is in fact contemplated by the
Commission or the NASD.
(h) By the Effective Date, the Underwriters will have received
clearance form the NASD as to the amount of compensation allowable or
payable to the Underwriters.
(i) At the date this Agreement is executed, the Underwriters
shall have received a letter, dated such date, addressed to the Underwriters
in form and substance satisfactory in all respects (including the
non-material nature of the changes or increases, if any, referred to in
clause (iii) below) to the Underwriters and Underwriters' counsel, from JR
Lupo, P.A. CPA.
(i) confirming that they are independent certified
public accountants with respect to the Company within the meaning of the Act
and the applicable Rules and Regulations;
(ii) stating that it is their opinion that the financial
statements and supporting schedules and footnotes thereto of the Company
included in the Registration Statement comply as to the form in all material
respects with the applicable accounting requirements of the Act and the
Rules and Regulations thereunder and that the Representatives may rely upon
the opinion JR Lupo, P.A. CPA with respect to the financial statements and
supporting schedules included in the Registration Statement;
(iii) stating that, on the basis of a limited review
which included a reading of the latest available unaudited interim financial
statements of the Company (with an indication of the date of the latest
available unaudited interim financial statements), a reading of the latest
available minutes of meetings of the shareholders and board of directors and
the various committees of the board of directors of the Company,
consultations with officers and other employees of the Company responsible
for financial and accounting matters and other specified procedures and
inquiries, nothing has come to their attention which would lead them to
believe that (A) the unaudited financial statements and supporting schedules
of the company included in the Registration Statement, if any, do not comply
as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations or are not fairly
presented in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the audited
financial statements of the Company included in the Registration Statement,
or (B) at a specified date not more than five days prior to the Effective
Date, there has been any change in the capital stock or long-term debt of
the Company, or any decrease in the shareholders' equity or net current
assets or net assets of the Company as compared with amounts shown in
December 31, 1997 balance sheet included in the Registration Statement,
other than as set forth in or contemplated by the Registration Statement,
or, if there was any change or decrease, setting forth the amount of such
change or decrease;
(iv) setting forth, at a date not later than five days
prior to the date of the Registration Statement, the amount of liabilities
of the Company (including a breakdown of commercial paper and notes payable);
(v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and earnings, statements
and other financial information pertaining to the Company set forth in the
Prospectus in each case to the extent that such amounts, numbers,
percentages, statements and information may be derived from the general
accounting records, including work sheets, of the Company and excusing any
questions requiring an interpretation by legal counsel, with the results
obtained from the application of specified readings, inquiries and other
appropriate procedures (which procedures do not constitute an examination in
accordance with generally accepted auditing standards) set forth in the
letter and found them to be in agreement, and
(vi) statements as to such other matters incident to the
transaction contemplated hereby as the Representative may request.
(j) On or prior to each Closing Date, the Underwriters shall
have received from JR Lupo, P.A. CPA a letter, dated each Closing Date to
the effect that they reaffirm that statements made in the letter furnished
pursuant to Paragraph ___ except that the specified date referred to shall
be a date not more than three days prior to each Closing Date and, if the
Company has elected to rely on Rule 430A of the Rules and Regulations, to
the further effect that they have carried out procedures as specified in
clause (v) of subsection (g) of this section with respect to certain
amounts, percentages and financial information as specified by the
Representative and deemed to be a part of the Registration Statement
pursuant to Rule 430(b) and have found such amounts, percentages and
financial information to be in agreement with the records specified in such
clause (v).
(k) On or before first Closing Date, the Securities shall have
been duly approved for quotation on the Nasdaq and BSE.
(l) On or before first Closing Date, there shall have been
delivered to the Representative all of the Lock-up Agreements, in form and
substance satisfactory to Underwriters' counsel.
(m) On or before first Closing Date, the Company shall have
executed and delivered the Consulting Agreement and Warrant Agreement,
substantially in the forms thereof filed as exhibits to the Registration
Statement.
(n) On or before the effective date on the Registration
Statement the Company shall deliver to the Representative satisfactory
results of UCC, lien and title searches effected in all appropriate
jurisdictions, showing that the Company's assets, including all of its
intellectual properties, are unencumbered, and satisfactory evidence,
including trademark and copyright searches, of its unencumbered title to its
owned intellectual properties.
(o) If any of the conditions herein provided for in this
Section 4 shall not have been fulfilled as of the date indicated, this
Agreement and all obligations of the Underwriters under this Agreement may
be canceled at, or at any time prior to, each of the Closing Dates by the
Representative notifying the Company of such cancellation in writing or by
telegram at or prior to the applicable Closing Date. Any such cancellation
shall be without liability of the Underwriters to the Company.
5. Conditions of the Obligations of the Company. The obligation of
the Company to sell and deliver the Securities is subject to the following
conditions:
(a) The Registration Statement shall have become effective not
later than [4:30] p.m., New York time, on the day following the date of this
Agreement, or on such later date as the Company and the Representative may
agree in writing.
(b) At the Closing Dates, no stop orders suspending the
effectiveness of the Registration Statement shall have been issued under the
Act or any proceedings therefore initiated or threatened by the Commission.
(c) At the Closing Dates, no action shall have been taken by
the Commission or the NASD the effect of which would make it improper, at
any time prior to the Closing Dates, for members of the NASD to execute
transactions (as principal or agent) in the Securities, Shares or warrants
and no proceedings for the taking of such action shall have been instituted
or shall be pending or, to the knowledge of the Underwriters or to the
knowledge of the Company, shall be contemplated by the Commission or the NASD.
If the conditions to the obligations of the Company provided for
in this Section 5 have been fulfilled on the First Closing Date but are not
fulfilled after the First Closing Date and prior to the O/A Option Closing
Date, then only the obligation of the Company to sell and deliver the
Securities, on exercise of the O/A Option provided for in Paragraph 2(b)
hereof shall be affected.
6. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of the Act against any losses, claims, damages or liabilities, joint
or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all reasonable costs of defense and investigation and all
attorneys' fees), to which any Underwriter, or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon any untrue statement or alleged untrue statement of any material
fact contained in (I) the Registration Statement, any Preliminary
Prospectus, the Prospectus, or any amendment or supplement thereto, (ii) any
blue sky application or other document executed by the Company specifically
for that purpose or based upon written information furnished by the Company
filed in any state or other jurisdiction in order to qualify any or all of
the Securities, Shares and warrants under the securities laws thereof (any
such application, document or information being hereinafter called a "Blue
Sky Application"), or arise out of or are based upon the omission or alleged
omission to state in the Registration Statement, any Preliminary Prospectus,
Prospectus or any amendment or supplement thereto, or in any Blue Sky
Application, a material fact required to be stated therein or necessary to
make the statements therein not misleading; provided, however, that the
Company will not be liable in any such case to the extent, but only 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 reliance upon and in conformity with written
information furnished to the Company by or on behalf of the Underwriters
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such Preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability
which the Company may otherwise have.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company and each of the Company's directors, each nominee (if
any) for director of the Company named in the Prospectus, each of the
Company's officers who have signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of the Act,
against any losses, claims, damages or liabilities (which shall, for all
purposes of this Agreement, include, but not be limited to, all costs of
defense and investigation and all attorneys' fees) to which the Company, or
any such director, nominee, officer, or controlling person may become
subject under the Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any Preliminary Prospectus, the
Prospectus or any amendment or supplement thereto, or arise out of or are
based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, in
reliance upon and in conformity with written information furnished to the
Company by such Underwriter or through the Representative specifically for
use in the preparation thereof. This indemnity agreement will be in
addition to any liability which each Underwriter may otherwise have.
(c) Promptly after receipt by an indemnified party under this
Section 6 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 6, notify in writing the indemnifying
party of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may have
to any indemnified party otherwise than under this Section 6. In case any
such action is brought against any indemnified party, and it notifies the
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate in, and, to the extent that it may wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, subject to the provisions herein stated, with counsel reasonably
satisfactory to such indemnified party, and after notice from the
indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section 6 for any legal or other expenses
subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. The
indemnified party shall have the right to employ separate counsel in any
such action and to participation in the defense thereof, but the fees and
expenses of such counsel shall not be at the expense of the indemnifying
party if the indemnifying party has assumed the defense of the action with
counsel reasonably satisfactory to the indemnified party; provided that, if
the indemnified party is an Underwriter or a person who controls such
Underwriter within the meaning of the Act, the fees and expenses of such
counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by
the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party and, in the judgment of such
Underwriter, it is advisable for such Underwriter or controlling persons to
be represented by separate counsel (in which case the indemnifying party
shall not have the right to assume the defense of such action on behalf of
such Underwriter or such controlling person, it being understood, however,
that the indemnifying party shall not, in connection with any one such
action or separate but substantially similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances,
be liable for the reasonable fees and expenses of more than one separate
firm of attorneys for such Underwriter and controlling persons, which firm
shall be designated in writing by you, as the case may be, and reasonably
acceptable to the Company). No settlement of any action against an
indemnified party shall be made without the consent of the indemnified
party, which shall not be unreasonably withheld in light of all factors of
importance to such indemnified party unless such settlement provides for a
full release of the indemnified party and the payment of money damages
solely by the indemnifying party.
7. Contribution. In circumstances in which indemnity provided for
in Section 6 above is unavailable or insufficient to hold harmless an
indemnified party in respect of any losses, claims, damages or liabilities
(or actions in respect thereof), each indemnifying party, in order to
provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses,
claims, damages or liabilities (or actions in respect thereof) in such
proportion as is appropriate to reflect (a) the relative benefits received
by the indemnifying party or parties on the one hand and the indemnified
party on the other from the offering of the Securities, or (b) if the
allocation provided by the foregoing clause (a) is not permitted by
applicable law, not only such relative benefits but also the relative fault
of the indemnifying party or parties on the one hand and the indemnified
party on the other in connection with the statements or omissions or alleged
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof). The relative benefit received
by the Company on the one hand and the Underwriters on the other shall be
deemed to be in the same proportion as the total proceeds from the offering
(before deducting expenses) received by the Company bears to the total
underwriting discounts and commissions received by the Underwriters. The
relative fault of the parties shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates to
information supplied by the Company or the Underwriters, the parties,
relative intents, knowledge, access to information and opportunity to
correct or prevent such statement or omission, and any other equitable
considerations appropriate in the circumstances. The Company and
Underwriters agree that it would not be equitable if the amount of such
contribution were determined by pro rata or per capita allocation or by any
other method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this Section 7.
Notwithstanding any other provision of this Section 7, no Underwriter shall
be obligated to make contributions hereunder that in the aggregate exceed
the total public offering price of the Securities purchased by such
Underwriter under this Agreement shall not be obligated to make
contributions hereunder that in the aggregate exceed the total fee paid,
less the aggregate amount of any damages that such Underwriter has otherwise
been required to pay in respect of the same or any substantially similar
claim, and no person guilty of 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. For
purposes of this Section 7, each person, if any, who controls an Underwriter
within the meaning of the Act shall have the same rights to contribution as
such Underwriter and each director of the Company, each officer of the
Company who signed the Registration Statement and each person, if any, who
controls the Company within the meaning of the Act, shall have the same
rights to contribution as the Company.
8. Costs and Expenses.
(a) Whether or not this Agreement becomes effective or the
sale of the Securities to the Underwriters is consummated, the Company will
pay all costs and expenses incident to the performance of this Agreement by
the Company including, but not limited to (i) the fees and expenses of all
counsel to the Company and of the Company's accountants; (ii) the costs and
expenses incident to the preparation, printing, filing and distribution
under the Act of the Registration Statement (including the financial
statements therein and all amendments and exhibits thereto), Preliminary
Prospectus and the Prospectus, as amended or supplemented, in such quantity
and quality as the Representative directs; (iii) the fees of the NASD in
connection with the filing required by the NASD relating to the offering of
the Securities contemplated hereby and the qualifications of said shares on
Nasdaq and BSE; (iv) all expenses, including reasonable fees and
disbursements of counsel to the Underwriter in connection therewith in
connection with the qualification of the Securities, Shares and warrants
under the state securities or blue sky laws which the Representative shall
designate; (v) the cost of printing and furnishing to each of the several
Underwriters copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, the Agreement Among Underwriters, Selected
Dealer Agreement, all Powers of Attorney, this Agreement, the Selling
Agreement, and the Blue Sky Memorandum(s) [LIST OTHER AGREEMENTS]; (vi) the
cost of printing the certificates representing the Shares and Warrants;
(vii) the cost of publication of a one-quarter page "tombstone"
advertisement in the National Edition of the Wall Street Journal or smaller
advertisement of aggregate equivalent cost; (viii) the cost of due diligence
meetings at locations to be designated by the Representative; (ix) the cost
of preparing and delivering to the Representative and counsel to the
Underwriters four bound volumes; each bound volume containing copies of all
documents and appropriate correspondence filed with or received from the
Commission and the NASD and all closing documents; (x) the Registration fee
for the Registration Statement to the SEC; (xi) the cost of commemorative
Lucite cubes in a reasonable number requested by the Representative; and
(xii) the fees and disbursements of the Company's transfer agent and warrant
agent. In addition, the Company shall pay any and all taxes (including any
transfer, franchise, capital stock or other tax imposed by any jurisdiction)
on sales to the Underwriters hereunder. The Company will also pay all costs
and expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Paragraph 3(a)
above, except as otherwise set forth therein.
(b) In addition to the expenses set forth in Paragraph 8(a)
above, at the First Closing Date, the Company shall pay to the
Representative a non-accountable expense allowance equal to three (3%)
percent of the gross proceeds received by the Company from the sale of the
Securities, of which $10,000.00 has been paid prior to the filing of the
Registration Statement and an additional $40,000.00 of which was paid on
filing of the Registration Statement. In the event the Over-Allotment
Option is exercised, the Company shall pay to the Representative at the O/A
Option Closing Date an additional amount as a non-accountable expense
allowance which is equal to three (3%) percent of the gross proceeds
received by the Company upon exercise of the Over-Allotment Option. In the
event the transactions contemplated hereby are not consummated by reason of
any action by the Underwriters (except if such prevention is based upon a
breach by the Company of any covenant, representation or warranty contained
herein or because any other condition to the Underwriters' obligations
hereunder required to be fulfilled by the Company is not fulfilled), the
Company shall not be liable for the actual accountable out-of-pocket
expenses of the Underwriters, including legal fees. In the event the
transactions contemplated hereby are not consummated by reason of any action
of the Company or because of a breach by the Company of any covenant,
representation or warranty herein, the Company shall be liable for the
actual accountable out-of-pocket expenses of the Underwriters, including
legal fees.
(c) No person is entitled either directly or indirectly to
compensation from the Company, Underwriters, or any other person for
services as a finder in connection with the proposed offering, and the
Company agrees to indemnify and hold harmless each of the Underwriters
against any losses, claims, damages or liabilities, joint or several, which
shall, for all purposes of this Agreement, include, but not be limited to,
all costs of defense and investigation and all attorneys' fees, to which the
Underwriters or person may become subject insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are
based upon the claim of any person (other than an employee of the party
claiming indemnity) or entity that he, she or it is entitled to a finder's
fee in connection with the proposed offering by reason of such person's or
entity's influence or prior contact with the indemnifying party.
9. Effective Date. This Agreement shall become effective upon its
execution, except that the Representative may, at the Representative's
option, delay its effectiveness until 9:30 a.m., New York time, on the first
full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the
Registration Statement as you in your discretion shall first commence the
initial public offering by the Underwriters of any of the Securities. The
time of the initial public offering shall mean the time of release by you of
the first newspaper advertisement with respect to the Securities, or the
time when the Securities are first generally offered by the Underwriters to
dealers by letter or telegram, whichever shall first occur. This Agreement
may be terminated by you at any time before it becomes effective as provided
above, except that Paragraph 3(c) and Sections 6, 7, 8, 12, 13, 14, and 15
shall remain in effect notwithstanding such termination.
10. Termination.
(a) This Agreement, except for Paragraph 3(c) and Sections 6, 7,
8, 12, 13, 14, and 15 hereof, may be terminated at any time prior to the
First Closing Date, and the Over-Allotment Option referred to in Section
2(b) hereof, if exercised, may be canceled at any time prior to the O/A
Option Closing Date, by the representative if, in the Representative's
judgment it is impracticable to offer for sale or to enforce contracts made
by the Underwriters for the resale of the Securities agreed to be purchased
hereunder by reason of:
(i) the Company having sustained a material loss,
whether or not insured, by reason of fire, earthquake, flood, accident or
other calamity, or from any labor dispute or court or government action,
order or decree;
(ii) trading in securities on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq Small-Cap Market having been
suspended or limited;
(iii) material governmental restrictions (not in force and
effect on the date hereof) having been imposed on trading in securities
generally;
(iv) a banking moratorium having been declared by federal or
New York State authorities;
(v) an outbreak of major international hostilities, an
escalation of current international hostilities raising such hostilities to
the level of a major international hostility, or other national or
international calamity having occurred;
(vi) a pending or threatened legal or governmental proceeding
or action relating generally to the Company's business, or a notification
having been received by the Company of the threat of any such proceeding or
action, which could materially adversely affect the Company;
(vii) the Company is merged or consolidated into or acquired by
another company or group or there exists a binding legal commitment for the
foregoing or any other material change of ownership or control occurs;
(viii) the passage by the Congress of the United States or by any
state legislative body of similar impact, of any act or measure, or the
adoption of any orders, rules or regulations by any governmental body or any
authoritative accounting institute or board, or any governmental executive,
which is reasonably likely to have a material adverse impact on the
business, financial condition or financial statements of the Company;
(ix) any material adverse change in the financial or securities
markets beyond normal market fluctuations having occurred since the date of
this Agreement; or
(x) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement
and Prospectus, in the earnings, business prospects or general condition of
the Company, financial or otherwise, whether or not arising in the ordinary
course of business.
(b) If you elect to prevent this Agreement from becoming
effective or to terminate this Agreement as provided in this Section 10, the
Company shall be promptly notified by you, by telephone or telegram,
confirmed by letter.
11. Representations, Warranties and Agreements to Survive Delivery.
The respective indemnities, agreements representations, warranties and
other statements of the Company, the Company's officers, directors and the
agreements, covenants and undertakings of the parties hereto set forth or
made pursuant to this Agreement will remain in full force and effect,
regardless of any investigation made by or on behalf of the several
Underwriters, the Company, or any of their respective officers, directors or
any controlling person, and will survive delivery of and payment of the
Securities and the termination of this Agreement.
12. Notice. All notices and other communications hereunder, unless
otherwise specifically provided, shall be in writing and shall be deemed to
have been duly given (a) three days following the day when mailed by prepaid
certified mail, return receipt requested, (b) one day following facsimile
transmission providing for written confirmation of transmission with a copy
thereof mailed by prepaid regular mail, or (c) on the day of personal
deliver against written receipt therefore. Notices and other communications
to any Underwriter shall in care of Hornblower & Weeks Inc., 110 Wall
Street, New York, New York 10005, facsimile number: 212/361-2273, with a
copy sent to Spinelli & Associates, 120 Wall Street, 28th Floor, New York,
New York, 10005, facsimile number: 212/635-6190; to the Company at
______________________________________, facsimile number:
___________________, with a copy to The International Business Law Firm,
3511 N.13th Street, Arlington, Virginia 22201, facsimile number:
703/522-1197; and, to the __________________________________________,
facsimile number: ____________________, with a copy to
________________________, facsimile number: ________________________.
14. Parties in Interest. You represent that you are authorized to
act on behalf of the several Underwriters named in Schedule I hereto, and
the Company shall be entitled to act and rely on any request, notice,
consent, waiver, or agreement purportedly given on behalf of the
Underwriters when the same shall be given by you on such behalf. The
Agreement herein set forth is made solely for the benefit of the several
Underwriters, the Company, any person controlling the Company or any of the
Underwriters, and directors of the Company, nominees for directors (if any)
of the Company named in the Prospectus, the Company's officers who have
signed the Registration Statement, and each of their respective executors,
administrators, successors, assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors
and assigns" shall not include any purchaser, as a purchaser, from an
Underwriter of the Securities.
15. Substitution of the Underwriters. If one or more of the
Underwriters shall fail (otherwise than for a reason sufficient to justify
the termination of this Agreement under the provisions of Section ___
hereof) to purchase the Securities which it or they are obligated to
purchase on the Closing Dates under this Agreement (the "Defaulted
Securities"), the Representative shall have the right, within 24 hours
thereafter, to make arrangement for one or more of the non-defaulting
Underwriters, or any other underwriters, to purchase all, but not less than
all, of the Defaulted Securities in such amounts as may be agreed upon and
upon the terms herein set forth and if any such underwriter is willing to so
purchase the Defaulted Securities, then notwithstanding Clause __ (ii)
below, the Representative shall be obligated to effect such arrangement; if,
however, the Representative shall not have completed such arrangement within
such 24-hour period, then:
(i) if the number of Defaulted Securities does not
exceed 10% of the total number of Securities to be purchased on such Closing
Date, the non-defaulting Underwriters shall be obligated to purchase the
full amount thereof in the proportions that their respective underwriting
obligations hereunder bear to the underwriting obligations of all
non-defaulting Underwriters, or
(ii) if the number of Defaulted Securities exceeds 10% of
the total number of Securities, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriters.
No action taken pursuant to this Section ___ shall relieve any
defaulting Underwriter from liability in respect of any default by such
Defaulting Underwriter under this Agreement.
In the event of any such default which does not result in a
termination of this Agreement, the Representative shall have the right to
postpone the Closing Date for a period of not exceeding ten days in order to
effect any required changes in the Registration Statement or Prospectus or
in any other documents or arrangements.
16. Applicable Law. This Agreement will be governed by, and
construed in accordance with, the laws of the State of New York applicable
to agreements made and to be entirely performed within New York without
regard to the conflicts of laws provisions thereof or the actual domicile of
the parties hereto.
17. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, and all of
which taken together shall be deemed to be one and the same instrument.
- ---------[THE REST OF THIS PAGE IS LEFT INTENTIONALLY BLANK] -------------
18. Entire Agreement; Amendments. This Agreement, the Warrant
Agreement and the Consulting Agreement constitute the entire agreements
between the parties hereto, and supersede all prior written or oral
agreement, understandings and negotiations, with respect to the subject
matter hereof, except as herein expressly provided. This Agreement may not
be amended except in writing, signed by the Representative and the Company.
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this Agreement, whereupon it will become a
binding Agreement.
Very truly yours,
BALTIA AIR LINES, INC.
By: ______________________________
Igor Dmitrowsky, President
The foregoing Underwriting Agreement is hereby
confirmed and accepted as of the date first above written.
HORNBLOWER & WEEKS INC.
[As Representative for the Several Underwriters
Named in Schedule I attached hereto]
By: __________________________________________
Eric Ellenhorn, CEO
______________________________
[As Qualified Independent Underwriter]
By: __________________________________________
Authorized Officer
SCHEDULE I
Name of Underwriter Total Number of Securities to be
Purchased
The International Business Law Firm P.C.
Arlington Office:
Telephone: (703) 522-1198
3511 North Thirteenth Street Fax: (703) 522-1197
Arlington, Virginia 22201-4907 U.S.A.
LEGAL OPINION
The International Business Law Firm, P.C. ("law firm"), has acted on behalf
of Baltia Air Lines, Inc., a New York corporation with principal executive
offices at East Wing Building #51, JFK International Airport, Jamaica, NY
11430, ("Corporation" or "Company") with respect to preparing and filing the
Corporation's application for Certificate of Public Convenience and
Necessity with the U.S. Department of Transportation, and the Company's
Registration Statement for its Initial Public Offering ("IPO"), Registration
File No. 333-2006, which did not close due to a problem with the
underwriter, and the Company's Registration Statement filed on October 8,
1997, as amended.
The principal documents in said transactions include New York State
Corporate certificate of good-standing, articles and bylaws of the
Corporation, US Department of Transportation Order 96-1-24, US Department of
Transportation Docket 97-2763, Financial Audits for 1993, 1994, 1995, 1996
and 1997, the Company's SB2 333-37409 and the Company's Registration
Statement, Prospectus and exhibits therein. In giving the opinion expressed
below, we have reviewed said documents as well as U.S. Securities and
Exchange Commission documents SEC 1898 (9-91), SEC 2345 (10-93), SEC 1887
(11-91), and have relied upon documents from the US Departments of
Transportation and of Commerce, documents from the State of New York,
statements by Airline Economics, Inc. of Arlington, VA, audits by J.R. Lupo,
P.A. CPA of Verona, NJ., and affidavits as well as letters drawn in the
course of business.
This opinion is based upon the assumption that the Company's second SB-2
Registration Statement 333-37409 becomes effective and contracts completed
with Escrow and Transfer Agents, pursuant to draft documents reviewed. It
is assumed that Blue Sky filing will be completed in all applicable
jurisdictions.
It is the law firm's belief that the Company is properly organized, that
presently issued Capital Stock and the Capital Stock being issued in
connection with the Company's public offering has been issued and is being
issued legally, and that the Company is fully complying as to the
aforementioned Capital stock with the Federal Securities Act of 1933, as
amended. The Company is restricted by agreement with the underwriter from
issuing further stock for a period of two years without prior written
permission from the underwriter. Excluding Capital Stock being offered in
present IPO, the Company has a reserve of 93,240,000 common stock. The
Company has 15,000 preferred stock authorized, none of which has been issued.
Based upon and subject to the foregoing, we are of the opinion that all
documents have been filed and all proceedings taken by the Corporation that
are required by the Securities and Exchange Commission of the United States
in order to qualify the Securities to be offered and sold to the public in
the United States. No other documents are required to be filed, proceedings
taken or approvals, consents or authorizations of regulatory authorities
obtained in order to comply with U.S. Securities and Exchange Commission
requirements to permit the issue, sale, and delivery of the Securities by
the Corporation in the United States. When sold, registered shares will be
legally issued, fully paid and non-assessable.
The International Business Law Firm
By:
Attorney
Date: June 4, 1998
US Department of 400 Seventh St, S.W.
Transportation Washington D.C. 20590
Office of the Secretary
of Transportation
February 11, 1998
Ms. Steffanie J. Lewis
The International Business Law Firm, P.C.
Counsel for Baltia Air Lines, Inc.
3511 N. l3th St.
Arlington, VA 22201
Dear Ms. Lewis:
By Order 96-2-51, issued February 7, 1996, the Department of Transportation
issued to Baltia Air Lines a certificate authorizing it to engage in foreign
scheduled air transportation between New York, New York and St. Petersburg,
Russia. The effectiveness of that certificate was conditioned upon Baltia's
providing evidence of FAA certification, liability insurance coverage, and
availability of sufficient funds to meet the Department's financial fitness
criteria. In accordance with our rules (14 CFR 204.7), Baltia had one year
from the date of issuance of Order 96-2-51 (i.e., until February 7, 1997),
to complete its certification and become operational; otherwise, its
authority would be revoked for dormancy. On February 6, 1997, and again on
September 11, 1997 (Order 97-9-11), the Department granted Baltia six-month
extensions of time in which to become operational.
On February 5, 1998, Baltia requested an additional four months to complete
its financing and FAA certification with the goal of beginning service to
Russia in mid-May 1998. The company has provided evidence of its continuing
fitness and of the steps it has taken to obtain the necessary start-up
capital and to fulfill the other conditions precedent to receiving effective
authority.
In view of the progress Baltia has made toward the institution of its
proposed scheduled operations, we have decided to grant Baltia an additional
six-month extension. Therefore, Baltia will have until August 7,1998, in
which to provide evidence of its FAA certification, operating capital and
liability insurance coverage.
Sincerely,
John V. Coleman
Director
Office of Aviation Analysis
PACIFIC AVIATION HOLDING COMPANY
VIA FACSIMILE
(360) 370-81165
January 23,1998
Igor Dmitrowsky
Chairman & President
Baltia Airlines Inc.
63-25 Saunders Street, Suite 71
Rego Park, NY 11374
Dear Igor,
Thank you for taking the time to visit our offices. This proposal offers the
ex-TWA Boeing 747-200. The terms and provisions are subject to approval by
the Lessor's management as well as the following additional conditions:
Lessor: Pacific Aviation Holding Company or its assignees.
Lessee: Baltia Airlines, Inc,
Aircraft: One (1) Boeing 747-200 aircraft equipped with four
(4) Pratt & Whitney JT9D-7A engines, The aircraft
is further described as having F,A.A. registration
number N303TW. See aircraft specifications in
Exhibit A.
Bass Lease Term: Three (3) to five (5) years.
Lease Payments: $225,000 per month in advance.
Delivery Date: To be mutually agreed upon.
Type of Lease; This will be a non-cancellable net lease transaction,
whereby operations, maintenance, insurance, taxes and
documentation costs in the USA and in any other country
where the Aircraft is registered, and all items of a
similar nature arising out of the use. operation and
leasing of the Aircraft by Lessee during the Lease term
will be for Lessee's account.
<PAGE>
Igor Dmitrowsky
January 29, 1998
Page 2
Lessor's Lender: A financial institution acting as Lender to Lessor who
may have a security interest in the Equipment, subject
to Lessee's right of quiet enjoyment under the Lease.
Lessor will advise Lessee of any security interest
granted by Lessor to Lessor's Lender.
Delivery/
Redelivery: Lessee 'will pay for the cost of the Delivery and
Redelivery of the Aircraft.
Delivery Condition: The Aircraft will be delivered to the Lessee in
Marana, Arizona on the Delivery Date in a condition
to be agreed on by Lessor and Lessee prior to lease
execution.
Country of Registration, USA
Maintenance: The Aircraft will be maintained by Lessee using an
approved maintenance provider in accordance with
Lessee's approved maintenance program so as to keep the
Aircraft in good operating condition, Lessee will,
during the term of the Lease, maintain all records and
logs required to be maintained by the FAA. At return,
the records and logs will meet the requirements of the
U.S. FAR Part 121,
Return Conditions: Upon expiration of the Lease, the Aircraft will be
returned to Lessor in Tucson, Arizona. Lessee shall
redeliver to Lessor all logs, and inspection or
maintenance records required to be maintained by the
United States FAA with respect to the Equipment
including historical records for the period of lease
necessary to prove parts traceability. The Lessor will
be responsible for the records prior to delivery. The
required maintenance status of the Aircraft upon return
shall be generally equivalent to the Delivery Condition.
More specific return conditions shall be agreed to
between Lessor and Lessee prior to lease execution.
Insurance: Lessee will maintain standard industry levels of hull,
liability and war risk insurance on the Aircraft in
amounts to be negotiated between Lessor and Lessee.
Lessee's insurance policies will be endorsed to include
the Lessor and Lessor's Lender as loss payee and as
additional insureds for their respective interests.
<PAGE>
Igor Dmitrowsky
January 23, 1998
Page 3
Stipulated Loss Value: $22,000,000.
Maintenance Reserves. Lessee will pay Lessor, monthly in arrears, on the
5th business day of each month, US$225.00 per
flight hour/cycle, whichever Is greater, for each
engine for engine overhaul reserves, US$200 per
flight hour/cycle, whichever is greater, for the
airframe "C"/"D" check, US$25.00 per flight
hour/cycle, whichever is greater, for landing gear
overhaul reserves and US$50.00 per flight
hour/cycle, whichever is greater, for APU overhaul
reserves. Lessee shall be raquired to maintain a
minimum 5:1 hour to cycle ratio for the purpose
of maintenance reserve calculation. These
reserves will only be utilized to pay for specific
overhaul work performed on the engine, airframe,
landing gear and APU, and will be utilized for
routine maintenance, or maintenance caused by
accidents, mishandling or FOD which are the subject
of normal insurance claims.
Assignment, Waivers
and Consents: Lessor will have the right to assign its interest
in the Lease and the Aircraft to any bank,
partnership, trust, financial institution or
corporation, subject to Lessee's right of quiet
enjoyment under the Lease.
Lessee Modifications: Lessee, at its sole cost and expense, will have the
right to modify or improve the Equipment in any
manner which does not materially decrease the value
or utility of the Equipment, Lessee will not
discriminate against the Equipment with respect to
the performance of service bulletins which Lessee
performs on a majority of other equipment of the
same type in Lessee's fleet. Any modifications or
additions to the Equipment required by law shall
become the property of Lessor.
Lease Commencement Date: The Leases will commence on the Delivery Dates.
<PAGE>
Igor Dmitrowsky
January 23, 1998
Page 4
Renewal Options: None.
Conditions Precedent: The obligations of the Lessor regarding this
transaction shall be subject to certain conditions,
including:
1) the Lessee's representations and warranties
made in connection with the transaction being true
and correct and the Lessee not being in default of
any of its obligations on the Delivery Date.
2) a credit review of lessee's financial
condition and no material adverse change in
Lessee's financial condition from the date hereof
to the date the Aircraft is delivered to Lessee;
3) the Lessor receiving favorable opinion(s) from:
a) independent counsel that all filings and
recordings necessary to protect Lessor's and
Lessors Lender's interest in the Aircraft in
the Country of Registration shall be
accomplished by the filing of the
documentation required for the Lease; and
b) counsel regarding the legality and
validity of the obligations of Lessor and
Lessor's Lender as it relates to the
documentation required for the Lease;
4) no loss or destruction of the Aircraft prior
to the Delivery Date.
<PAGE>
Igor Dmitrowsky
January 23, 1998
Page 5
Conditions Precedent
(cont'd):
5) the Lessee providing the following documents
(to the extent reasonably requested by the Lessor):
a) a certificate or certificates evidencing
satisfactory liability insurance coverage of
the Aircraft;
b) an opinion of counsel, officer's
certificates, certified resolutions and an
incumbency and signature certificate;
and
c) evidence that the Lessor's and Lessor's
Lender's interest shall be appropriately
recorded or perfected;
6) all other documentation associated with this
transaction including but not limited to the Lease
being satisfactory to Lessor;
7) Lessor's Executive Committee approval; and
8) Lessee's Board of Director's approval.
9) Availability of the Aircraft-
Documentation: Documentation for the transaction will be prepared by
counsel to Lessor. All documentation shall be subject to
the laws of the State of California, United States of
America and shall be mutually agreed upon and acceptable
to all parties to the transaction. The parties shall
receive customary legal opinions for the Lease transaction.
Transaction
Expenses: Each party shall bear its own expenses associated
with negotiating and documenting this transaction.
<PAGE>
Igor Dmitrowsky January 23, 1998 Page 6
Security Deposit: Within Five (5) business days after the execution of
this proposal by Lessee, Lessee will provide a Security
Deposit per Aircraft as follows:
1) Three months rental in cash or in the form of a
Letter of Credit satisfactory to Lessor.
The Security Deposit will only be refunded should
commercially reasonable documentation not be agreed to
by the parties, The Security Deposit will be returned at
the end of the lease upon notice by the Lessor that all
terms of the lease are in compliance.
Expiration Date: This proposal shall expire at 5:00 p.m, PDT on Monday,
February 23, 1998. If the above proposal Is acceptable,
please sign below where indicated and return a copy of
same to us on or before the Expiration Date, along with
the Security Deposit.
Yours truly,
AGREED AND ACCEPTED
Pacific Aviation Holding Company BALTIA AIRLINES, INC.
By:___(Igor Dmitrowksy)___
Paul Redman Title: ___President_______
Vice President
Date:____ 2-4-98__________
BALTIA AIR LINES
The New Way To Europe
Baltia - JFK Station
Iceland Air Terminal
East Wing Building #51
April 2, 1998
Mr. D. Pelcbergs, Chairman
LainBanka
6, Grecinieku St.
Riga, Latvia LV-1587
Dear Mr. Pelcbergs:
I accept your offer of $6.2 million revolving line of credit for Baltia's
operating needs and we find the conditions outlined in your letter of March
16, 1998 to be acceptable. Upon inauguration of Baltia's flight service, we
will supply to you the standard documentation, will register a subsidiary in
Latvia and will open an account at LainBanka.
I am looking to a mutually rewarding relationship.
Sincerely,
Igor Dmitrowsky
President
Baltia Air Lines, Inc.
03 25 Saunders St., Suite 71, Rego Park, NY 11.374 Tel: (718)275-5205
Fax; (718) 275 4731
<PAGE>
I N D U S T R I A L B A N K 0 F L A T V I A
Mr. Igor Dmitrowsky
President LainBanka
Baltia Air Lines, Inc.
63-25 Saunders St.
Rego Park, NY 11374
March 16, 1998
No. 1/2 - 58
Re: Baltia Air Lines, Inc. request for 6,2 Million $ line of Credit.
Dear Mr. Dmitrowsky:
Based on the request of Baltia Air Lines, Inc., a New York State
Corporation (the "Company"),industrial Bank of Latvia (LainBanka) is willing
to negotiate issues concerning participation of LainBanka in project of
issuance of syndicated line of credit to the Company in the amount of
6,200,000 (six million two hundred thousand US dollars) on the following
conditions:
The Company will provide LainBanka with documentation according to LainBanka
requirements;
The line of credit will be a short-term loan that is not intended for
capital investments or long-term financing;
The Company will register a subsidiary in the Republic of Latvia, will open
its account in LainBanka and will agree to conduct banking in Latvia through
LainBanka;
The Company will notify about its borrowing needs LainBanka two weeks, in
advance;
The interest rate will be between 10 to 14 percent per annum.
This letter remains in effect until December 31, 1998.
Sincerely,
Pelcbergs
Grecinieka St.
LV 1587 Riga Latvia
Phone: (371-7) 216529
Fax: (371-7) 221135
(371-7) 82610A
Telex: 161287 EMMA LV
Account Mr 700 161 999
Latvia Bank, Code 3101017N
Form No 003922
BRIDGE LOAN AGREEMENT
Agreement dated as of February 27, 1998, by and between BALTIA AIR LINES,
INC., a New York corporation ("BALTIA") and HOBBS MELVILLE & CO., INC.
("Lender") having an office at the address of its affiliate Hobbs Melville
Securities Corp., 110 Wall Street, New York, New York.
BALTIA intends to have a public offering or a private placement of its
securities on or before September 30,1998 (collectively referred to as the
"Offering"), the proceeds of which are to be used first to repay this and
any other "bridge loans" BALTIA may secure, to purchase goods and services
necessary to commence BALTIA revenue flight service in time for the 1998
Summer Season between John F. Kennedy International Airport in Jamaica, New
York, USA, and St. Petersburg, Russia ("Revenue Service"), and to provide
initial working capital;
While awaiting the closing of the Offering, BALTIA desires to obtain
certain goods and services itemized in the "Use of Proceeds" section of its
preliminary prospectus that forms a part of its registration statement no.
333-37409 (the "Registration Statement") to enable BALTIA to accelerate
commencement of Revenue Service; and
Lender is willing to lend BALTIA $250,000 to assist BALTIA commence
Revenue Service, and BALTIA is willing to borrow that amount (the "Bridge
Loan") under conditions that both parties consider reasonable and
commensurate with the associated risk as hereinafter set forth;
NOW THEREFORE, for and in consideration of the foregoing premises and the
mutual promises, agreements and covenants set forth herein, BALTIA and
Lender agree as follows:
(2) Bridge Loan. At the Closing as herein defined, Lender shall lend to
BALTIA and BALTIA shall borrow from Lender, the sum of TWO HUNDRED
FIFTY THOUSAND DOLLARS ($250,000.00) in lawful money of the United
States of American in immediately available funds wired to BALTIA's
account as set forth on Exhibit A annexed. BALTIA's Documents. For
and in consideration of the Bridge Loan and as a condition precedent to
Lender's making thereof, at the Closing, BALTIA shall deliver to
Lender:
(1) A promissory note substantially in the form annexed hereto as
Exhibit B (the"Promissory Note");
(2) A properly executed Warrant Certificate substantially in the
form of Exhibit C annexed ("Warrants"), for Two hundred fifty
Thousand (250,000) Warrants each entitling the holder thereof to
purchase one share of BALTIA common stock for $6.05 during the
four-year period commencing one year form the date BALTIA's common
stock commences trading in any recognized public market in the
United States of America (Effective Date). BALTIA may redeem
outstanding Warrants, once they become exercisable, at a price of
$.10 per Warrant on no less than thirty (30) days' prior written
notice, provided the closing bid quotations of BALTIA's shares
shall have exceeded $10 for 10 consecutive trading days ending on
the third day prior to the date on which notice is given;
(3) A certified copy of a resolution of BALTIA's Board of Directors,
in form and substance satisfactory to Lender and its counsel
approving the loan contemplated in this Agreement and the
execution and delivery of each and every document to be executed
and delivered pursuant there to and such other documents and
actions as may be necessary or appropriate to give full effect to
the intents and purposes of this Agreement. The resolution should
specifically authorize the officer signing any document to be
executed or delivered to Lender in connection with the Bridge Loan
to make such changes there to as he shall deem necessary or
appropriate to give effect to the transaction.
(4) An opinion of BALTIA's counsel, in form and substance
satisfactory to Lender and its counsel, that BALTIA has taken all
steps necessary and appropriate to authorize the execution and
delivery of this Agreement and each and every document, including
the Promissory Note, the Warrants, and any certificate delivered
hereunder and that the same are fully effective and enforceable
against BALTIA according to their terms and that such counsel, to
the best of its knowledge after due investigation, knows of no
material breach or any representation or warranty BALTIA or its
duly authorized officials have made in connection with this
Agreement, the Bridge Loan, the Warrants, or any document to be
delivered pursuant thereto or in connection therewith; and
(5) An incumbency certificate showing the current officers of BALTIA
and their genuine signatures.
(3) Closing. The Closing of the Bridge Loan shall take place at the
offices of Lender's counsel, Berg and Duffy, LLP, 200 Willis Avenue,
Mineola, New York, or as such other place as Lender and BALTIA shall
agree on or about February 23, 1998, or as soon thereafter as BALTIA
notifies Lender or its counsel that BALTIA can deliver the documents
required of it under paragraph (2) hereof, but, in no event later than
February 27, 1998. If BALTIA is unable to close by that date, Lender
shall have no further obligation to BALTIA hereunder.
(4) BALTIA's Undertakings. BALTIA shall, at its sole cost and expense:
(1) register the Warrants in any registration statement it may file
with respect to any public offering of its common stock;
(2) diligently and continuously pursue until concluded a public
offering of its common stock in the United States of American for
trading on a recognized exchange or in a recognized trading market
in the United States of America and provide Lender with a copy of
any registration statement or other documents related thereto;
(3) provide Lender with monthly financial statements until the
Bridge Loan is repaid in full;
(4) give Lender's affiliate, Hobbs Melville Securities Corp. a right
of first refusal to underwrite a public offering of its securities
until such time as the Bridge Loan is repaid in full;
(5) execute and deliver such other and further documents, at any
time, and from time to time, as Lender may reasonably require to
give full effect to the intents and purposes of this Agreement,
the Bridge Loan, the Promissory Note, the Warrants, or any other
document executed or delivered hereunder or in connection there
with; and
(6) BALTIA hereby terminates and discharges its letter of intent
with Hobbs Melville Securities Corp. and its predecessors in
interest which letter of intent called for Hobbs Melville
Securities Corp. to pursue a public offering of BALTIA's
securities and releases Hobbs Melville Securities Corp., its
parents, subsidiaries, affiliates, successors, and assigns and its
officers, directors, agents, and employees from any and all claims
related to or arising out of that letter of intent or the
underwriting contemplated thereby.
(5) BALTIA's Representations and Warranties. BALTIA represents and
warrants to Lender:
(1) BALTIA's execution of this Agreement and any document required
of BALTIA hereunder does not, and will not with the passage of
time or otherwise, constitute an event of default or accelerate
any obligation under any other agreement, franchise, permission,
or right;
(2) BALTIA currently has all required licenses, franchises, rights,
and agreements necessary to commence Revenue Service, except as is
set forth on Exhibit D annexed, and BALTIA will maintain the same
until the Warrants are redeemed or exercised or expire according
to their terms;
(3) BALTIA is not now in default of any material obligation except
as is set forth on Exhibit E annexed, and, to the extent of the
existence of a default, BALTIA will first apply the proceeds of
the Bridge Loan to cure that default;
(4) BALTIA has taken all steps necessary to authorize its entry in
to the Bridge Loan, including, and not limited to, the execution
and delivery of this Agreement, the Promissory Note, the Warrants,
and any other document delivered pursuant thereto; and
(5) This Agreement, the Bridge Loan, the Promissory Note, the
Warrants, and any other document delivered pursuant hereto or
thereto constitute valid and binding obligations according to
their terms.
(6) Lender's Investment Representation. Lender represents to BALTIA that
Lender is an accredited investor as that term is commonly understood
within the meaning of the Securities Laws of the United States of
America. Lender further represents and warrants to BALTIA that Lender
is acquiring the Warrants for Lender's own account for an investment
and without any present intention of further distributing the same.
Lender consents to the placing of a suitable legend to the foregoing
effect on any certificates representing Warrants.
(7) Miscellaneous.
(1) This agreement shall be interpreted and construed according to
the internal laws of the State of New York without reference to
any conflict of laws provisions.
(2) BALTIA consents to jurisdiction and venue in the Federal and
State courts of the State of New York with respect to any matter
arising under this Agreement.
(3) BALTIA hereby appoints the Secretary of State of the State of
New York as its agent for the receipt of process in connection
with any action or proceeding brought in such courts.
(4) BALTIA may not assign this Agreement, in whole or in part,
without the prior written consent of Lender.
(5) This document is the whole and entire agreement regarding the
subject matter hereof, and there are no other agreements,
expressed or implied, regarding that subject matter, except as are
set forth herein. This Agreement may only be modified by a
writing signed by both parties hereto with the same formalities as
this Agreement.
IN WITNESS WHEREOF, each of BALTIA AIR LINES, INC., and HOBBS MELVILLE
& CO., INC., have caused this Agreement to be signed by it duly authorized
corporate officers as of the date above written
BALTIA AIR LINES, INC.
By:____________________________________
Igor Dmitrowsky, President
HOBBS MELVILLE & CO., INC.
By:___________________________________
Authorized Signatory
BRIDGE LOAN AND WARRANT PURCHASE AGREEMENT
THIS BRIDGE LOAN AND WARRANT PURCHASE AGREEMENT (this "Agreement ")
is entered into as of June 2, 1998, between Baltia Air Lines, Inc., a New
York corporation ("Borrower") and , ("Lender"), with
reference to the following.
RECITALS
A. Borrower desires to borrow certain funds from Lender to meet
working capital needs until the funding of its anticipated private placement
of stock.
B. Borrower desires to borrow a total of $400,000 in increments of
$50,000 from accredited investors.
C. Lender desires to lend $50,000 to Borrower pursuant to the terms
of that certain Promissory Note, of even date herewith, a copy of which is
attached hereto as Exhibit "A" (the "Note"). The note shall be accompanied
by 50,000 common stock purchase warrants of the Borrower (the "Warrants").
Each Warrant entitles the registered holder thereof to purchase one share of
the common stock at 110% of the Public Offering price of the Common Stock,
at any time commencing six months after the Effective Date of The Public
Offering until five years after the Effective Date of the Offering. The
Warrants and the Note together shall be referred to as a "Unit."
AGREEMENT
NOW, THEREFORE, in consideration of the forgoing premises, the
provisions set forth below, and other good and valuable consideration, the
parties agree as follows.
1. LOAN. Borrower hereby borrows from Lender and Lender hereby makes a
loan to Borrower, in the amount of $50,000 (the "Loan") in accordance with
the terms of the Note. The proceeds of the Loan shall be delivered to
Borrower through an escrow, net all fees, commissions and costs associated
with the loan.
2. SENIOR DEBT. The Note will rank senior in right of payment to all
existing and future indebtedness of Borrower, except for: (i) purchase money
indebtedness incurred in arm's length transactions in the ordinary course of
business; (ii) unsecured obligations currently payable and paid by borrower
in the ordinary course of business; and (iii) indebtedness approved in
writing by Lender. Notwithstanding the foregoing, Lender does not hereby
subordinate or agree to subordinate to any debt or obligation of Borrower,
regardless of how or when incurred and nothing in this Agreement shall
affect the relationship between Lender and Borrower's creditors and no such
creditors are intended third party beneficiaries of this Agreement.
3. SALE OF WARRANTS. Borrower hereby delivers to Lender 50,000 common
stock purchase warrants of the Borrower. The certificate for the Warrants
shall be delivered to Borrower within 10 days of the date of this Agreement,
and shall be
subject to the provisions of this Agreement.
4. PIGGYBACK REGISTRATION. If Borrower or its successors or
assigns conducts an initial public offering of any of its securities or
securities of any of its subsidiaries or merges with a public company,
Borrower shall include in the registration statement such number of the
shares of the Common Stock underlying the Warrants as Lender may request,
subject to reasonable limitations established by the underwriter. Such
inclusion, in any event, shall be at no cost to Lender and shall be at the
sole cost and expense of the Borrower. In connection with any notification
or registration statement, Borrower shall take any reasonable steps to make
the securities covered thereby eligible for public offering and sale by the
effective date of such notification or registration statement. In
connection with any filing hereunder Borrower shall bear all the expenses
and professional fees which arise in connection with such filings and
keeping them effective and correct as provided hereunder and shall provide
Lender with a reasonable number of printed copies of the prospectus or
offering circulars. Borrower consents to the use of such prospectus or
offering circular in connection with the sale of the Lender's shares.
5. REPRESENTATION AND WARRANTIES OF BORROWER. Borrower hereby
represents and warrants to Lender as follows:
a. ORGANIZATION. Borrower: (i) is a corporation
duly organized, validly existing and in good standing under the laws of the
State of New York; (ii) is duly qualified and licensed to do business in
each jurisdiction in which it operates; and (iii) has all requisite power
and authority to carry on its business, to own and hold its properties and
assets, to enter into and perform this Agreement and to issue and carry out
the provisions of the Note and this Agreement.
b. AUTHORIZATION. The execution, performance and
delivery by Borrower of this Agreement, the Warrants and Note have been duly
and validly authorized by Borrower's Board of Directors and no authorization
or approval of Borrower's shareholders is required in connection therewith.
This Agreement and the Note constitute the legal, valid and binding
obligations of Borrower and each is enforceable against Borrower in
accordance with their respective terms, except as such enforcement maybe
limited by bankruptcy, insolvency and other similar laws affecting the
enforcement of creditors' rights generally.
c. NO CONFLICT. The execution, delivery and
performance by Borrower of this Agreement, the Warrants and the issuance of
the Note: (i) will not conflict with, result in a breach of or constitute a
default under any contract, agreement, indenture, loan or credit agreement,
deed of trust, mortgage, lease, security agreement lock-up agreement, or
other arrangement to which Borrower is a party by which Borrower or any of
its properties or assets is bound or affected; (ii) will not cause Borrower
to violate or contravene any provision of its Articles of Incorporation or
Bylaws; or (iii) require any authorization, consent, approval, permit,
exemption or other action by or notice to any court or administrative or
governmental body pursuant to the Articles of Incorporation or Bylaws of
Borrower, any law, statute, rule or regulation to which Borrower is subject
or any agreement, instrument, order, judgment, or decree to which Borrower
is subject.
d. PATENTS, TRADEMARKS, AND OTHER INTANGIBLE RIGHTS.
Borrower has good title (without known misappropriation) to all inventions
(whether patentable or not), patents, trademarks, copyrights, trade names,
proprietary information, processes, designs, trade secrets, computer
programs, source codes, modules, and technical materials (collectively, the
"Trade Secrets"), or adequate licenses and rights to used the Trade Secrets
of others on terms deemed favorable by Borrower, that are necessary for the
successful conduct of the Business of the Borrower, free of any claim by an
officer, director, employee or other person, and that Borrower's business is
being carried on without known conflicts or infringements with the Trade
Secrets of others; and Borrower has taken reasonable security measures to
protect the secrecy, value and confidentiality of such Trade Secrets, and
any former or current employees who have worked on, developed or contributed
to the development of such Trade Secrets have been informed and have entered
into agreements that such Trade Secrets are proprietary and not to be
developed. Borrower knows of no reason why any Trade Secrets of Borrower
which are eligible for patent, copyright or trademark protection cannot be
patented, copyrighted or trademarked. No shareholder or employee is under
any restriction, whether contractual or by virtue of previous employment or
otherwise, that would prevent him from performing his duties for Borrower or
prevent Borrower from using the Trade Secrets.
e. LITIGATION. There are no (i) actions, proceedings
or investigations pending or to Borrower's knowledge, threatened or any
verdicts or judgments entered against Borrower, its officers or directors or
shareholders before any court or before any administrative agency or officer
that might result in any material adverse change in the business, properties
or condition, financial or otherwise, of Borrower and Borrower has received
no correspondence or communications with respect to any possible violation
or investigation of the same.
f. TAX RETURNS AND PAYMENTS. Borrower has filed or
caused to be filed all federal and state income tax returns and all other
federal and state tax returns that are required to be filed, completed all
such returns accurately and paid or caused to be paid or set aside adequate
reserves for all taxes, penalties and interest due or that may become due.
The federal and state returns of Borrower are not now and have never been
audited by the Internal Revenue Service or the Franchise Tax Board or the
Board of Equalization of each jurisdiction in which its conducts business,
respectively, and no waivers of the applicable statute of limitations have
been executed.
g. MATERIAL LICENSES, AGREEMENTS, RELATED PARTY
AGREEMENTS. Borrower is not a party to, nor is its property bound by any
agreement not entered into in the ordinary course of business and that is
materially adverse to the business, properties or financial condition of
Borrower. There is no default or event that with notice or lapse of time,
or both, would constitute a default by Borrower, or to Borrower's knowledge,
by any other party to any of these agreements. Borrower has not received
notice nor does it have knowledge that any party to any of these agreements
intends to cancel or terminate any of these agreements or to exercise or not
exercise any options under any of these agreements or seek a re-negotiation
or adjustment of any material provisions.
h. INSURANCE. Borrower maintains insurance coverage
with respect to its properties, assets and business which is customary and
sufficient for corporations of similar size and engaged in similar lines of
business and is in full force and effect.
I. LIABILITIES. Borrower does not have any debt,
liability or obligation of any nature, whether accrued, absolute, contingent
or otherwise arising out of any transaction entered into or any state of
facts existing prior hereto, including without limitation liabilities or
obligations on account of taxes or government charges penalties, interest or
fines thereon in respect thereof other than as disclosed in writing to
Lender. Borrower does not know and has no reasonable grounds to know of any
basis for any claim against it as of the date of this Agreement or of any
debt, liability, or obligation other than those mentioned herein.
j. MATERIAL FACTS DISCLOSED. There are no material
facts relating to Borrower not fully disclosed to Lender; no representation,
covenant or warranty made by Borrower herein or with the transaction
contemplated hereby contains or will contain any untrue statement of or
omits to state a material fact necessary to make the statement not misleading.
6. REPRESENTATIONS AND WARRANTIES AND AGREEMENTS OF LENDER.
Lender hereby represents and warrants to Borrower as follows:
(a) KNOWLEDGE AND EXPERIENCE. Lender has sufficient
knowledge and experience in financial and business matters as to be capable
of evaluating the merits and risks of investments generally and of
investment in Borrower in particular and LENDER IS ABLE TO BEAR THE ECONOMIC
RISK OF THIS LOAN TRANSACTION WITH FULL UNDERSTANDING THAT IT CAN LOSE ITS
ENTIRE INVESTMENT IN BORROWER WITHOUT PRODUCING A MATERIAL ADVERSE CHANGE IN
LENDER'S FINANCIAL CONDITION.
(b) TRANSFERABILITY RESTRICTIONS. The Stock cannot be
transferred or sold unless such transfer or sale is registered pursuant to
the Securities Act of 1933 (the "Act") and registered or qualified pursuant
to applicable securities laws, or exemptions from such registrations or
qualifications are available or without prior written consent of Borrower
which consent may require an opinion of the transferor's legal counsel
(concurred with by Borrower's legal counsel) to the effect that the
proposed transfer is exempt from the registration provisions of the Act and
from the registration or qualification provisions of any applicable
securities law.
(c) NO PUBLIC MARKET. Lender is aware that there is
currently no public market for the Warrants or the Note and that Lender may
not be able to readily liquidate Lender's investment in Borrower.
(d) SUBSCRIPTION AGREEMENT. Lender will execute a
Subscription Agreement concerning the purchase of the Stock and Note.
7. AFFIRMATIVE COVENANTS OF BORROWER. Borrower makes the
following affirmative covenants to Lender, upon which Lender is relying in
entering into this Agreement and which, unless otherwise indicated, shall
survive the repayment of the Note until the earlier of (i) Borrower
conducting an initial public offering, or (ii) ninety (90) days.
(a) PAYMENT OF PRINCIPAL AND INTEREST. Borrower will
duly and punctually pay or caused to be paid all amounts due under the Note
at the time and place in the manner specified in the Note and this
Agreement. To the extent Borrower has sufficient revenues. Borrower will
duly and punctually pay or cause to be paid all debts and obligations of
Borrower in accordance with the terms of each agreement pursuant to which
such obligation was incurred by borrower.
(b) RECORDS. Borrower shall: (i) at all time keep
proper books of record and account in which full, true and correct entries
shall be made of its transactions in accordance with generally accepted
accounting principles, consistently applied; (ii) set aside on its books
from its earnings for each fiscal year all such proper reserves, including
reserves for depreciation, depletion, obsolescence and amortization of its
properties during such fiscal year, in connection with Borrower's business.
(c) TAXES. Borrower shall pay and discharge promptly
as they become due and payable all taxes, assessments and other governmental
charges or levies imposed upon it or its income or upon any of its property,
real, personal or mixed, or upon any part thereof, as well as all material
claims of any kind (including claims for labor, materials and supplies)
which if unpaid might by law become a lien or charge upon its property;
provided, however, that it shall not be required to pay any such tax,
assessment, charge, levy or claim if the amount, applicability or validity
thereof shall currently be contested in good faith by appropriate
proceedings or other appropriate actions promptly initiated and diligently
conducted.
(d) EXISTENCE. Borrower shall do or cause to be done
all things necessary to preserve and keep in full force and effect its
corporate existence.
(e) PROPERTIES. Borrower shall maintain and keep its
properties in good repair, working order and condition, ordinary wear and
tear excepted, and from time to time make all necessary and proper repairs,
renewals and replacements and preserve all licenses, contracts and rights as
in its judgment may be necessary so that the Business carried on in
connection therewith may be properly and advantageously conducted at all
times, provided, however, that nothing in this Section shall prevent
Borrower from selling abandoning or otherwise disposing of any property that
is not material to its business or property (including any lease of
property) if in its judgment the same is no longer useful in the business.
This covenant shall terminate upon payment of the Note in full.
(f) COMPLIANCE WITH LAWS. Borrower shall comply in
all material respect with all applicable statutes, rules, regulations and
orders of and all applicable restrictions imposed by all governmental
authorities related to the conduct of its business and the ownership of its
property to environmental, safety and other similar standards or controls)
unless the failure to so comply would not have a material adverse effect on
the business or condition (financial or otherwise) of Borrower.
(g) INSURANCE. Borrower shall maintain with
financially sound and reputable insurers, insurance with respect to its
properties and business against loss or damage of the kinds customarily
insured against by owners of established reputation engaged in the same or
similar business and similarly situated, in such amounts and by such methods
shall be customary for such owners.
(h) LITIGATION. Borrower shall promptly notify Lender
of any material litigation or legal proceedings initiated against Borrower
or any violation or potential violation of any representation, warranty or
covenant under this Agreement or the Note. This covenant shall terminate
upon payment of Note in full.
8. NEGATIVE COVENANTS OF BORROWER. Borrower makes the following
negative covenants to Lender, upon which Lender is relying in entering into
this Agreement and which shall survive until the Note is repaid in full.
(a) INDEBTEDNESS. Borrower shall not incur any
indebtedness, or any trade indebtedness other than in the usual and ordinary
course of business without the prior written consent of Lender.
(b) GUARANTEE. Borrower shall not guarantee or
otherwise in any way become liable for the obligations or liabilities of any
other person or entity.
(c) NO LIENS. Borrower shall not sell, except in the
ordinary course of business, encumber, pledge, mortgage, grant a security
interest in, assign, hypothecate or otherwise obligate any of Borrower's
assets, or permit any lien, charge, security interest, abstract of judgment
or any other encumbrance on any of its assets.
(d) NO RELATED PARTY AGREEMENT. Without the prior
written consent of Lender, Borrower shall not enter into or become a party
to any transaction with any affiliate, stockholder, officer or director,
except placement agents and employment agreements entered into in the
ordinary course of business on commercially reasonable terms.
(e) NO VIOLATION. Borrower shall not cause or permit
any violation of any representation, warranty or covenant under this
Agreement or cause or permit any action that could result in a violation of
any representation, warranty or covenant under this Agreement, violate or
take any action which is likely to result or will result in the violation of
any contract or agreement by which Borrower is bound.
(f) NO BORROWING. Prior to the repayment in full of
the Note, Borrower shall not borrow any additional funds or issue any form
of debt instrument or any security convertible into any form of debt or
charge against Borrower in excess of $500,000 in the aggregate, which is
part of this bridge financing on the same terms and conditions as the
indebtedness evidenced by this Agreement.
9. INVESTMENT COVENANT. By accepting the Warrant, the holder
thereof represents, warrants and covenants that it is an "accredited
investor" within the meaning of Section 496) of the Securities Act or an
"accredited person" within the meaning of Rule 242 of the Securities Act,
and is acquiring the Units for its own account for investment and not with
the view to resale or distribution thereof except in accordance with
applicable federal and state securities laws.
10. DEFAULT.
(a) EVENTS OF DEFAULT. The occurrence of any of the
following events shall be an event of default under this Agreement and the
Note ("Events of Default"):
(i) If default shall be made in the due and punctual
payment of any principal or interest or cost under the Note;
(ii) If the default shall be made in the due and
punctual payment, after applicable cure periods, under any note, bond,
indenture, loan agreement, note agreement, mortgage, security agreement or
other instrument entered into by Borrower;
(iii) If default shall be made in the due and punctual
performance or observance of any material non-payment term, condition or
covenant contained in this Agreement or the Note and such default continues
unremedied for a period thirty (30) days after written notice to Borrower by
Lender, or if any representations or warranties of Borrower contained in
this Agreement is untrue or inaccurate in any material respect as of the
date on which such representation or warranty is made;
(iv) The material breach of any warranty of Borrower
contained in this Agreement not cured within thirty (30) days of written
notice of such breach;
(v) If Borrower; (A) becomes unable to pay its debts
generally as they become due; (B) files a petition in bankruptcy or a
petition to take advantage of any insolvency act or other act for the relief
or aid of debtors; (C) makes an assignment for the benefit of its creditors;
(D) consents to or acquiesces in the appointment of a receiver, liquidator
or trustee of itself or of the whole or any part of its properties and
assets; (E) files a petition or answer seeking for itself reorganization,
arrangement, composition, readjustment, liquidation, dissolution or similar
relief under the federal bankruptcy laws or any other applicable law; (F)on
a petition in bankruptcy filed against it, is adjudicated a bankrupt; or
(G) is served within a three-day notice to quit any of its leasehold
premises, which notice is not discharged or contested in good faith by
appropriate proceedings prior to the initiation of an unlawful detainer suit
against Borrower.
(vi) If a court of competent jurisdiction shall enter
an order, judgment or decree appointing, without the consent of acquiescence
of Borrower, as a receiver, liquidator or trustee of Borrower, or of the
whole of any substantial part of its properties and assets; or approving a
petition filed against it seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under the federal
bankruptcy laws of any other applicable law, and such order, judgment or
decree shall remain unvacated or not set aside or unstayed for an aggregate
of 30 days, whether or not consecutive, from the date of entry thereto; or
(vii) if, under the provisions, of any other law for
the relief or aid of debtors, any court of competent jurisdiction shall
assume custody or control of Borrower or the whole of any substantial part
of its operations and assets and such custody and control shall remain
un-terminated or unstayed for an aggregate of thirty (30) days, whether or
not consecutive, from the date of assumption of such custody or control.
(b) DUE AND PAYABLE. Upon the occurrences of any
such event of default, Lender at its option exercised by written notice to
Borrower shall deem the principal under the Note, together with the interest
and charges accrued thereon, become immediately due and payable.
(c) OTHER REMEDIES. The rights, powers, and remedies
granted to Lender pursuant to the provisions of this Agreement shall be in
addition to al the rights, powers and remedies granted to Lender under any
statute or rule of law. Any forbearance, failure or delay by Lender in
exercising any right, power or remedy under this Agreement shall not be
deemed to be waiver of such right, power or remedy. Any single or partial
exercise of any right, power or remedy under this Agreement shall not
preclude the further exercise thereof, and every right, power and remedy of
Lender under this Agreement shall continue in full force and effect until
such right, power or remedy is specifically waived by any instrument
executed by Lender.
11. DISPUTES. This Agreement will be interpreted in accordance
with New York Law, including all matters of construction, validity,
performance and enforcement, without giving effect to any principles of
conflict of laws.
12. ATTORNEY'S FEES. If any arbitration, litigation, action, suit
or other proceeding is instituted to remedy, prevent or obtain relief from a
breach of this Agreement, in relation to a breach of this Agreement or
pertaining to a declaration of rights under this Agreement, and prevailing
party will recover all such party's reasonable attorney's fees incurred in
each and every such action, suit or other proceedings, including any and all
appeals or petitions therefrom. As used in this Agreement, attorney's fees
will be deemed to the full and actual costs of any legal services actually
performed in connection with the matters involved, including those related
to any appeal or the enforcement of any judgment, calculated on the basis of
the usual fee charged by attorneys performing such services.
13. NOTICES. Any notice to be given hereunder shall be given
(except as otherwise expressly set forth herein) by registered or certified
mail, postage, prepaid, by cable, telex or facsimile, or may be delivered by
hand or by messenger and shall be deemed to have been received as follows:
if given by registered or certified mail, five business days after posting;
if given by cable, two business days after dispatch; if given by telex or
facsimile, one business day after dispatch, and if delivered by hand or by
messenger and receipted by for by or on behalf of the party to whom the
notice is directed, at the time of such delivery. Any notice shall be sent
to the address set forth below or to such other address as the relevant
party may notify to the other.
If to Borrower: Mr. Igor Dmitrowsky
Baltia Air Lines, Inc.
63-25 Saunders Street, Suite 71
Rego Park, NY 11374
If to Lender: _________________________
_________________________
_________________________
_________________________
14. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be an original but all of which shall be constituted one
and the same instrument.
15. INTERPRETATION. The language in all parts of this Agreement
shall be in all cases construed simply according to its fair meaning and not
strictly for or against any party. Whenever the context requires, all words
used in the singular shall be construed to have been used in the plural and
vice versa and each gender will include any other gender. The captions of
the paragraphs of this Agreement are for convenience only and shall not
affect the construction or interpretation of any such of the provisions herein.
16. MISCELLANEOUS. The recital and all exhibits, attachments or
other documents referenced in this Agreement are fully incorporated into
this Agreement by reference. Unless expressly set forth otherwise herein,
all references herein to a "day, month" or "year" will be deemed to be a
reference to a calendar day, month or year, as the case may be. Unless
expressly set forth otherwise, herein, all cross-references herein will
refer to provisions within this Agreement, and will not be deemed to be
references to the overall transaction or to any other agreement or documents.
17. MODIFICATIONS, AMENDMENTS, AND WAIVERS. No provision of this
Agreement or the documents referred to herein may be altered, amended,
canceled, revoked or otherwise modified, and no addition to this Agreement
may be made, unless in writing signed by each of the parties. There can be
no waiver with respect to this Agreement of any provision of this Agreement
by any party will be, nor will it be deemed to be, a waiver of the right of
any other party to enforce strict compliance with the provisions hereof.
18. SEVERABILITY. Each provision of this Agreement is intended to
be severable and if any term or provision herein is determined invalid or
unenforceable for any reason, such illegality or invalidity will not affect
the validity of the remainder of this Agreement and whenever possible,
intent will be given to the invalid or unenforceable provision.
19. MERGER. The terms of this Agreement and the agreements
contemplated hereby are intended by the parties as a final expression of
their agreement with respect to such terms and may not be contradicted by
evidence of any prior agreement or contemporaneous oral agreement, and this
agreement and the agreements referenced herein constitute the complete and
exclusive statement of its terms and no extrinsic evidence whatsoever may be
introduced in any judicial or arbitration proceeding, if any, involving this
Agreement.
IN WITNESS WHEREOF, this Agreement is entered into by the parties as of the
date set forth above.
"BORROWER"
BALTIA AIR LINES, INC.
By:
__________________________
Its:
__________________________
"LENDER"
______________________________
EXHIBIT "A"
PROMISSORY NOTE
$50,000 JUNE 2, 1998
NEW YORK
FOR VALUE RECEIVED, Baltia Air Lines, Inc., a New York
Corporation ("Borrower"), hereby covenants and promises to pay to
______________________, and individual, ("Lender"), Fifty Thousand Dollars
($50,000.00) in lawful money of the United States of America, together with
interest thereon computed from the date hereof at the rate of ten percent
(10%) per annum, on an actual day/360 day basis which shall accrue from June
2, 1998. All interest, principal and other costs hereunder shall be due and
payable to the holder ("Holder") of this Promissory Note (this "Note") on
the earlier of 90 days from June 2, 1998 or the first break of escrow on
Borrower's pending Initial Public Offering (the "Due Date").
Payments of principal and interest will be made in legal tender
of the United States of America. Borrower shall have the right to prepay
without penalty all or any part of the unpaid balance of this Note at any
time. Borrower shall not be entitled to re-borrow any prepaid amounts of the
principal, interest or other costs or charges. All payments made pursuant to
this Note will be first applied to accrued and unpaid interest, if any, then
to other proper charges under this Note and the balance, if any, to principal.
Notwithstanding anything in this Note to the contrary, the
entire unpaid principal amount of this Note, together will all accrued but
unpaid interest thereon and other unpaid charges hereunder, will become
immediately all due and payable without further notice at the option of the
Holder upon any of the following (the "Acceleration Date"): (i) Borrower
fails to timely make any payments hereunder when such payment becomes first
due and such failure continues for a period of five days after written
notice from Holder to Borrower; (ii) The occurrence of an "Event Of Default"
as defined in the Bridge Loan and Stock Purchase Agreement, of even date
herewith (the "Loan Agreement") or this Note and such default continues
unremedied for a period of ten (10) days after written notice to Borrower by
Lender; (iii) Borrower ceases to carry on business on a regular basis or
enters into an agreement to sell substantially all of its assets or an
agreement whereby it merges into, consolidates with or is acquired by any
other business entity; or
(iv) Borrower makes any assignment for the benefit of its creditors, makes
any election to wind up or dissolve or becomes unable to pay Borrower's
debts as they mature, insolvent or the subject of any proceeding under any
bankruptcy, insolvency or debtor's relief law.
If any amount payable to Holder under this note is not received
by Holder on or before the Due Date, then such amount (the "Delinquent
Amount") will bear interest from and after the Due Date until paid at an
annual rate of interest equal to the greater of (i) fifteen percent (15%),
(ii) the advance rate to member banks on the Acceleration Date as
established by the Federal Reserve Bank of New York, New York, pursuant to
Section 13 of the Federal Reserve Act, plus five percentage points, or (iii)
the maximum rate then permitted by law (the "Default Rate"). In addition,
Borrower will also pay to Holder each month a late payment processing fee
("Late Fee") in an amount each month equal to six percent (6%) of each
Delinquent Amount to defray. In addition, Borrower will also pay the Holder
each month that the note is in default a penalty of 5,000 shares of the
Company's Common Stock.
Dated as of June 2, 1998 "BORROWER"
BALTIA AIR
LINES, INC.
By: ____________________________________
Its: __________________________________
By:____________________________________
Its:__________________________________
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Baltia Airlines Inc.
63-25 Saunders St. Suite 7I
Rego Park, NY 11374
We hereby consent to the use in this registration statement
on form SB-2 of ;our opinion dated June 4, 1998 and to the
reference to our firm under the caption "Experts" in same
registration statement.
J.R. Lupo, P.A. CPA
25 Pompton Ave.. Ste 202
Verona, NJ 07044
June 4, 1998
AIRLINE ECONOMICS INTERNATIONAL, INC.
Lee R. Howard Telephone
(706)579-1466
President
6088 Indian Pipe Drive
487 Big Canoe
Big Canoe, Georgia 30143 USA
Igor Dmitrowsky
President
Baltia Air Lines, Inc.
63-25 Saunders Street, Suite 7I
Rego Park, NY 11374
June 3, 1998
Dear Mr. Dmitrowsky:
We, Airline Economics, Inc. and Airline Economics
International, Inc., give you permission to publish
in your forthcoming prospectus all letters, analyses,
data, statements, and other material furnished you
regarding Baltia's JFK-St.Petersburg operation.
Sincerely,
SUBJECT TO COMPLETION, DATED June ___, 1998
PROSPECTUS SUPPLEMENT
(c) BALTIA AIR LINES - U.S. INTERNATIONAL AIR CARRIER
The New Way to Europe(tm)
Seventeen Selling Securityholders
of Bridge Warrants and
825,000 Shares of Common Stock
Underlying Bridge Warrants
___________________
Baltia Air Lines, Inc. ("Baltia" or "Company"), a New York corporation,
hereby identifies seventeen Selling Securityholders, holding unregistered
Bridge Warrants of the Company, entitling the holders to purchase up to
825,000 registered shares of common stock of $.0001 par value ("Common
Stock" or "Shares") in accordance with the terms, conditions and plan of
distribution set forth herein. The Company's Prospectus dated June ______,
1998, ("Prospectus") also relates to these seventeen Selling Securityholders
of 825,000 warrants and to the 825,000 Shares underlying those warrants.
The warrants were issued in connection with money ("Bridge Loan") the
Company borrowed in order to purchase goods and services identified in the
Prospectus under "Use of Proceeds" which otherwise would be purchased with
proceeds of the offering described in the Prospectus.("Offering") The two
classes of warrants are as follows.
Class B Bridge Warrants. In February 1998, the Company issued 250,000
warrants in connection with a Bridge Loan for $250,000. ("Class B Bridge
Warrants") These warrants are exercisable during the four-year period
commencing one year form the date the Prospectus becomes effective
("Effective Date") unless redeemed earlier by the Company. Otherwise, the
terms of Class B Bridge Warrants are identical to those offered to the
public in the Prospectus.
Class A Bridge Warrants. In June 1998, the Company issued 575,000 warrants
in connection with a series of Bridge Loans in the aggregate amount of
$575,000. ("Class A Bridge Warrants") The terms of these warrants are
identical to the Warrants offered to the public in the Prospectus. (See
"Notes to Financial Statements" in the Prospectus.)
The Company may redeem outstanding Class A and Class B Bridge Warrants, once
they become exercisable, at a price of $.10 per warrant on not less than 30
days' written notice, provided the closing bid quotations of the Shares have
exceeded $10 for 20 consecutive trading days ending on the third day prior
to the date on which notice is given. See "Description of Securities" in the
Prospectus.
Each Class A and Class B Bridge Warrant entitles the holder to purchase one
Share for $6.05. The 825,000 Shares underlying the 825,000 Bridge Warrants
are registered effective on the Date of the Prospectus.
------------------------------------
The following list identifies each Selling Securityholder and the number of
Bridge Warrants each holds.
CLASS A BRIDGE WARRANT HOLDERS:
Neil Jones . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 warrants
23 Tucquan Glen Road
Holtwood, PA 17532
Socrates Skiadas . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
154-5017 Road
Whitestone, NY 11357
T.H. Holloway . . . . . . . . . . . . . . . . . . . . . . . . 50,000 warrants
16 Cloister Parkway
Amarillo, TX 79121
Ron Rust . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
103 Brookmeadow Road
Wilmington, DE 19807
Hart Rotenberg . . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
BT1 Computers
1789 NW 79th Avenue
Miami, FL 33126
Metro Consulting . . . . . . . . . . . . . . . . . . . . . . . 50,000 warrants
199 Brook Street
Scarsdale, NY 10538
M, S. Arden Inc. . . . . . . . . . . . . . . . . . . . . . . . 50,000 warrants
1109 Arden) Avenue
Staten Island, NY 10312
Brian Sly . . . . . . . . . . . . . . . . . . . . . . . . . . 50,000 warrants
73 Scenic Drive
Orinda, CA S~4563
Russet Development Association . . . . . . . . . . . . . . . . 25,000 warrants
39 Brighton, Avenue
Boston, MA 02134
Richard Charbit. . . . . . . . . . . . . . . . . . . . . . . .100,000 warrants
7 Rue Ste. Isaure
Paris, FRANCE 75018
David Marston . . . . . . . . . . . . . . . . . . . . . . . . 15,000 warrants
119 Gand Avenue
Paonia, CO 81428
J. Walker Clerk . . . . . . . . . . . . . . . . . . . . . . . 10,000 warrants
P.O. Box 11359
Columbia, SC 29211-1359
Arian Jacob . . . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
9 Mica Court
Baltimore, M D 21209
Joseph Rotenberg . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
BTI Computers
1789 NW 79th Avenue
Miami, FL 33 126
Harvey DeLott . . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
c/o Qua1ity Truck Parts
2421 S. Wabash Avenue
Chicago, IL 60616
Michael Ostro . . . . . . . . . . . . . . . . . . . . . . . . 25,000 warrants
85 Glen Park Avenue
Toronto, Ontario
CANADA H6B2C3
CLASS B BRIDGE WARRANT HOLDER:
Hobbs Melville & Co. . . . . . . . . . . . . . . . . . . . . .250,000 warrants
110 Wall Street
New York, NY 10005
Total: 17 Securityholders . . . . . . . . . . . . . . . . . 825,000 warrants
(Class A and Class B
Bridge Warrants)
PLAN OF DISTRIBUTION.
No underwriter is involved in the distribution of the
securities that may be owned by the Selling Securityholders, but rather
sales will be made by the Selling Securityholders either directly or through
one or more securities brokers or dealers in privately negotiated
transactions, or in transactions on The Nasdaq SmallCap Market or Boston
Stock Exchange, if the Company's securities are listed thereon. However,
there is no assurance that the Company will qualify for listing or, if
listed, will be able to maintain that listing. Alternatively, the sales may
be over-the-counter transactions on The Nasdaq Stock Market. At the closing
of the Company's initial public offering presented in the Company's
Prospectus dated _______, 1998, this Prospectus Supplement will be
distributed setting forth the identity of each Securityholder and the number
of Warrants each holds.
Bridge Warrants are expected to be sold at prices acceptable to
the buyer and seller. Broker-dealers through which the Selling
Securityholders effect sales of the warrants may receive compensation in the
form of discounts, concessions or commission from the Selling
Securityholders and/or the purchasers of the warrants. The Underwriters may
act as broker-dealers on behalf of one or more of the Selling
Securityholders. If engaged in connection with sales by Selling
Securityholders, the Underwriters do not anticipate that they will receive
in excess of the customary brokerage commission in connection therewith.
Class A and Class B Bridge Warrants are tradeable on the
Effective Date of the Company's Prospectus. Class A Bridge Warrants are
exercisable commencing six months after the Effective Date and continue
until the fifth anniversary of the Effective Date unless redeemed sooner by
the Company. Class B Bridge Warrants are exercisable for a four-year period
commencing one year from the Effective Date unless redeemed sooner by the
Company. The Company may redeem the its outstanding shares upon no less
than 30 days written notice, provided the closing bid quotations of the
Company's shares have exceeded $10 for 20 consecutive trading days ending on
the third day prior to the date on which notice of redemption is given.
Both Class A and Class B Bridge Warrants entitle the holder to purchase one
share of the Company's common stock @ $6.05 per share. The 825,000 shares
underlying both Class A and Class B Bridge Warrants are registered effective
on the Date of the Prospectus.
The Selling Securityholders will receive the entire proceeds
from the sale of their Bridge Warrants, less any commissions paid to brokers
or dealers for executing such transactions. Although the Company will not
receive any funds from the sale of the Selling Securityholders' Bridge
Warrants, the Company expects to pay for all expenses of registration and
will furnish Prospectuses to the Selling Securityholders.
