As filed with the Securities and Exchange Commission on June 5, 1996
Registration No. 333-860
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
AMENDMENT NO. 4 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BALTIC INTERNATIONAL USA, INC.
(Exact name of Registrant as specified in its charter)
4511
(Primary Standard Industrial
Classification Code Number)
TEXAS 76-0336843
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1990 Post Oak Blvd., Suite 1630 Robert L. Knauss
Houston, Texas 77056-3813 Baltic International USA, Inc.
(713) 961-9299 1990 Post Oak Blvd., Suite 1630
(Address, including zip code, and Houston, Texas 77056-3813
telephone number, including (713) 961-9299
area code, of registrant's (Name, address, including zip code,
principal executive offices) and telephone number, including
area code, of agent for service)
COPY TO:
Thomas C. Pritchard
Brewer & Pritchard, P.C.
1111 Bagby, 24th Floor
Houston, Texas 77002
Phone (713) 659-1744
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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]
CALCULATION OF REGISTRATION FEE (1)
============================================= ----------------- --------------------- --------------------- ================
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED PER SHARE(2) OFFERING PRICE(2) FEE
============================================= ----------------- --------------------- --------------------- ================
Common Stock to be Resold:
Shares Outstanding..................... 15,000 1.750 (3) 26,250 9
9,000 1.688 (4) 15,192 5
19,000 1.281 (5) 24,339 8
Shares to be Issued.................... 45,000 1.625 73,125 25
Shares Underlying Resale Warrants...... 19,500 1.000 19,500 7
78,125 2.400 187,500 65
Shares Underlying Options.............. 10,000 1.875 18,750 6
Shares Underlying Debt................. 300,000 0.833 250,000 --
============================================= ================= ===================== ===================== ================
TOTAL 495,625 -- $614,656 $ 125 (6)
============================================= ================= ===================== ===================== ================
(1) This table reflects the shares that were added in Amendments No. 1, 2 and 3
dated April 24, 1996, May 9, 1996 and May 23, 1996, respectively.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) Based on the average of the high and low price per share of Common Stock as
reported by Nasdaq on April 19, 1996.
(4) Based on the average of the high and low price per share of Common Stock as
reported by Nasdaq on May 3, 1996.
(5) Based on the average of the high and low price per share of Common Stock as
reported by Nasdaq on May 17, 1996
(6) An aggregate filing fee of $2,000.00 was previously paid for other
securities registered.
USE OF A COMBINED PROSPECTUS IS PERMITTED PURSUANT TO RULE 429(A), AND THIS
PROSPECTUS SHALL BE DEEMED TO CONSTITUTE COMPLIANCE WITH THE UNDERTAKINGS SET
FORTH IN REGISTRATION STATEMENT 33-74654-D.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITSEFFECTIVE 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.
BALTIC INTERNATIONAL USA, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
1. Front of Registration Statement and
Outside Front Cover of Prospectus.................. Outside Front Cover
Page
2. Inside Front and Outside Back Cover
Pages of Prospectus................................ Inside Front Cover
Page; Outside Back
Cover Page
3. Summary Information and Risk Factors............... Prospectus Summary;
Risk Factors; The
Company
4. Use of Proceeds.................................... Use of Proceeds
5. Determination of Offering Price.................... Outside Front Cover
Page; Risk Factors
6. Dilution........................................... *
7. Selling Security-Holders........................... Plan of Distribution
and Selling
Stockholders
8. Plan of Distribution............................... Plan of Distribution
and Selling
Stockholders
9. Legal Proceedings.................................. *
10. Directors, Executive Officers, Promoters
and Control Persons................................ The Company;
Management - Executive
Officers and Directors
11. Security Ownership of Certain Beneficial
Owners and Management.............................. Principal Stockholders
12. Description of Securities.......................... Description of
Securities
13. Interest of Named Experts and Counsel.............. *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities........................................ *
15. Organization Within Last Five Years................ The Company
16. Description of Business............................ Business
17. Management's Discussion and Analysis
or Plan of Operation............................... Management's
Discussion and
Analysis of Financial
Condition and Results
of Operations
18. Description of Property............................ Business
19. Certain Relationships and Related
Transactions....................................... Management - Certain
Transactions
20. Market for Common Equity and Related
Stockholder Matters................................ Risk Factors; Price
Range of Common Stock
and Dividend Policy;
Description of
Securities
21. Executive Compensation............................. Management - Executive
Compensation
22. Financial Statements............................... Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure......................................... *
- -----------------------------
(*) None or Not Applicable
SUBJECT TO COMPLETION, DATED JUNE 5, 1996
BALTIC INTERNATIONAL USA, INC.
ISSUANCE OF 479,975 SHARES OF COMMON STOCK
RESALE OF 4,714,908 SHARES OF COMMON STOCK
This Prospectus relates to the issuance by Baltic International USA,
Inc. ("Company") to related and unrelated parties of an aggregate of 479,975
shares of Company Common Stock, $.01 par value ("Common Stock"). Of the 479,975
shares to be issued by the Company, (i) 80,000 shares are to be issued upon
exercise of outstanding warrants ("Compensation Warrants") which become
exercisable for $1.375 per share in December 1997 and expire in December 2000,
and (ii) 399,975 shares are to be issued upon exercise of outstanding public
warrants ("Public Warrants") which are exercisable for $6.00 per share and
expire on April 26, 1998. The Public Warrants may be redeemed by the Company at
$.05 per Public Warrant, on not less than 30 days' nor more than 60 days'
written notice, if the average of the last sales price of the Common Stock for a
period of 30 consecutive trading days equals or exceeds $10.00 per share,
subject to adjustment, provided that such notice is mailed not later than 20
days after the end of such period. This Prospectus also relates to the resale of
4,714,908 shares of Common Stock which may be sold by the holders thereof
("Selling Stockholders") from time to time as market conditions permit in the
market, or otherwise, at prices and terms then prevailing or at prices related
to the then current market price, or in negotiated transactions. The shares to
be resold include (i) 2,176,487 shares issued and outstanding; (ii) 255,001
shares to be issued for services rendered; (iii) 765,620 shares underlying
outstanding warrants ("Resale Warrants") exercisable at prices ranging from
$1.00 to $2.40 per share which expire on various dates from August 1998 to March
2001; (iv) 602,800 shares underlying outstanding options ("Options") exercisable
at prices ranging from $0.50 to $1.875 per share which expire on various dates
from October 1999 to April 2000; (v) 615,000 shares underlying outstanding
shares of the Company's Convertible Redeemable Series A Preferred Stock ("Series
A Preferred Stock") convertible at an initial conversion price of $2.00 per
share; and (vi) 300,000 shares underlying an outstanding convertible promissory
note in the original principal amount of $250,000 which bears interest at 10%
per annum, matures on October 5, 1996 and is convertible at a conversion price
equal to the lesser of $1.50 or 70% of the closing bid price per share of Common
Stock on the trading date immediately preceding the date of conversion
("Convertible Note"). Unless otherwise specified, the Compensation Warrants and
Resale Warrants are sometimes collectively referred to herein as "Warrants." See
"Management-Stock Options," "-Certain Transactions," "Description of Securities"
and "Plan of Distribution and Selling Stockholders." Shares offered by the
Selling Stockholders may be sold in unsolicited ordinary brokerage transactions
or privately negotiated transactions between the Selling Stockholders and
purchasers without a broker-dealer. A current prospectus must be in effect at
the time of the sale of the shares of Common Stock to which this Prospectus
relates. Each Selling Stockholder or dealer effecting a transaction in the
registered securities, whether or not participating in a distribution, is
required to deliver a current prospectus upon such sale. The shares to be issued
by the Company upon exercise of the Compensation Warrants and Public Warrants
are being offered on a "best-efforts, no minimum" basis. The Company will retain
all proceeds from the exercise of the Compensation Warrants and Public Warrants,
regardless of the number exercised. Such proceeds (approximately $2.5 million)
will be used for working capital and general corporate purposes. The Company
will not receive any proceeds from the resale of Common Stock by the Selling
Stockholders. The Company's Common Stock is traded on the Nasdaq SmallCap Market
under the symbol "BISA." On May 29, 1996, the last sales price of the Common
Stock as reported by Nasdaq was $1.0625.
---------------------------
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 7.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1996
TABLE OF CONTENTS
PAGE
Available Information...................................................... 2
Prospectus Summary......................................................... 3
Risk Factors............................................................... 7
Use of Proceeds............................................................ 14
Price Range of Common Stock and Dividend Policy............................ 14
Capitalization............................................................. 15
Management's Discussion and Analysis of Financial Condition
and Results of Operations............................................... 16
Business................................................................... 28
Management................................................................. 42
Principal Stockholders..................................................... 51
Description of Securities.................................................. 52
Plan of Distribution and Selling Stockholders.............................. 55
Legal Matters.............................................................. 59
Experts.................................................................... 60
Index to Financial Statements.............................................. F-1
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY, OR AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY
SECURITIES OFFERED HEREBY TO OR FROM ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE BUSINESS OR AFFAIRS OF THE
COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION IN THIS PROSPECTUS IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE AS OF WHICH SUCH INFORMATION IS
FURNISHED.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, files periodic reports, proxy materials and other information with
the Securities and Exchange Commission ("Commission"). Such reports, proxy
materials and other information are available for inspection at, and copies of
such materials may be obtained upon payment of the fees prescribed therefor by
the Commission from, the Commission at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as the following regional offices: 7 World Trade Center, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Company has filed a registration statement on Form SB-2
("Registration Statement") under the Act with respect to the securities being
registered. This Prospectus does not contain all the information set forth in
the Registration Statement and the exhibits and schedules thereto, to which
reference is hereby made. Copies of the Registration Statement and its exhibits
are on file at the offices of the Commission and may be obtained upon payment of
the fees prescribed by the Commission or may be examined, without charge, at the
public reference facilities of the Commission.
2
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY, THE MORE DETAILED INFORMATION APPEARING ELSEWHERE
IN THIS PROSPECTUS. INVESTORS SHOULD CAREFULLY CONSIDER THE INFORMATION SET
FORTH UNDER THE CAPTION "RISK FACTORS." UNLESS OTHERWISE INDICATED, ALL MONETARY
AMOUNTS HAVE BEEN EXPRESSED IN U.S. DOLLARS.
THE COMPANY
Baltic International USA, Inc. ("Company" or "BIUSA") is a Texas
corporation which currently owns interests in and participates in the management
of aviation-related businesses operating primarily in the Republics of Latvia
and Lithuania. The Company is identifying and developing additional
aviation-related and other business opportunities in Latvia, Estonia and
Lithuania (collectively, the "Baltic States") and the other former Soviet
Republics, including Russia (collectively, the "Newly Independent States"). The
Company owns 49%, and assists in the management, of Baltic International
Airlines, a Latvian joint venture-limited liability company based in Riga,
Latvia ("BIA"). The remaining 51% of BIA is owned by the Latvian Privatization
Agency ("Latvian Partner"). BIA commenced operations in June 1992, and until
September 30, 1995 operated regularly scheduled passenger service to Frankfurt
and Berlin, Germany; Tallinn, Estonia and Vilnius, Lithuania; Amsterdam, The
Netherlands; and London, England. The route structure and passenger revenue
base, which comprised the bulk of BIA's revenue, was contributed to Air Baltic
Corporation, a Latvian limited liability company ("Air Baltic") as of September
30, 1995. The Company will continue to manage and operate BIA, which is expected
to be operated as a cargo and charter carrier and aviation services company;
however, BIA is not currently engaged in any business operations. The Company
also provides aviation-related support services to BIA and Air Baltic through
its management of, and ownership interests in, other ventures. The Company
provides freight marketing services through Baltic World Air Freight ("BWAF"), a
wholly owned Latvian limited liability company based in Riga, and provides
aviation catering and distribution services through Baltic Catering Services
("BCS"), a Latvian joint venture-limited liability company based in Riga,
Latvia. The Company owns 50% of BCS and ARVO, Ltd., a Latvian limited liability
company based in Riga, Latvia, owns 50% of BCS. The Company provides food
distribution services through American Distributing Company ("ADC"), a wholly
owned Latvian limited liability company.
On August 29, 1995, the Company entered into a Joint Venture Agreement
For the Establishment of a New Latvian Air Carrier (this joint venture agreement
and all amendments thereto are referred to collectively herein as the "Air
Baltic Joint Venture Agreement") with The Republic of Latvia, SwedFund
International AB, Investeringsfonden For Ostlandene, and Scandinavian Airlines
System Denmark-Norway-Sweden ("SAS"). The new airline, Air Baltic, began
operations on October 1, 1995. Pursuant to the Air Baltic Joint Venture
Agreement, the Company acquired a 20.02% interest in Air Baltic in exchange for
BIA's current scheduled passenger service operation. BIA ceased operations as a
scheduled service carrier when Air Baltic commenced operations in October 1995.
From October through December 1995, the Company managed the interim flight
operations of Air Baltic, subleased the two western aircraft previously operated
by BIA and provided crews for such aircraft.
On January 10, 1996, the Company entered into an agreement to sell 12%
of Air Baltic stock to SAS for $1.7 million in cash and the assumption by SAS of
the remaining subordinated debt obligation of the Company to Air Baltic of
$2,175,000. The Company will retain a 8.02% interest in Air Baltic. The
Company's influence over and participation in the management of Air Baltic is
nominal. The Company expects this transaction to close during May 1996. For the
remainder of this Prospectus, the closing of this transaction has been assumed
to have occurred.
In connection with the creation of Air Baltic in August 1995, the
Company purchased a 25% interest in Latvian Airlines ("Latavio"), which was
formerly owned 100% by the Latvian government. The Company also assumed the
operational management of Latvian Airlines and transferred its routes to Air
Baltic. Subsequent to the Company's purchase of its 25% interest in Latvian
Airlines in September 1995, the Commercial Court of the Republic of Latvia ruled
to temporarily halt the further privatization and restructuring of the charter
and cargo operations of Latvian Airlines proposed by the Company. The
3
Court in March 1996 ruled that Latvian Airlines is to be liquidated. The Company
cannot determine the potential recovery of its interest in Latvian Airlines and
currently has a 100% reserve against the investment in Latvian Airlines. The
Company does not anticipate that this decision will adversely affect the
Company's results of operations or future prospects.
On September 28, 1995, the Company executed Articles of Incorporation
with Siauliai Aviacija, a joint stock company wholly owned by the Ministry of
Transportation of the Republic of Lithuania, and the Municipality of Siauliai
City to form Lithuanian Aircraft Maintenance Corporation ("LAMCO"), a Lithuanian
closed stock company, for the purpose of establishing an aircraft maintenance
facility in Lithuania. The lines of business of LAMCO have been amended to
include production of metal buildings, production of plastic articles, retail
trade in non-specialized shops and wood cutting in addition to establishing an
aircraft maintenance facility. The Company does not expect LAMCO to be fully
operational until late 1996 or early 1997, if at all.
In March 1996, the founders of LAMCO amended the Articles of
Incorporation changing the authorized capital from $5,000,000 to $1,538,482. The
Company has the right to own up to 50% of LAMCO; however, the Company's initial
investment will total only 2.6% of LAMCO. Further purchases of shares are
anticipated during 1996 as the business plans for the operating entities of
LAMCO are concluded. Siauliai Aviacija currently owns 96.6% of LAMCO and 0.8% is
owned by the Municipality of Siauliai City. The Company will have the right to
recommend the general manager, chief financial officer and department heads for
approval by LAMCO's board for a period of 10 years. The Company will also have
the authority to negotiate a line of credit for LAMCO.
The Lithuanian partners have made their cash capital contributions. The
Company's initial capital contribution is $40,000 of which 25% was contributed
on March 26, 1996, with the remainder of the Company's initial capital
contributed in May 1996. In the event the Company is unable to meet its capital
contribution obligations, any interest it may have in LAMCO may be forfeited.
In February 1996, the Company entered into a joint venture agreement
with Topflight AB, a Stockholm-based airline catering company, which resulted in
the establishment of a new catering company, Airo Catering Services ("ACS"). ACS
was incorporated in the British Virgin Islands. The Company owns 51% of ACS and
Topflight owns 49%. On April 2, 1996, the catering operations of BCS were
acquired by Riga Catering Services ("RCS"), previously owned by Topflight AB, in
exchange for the issuance of RCS shares to the Company. RCS is currently owned
35% by ACS, 23.5% by the Company and 41.5% by the principals of the Company's
partner in BCS. ACS will develop additional airline catering companies in
selected markets of the Baltic States and the Newly Independent States. ACS is
preparing a business plan which will identify specific airports which may
demonstrate the best opportunity for development of in-flight catering
operations. There can be no assurances that definitive agreements will be
entered into or that business operations will result from this joint venture.
On January 25, 1996, the Company submitted a proposal to the Estonian
Privatization Agency for the privatization of Estonian Air, the national airline
of the Republic of Estonia. The proposal submitted by BIUSA contemplates the
purchase of 66% of the shares of Estonian Air by private companies and/or
institutions. BIUSA has proposed to arrange for the sale of the shares which the
government wishes to privatize. The privatization process is a competitive one
and five parties, including BIUSA, have submitted proposals. BIUSA's proposal
does not anticipate that BIUSA will use any of its internal resources to acquire
shares or seek external equity funds to acquire shares. There can be no
assurances BIUSA will be successful in its efforts to participate in the
privatization of Estonian Air.
4
Prior to the breakup of the former Soviet Union, the civil aviation
industry of the Baltic States and Newly Independent States was wholly owned and
managed by Aeroflot, the former Soviet state enterprise. After the breakup of
the former Soviet Union, the Baltic States and Newly Independent States were
left with a shortage of qualified administrative and operational personnel, and
their aircraft, air traffic control and terminal facilities, and other equipment
did not meet acceptable international standards. In this environment, the
Company believes that private companies or joint ventures, free of excessive
overhead and the bureaucratic burdens of the former state owned aviation
enterprises, will have a significant opportunity, as most of the Baltic States
and Newly Independent States do not have the capital or personnel to improve
their aviation industries to attract Western business and tourism.
Members of the Company's Board of Directors have substantial experience
in business dealings with officials, practices and customs in the former Soviet
Union and Asia. Robert Knauss and Paul Gregory have served as consultants and
advisors to the former Soviet Union and Russian government; Juris Padegs has
been involved in international investments for over 25 years; and Homi Davier
has participated in the start-up and management of the national aviation company
of Oman and the Middle Eastern operations of the national aviation company of
Bangladesh, and has extensive experience in the travel agency industry.
The Company was incorporated in Texas in March 1991. Unless otherwise
indicated, references to the Company include its interests in BIA, Air Baltic,
BWAF, BCS, ADC, ACS, RCS, LAMCO and Latavio. The offices of the Company are
located at 1990 Post Oak Boulevard, Suite 1630, Houston, Texas 77056-3813 and
its telephone number is (713) 961-9299.
The following chart shows the Company's ownership percentages in each
of its subsidiaries and joint ventures as of May 29, 1996:
BIUSA
- ---------------------------------------------------------------------------------------------------------------------
--------
- ---------- AIR --------- --------- -------- --------- -------- ---------
BIA BALTIC BWAF BCS LAMCO ADC LATAVIO ACS
- ---------- -------- --------- --------- -------- --------- -------- ---------
(49%) (8.02%) (100%) (50%) (2.6%) (100%) (25%) (51%)
-
-
- 35%
-
- --------
- RCS
--------
(23.5%)
5
THE OFFERING
- -------------------------------------------------------------------------------
Common Stock Outstanding
Prior to Offering................ 6,007,315 (1)
Common Stock to be Issued.......... 479,975 (2)
Common Stock to be Resold.......... 4,714,908(3). See"Plan of Distribution and
Selling Stockholders."
Use of Proceeds.................... Working capital. See "Use of Proceeds."
Nasdaq Symbol...................... BISA
- ---------------------
(1) Does not include (i) 602,800 shares issuable upon exercise of
outstanding Options; (ii) 1,365,595 shares underlying the Warrants,
Public Warrants and Representative's Warrants; (iii) 615,000 shares
underlying outstanding shares of Series A Preferred Stock; (iv)
300,000 shares underlying the outstanding Convertible Note; (v)
255,001 shares to be issued for services rendered; and (vi) 1,206,751
shares underlying outstanding shares of Series B Preferred Stock. See
"Management --Stock Options" and "Description of Securities."
(2) Includes (i) 80,000 shares to be issued upon exercise of outstanding
Compensation Warrants and (ii) H399,975 shares to be issued upon
exercise of the Public Warrants. See "Plan of Distribution and Selling
Stockholders."
(3) Includes (i) 2,176,487 shares issued and outstanding; (ii) 765,620
shares underlying currently exercisable Resale Warrants; (iii) 602,800
shares underlying currently exercisable Options; (iv) 615,000 shares
underlying outstanding shares of convertible Series A Preferred Stock;
(v) 300,000 shares underlying the Convertible Note; and (vi) 255,001
shares to be issued for services rendered.
SUMMARY FINANCIAL DATA
YEAR ENDED DECEMBER 31, THREE MONTHS
------------------------- ENDED MARCH 31,
STATEMENT OF OPERATIONS DATA: 1994 1995 1996
----------- ----------- ----------
Revenues ......................... $ 326,128 $ 6,499,953 $ 146,130
Loss before income taxes and
extraordinary item ............. (6,285,468) (1,769,569) (597,195)
Net loss ......................... (6,343,195) (2,127,624) (597,195)
Loss per common share before
extraordinary item ............. (2.37) (0.51) (0.11)
Net loss per common share ........ (2.40) (0.51) (0.11)
BALANCE SHEET DATA: DECEMBER 31, MARCH 31,
1995 1996
------------ -----------
Working capital deficit .................. $(1,840,955) $ (373,126)
Total assets ............................. 3,522,423 3,645,862
Total long-term liabilities .............. 0 0
Stockholders' equity(deficit) ............ 1,029,226 1,640,558
6
RISK FACTORS
AN INVESTMENT IN THE COMPANY INVOLVES CERTAIN RISKS. PROSPECTIVE
INVESTORS SHOULD CAREFULLY REVIEW THE FOLLOWING FACTORS TOGETHER WITH THE OTHER
INFORMATION CONTAINED IN THIS PROSPECTUS PRIOR TO MAKING AN INVESTMENT DECISION.
HISTORY OF OPERATING LOSSES; PROFITABILITY UNCERTAIN
From its inception in 1991 through December 31, 1995, the Company has
incurred operating losses on an annual basis. For the years ended December 31,
1993, 1994 and 1995, the Company had revenues of $389,299, $326,128 and
$6,499,953, respectively, with net losses of $430,697, $6,343,195 and
$2,127,624, respectively. For the first quarter of 1996, the Company had
revenues of $146,130 and a net loss of $597,195. BIA's losses have historically
directly affected the Company's results of operations. The Company has recorded
its investments in BIA using the equity method of accounting for investments,
and, as such, the Company recognizes its pro rata share of the earnings and
losses of BIA. The Company recorded losses relating to BIA of $4,580,752,
$3,440,445 and $612,385 for the years ended December 31, 1994 and 1995 and for
the three months ended March 31, 1996, respectively. The Company believes that
its results of operations have been and will continue to be affected by various
factors, including market acceptance of the Company's business ventures,
regional, economic and political factors, the need for additional capital and
seasonality. There can be no assurance that the Company, or any of its business
operations, including Air Baltic, will experience profitability in the future,
if at all. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
CAPITAL REQUIREMENTS; LIMITED SOURCES OF LIQUIDITY; NEED FOR ADDITIONAL FUNDS
The Company requires substantial capital to pursue its operating
strategy. At March 31, 1996, the Company had a working capital deficit of
$373,126 and its debt to equity ratio was 122%. To date, the Company has relied
on net cash provided by financing activities to fund its capital requirements.
Financing activities, primarily through the issuance of stock, provided the
Company with $4,244,746 and $3,338,134 of cash during 1994 and 1995,
respectively. The Company received $1,159,152 in net cash for financing
activities during the first quarter of 1996. The Company used $1,410,874 of cash
in operations during 1994. Operating activities generated $2,531,097 in cash
during 1995; however, operating activities used net cash of $835,121 during the
first quarter of 1996. Furthermore, the Company used $2,752,817, $5,825,258 and
$51,916 of cash in investing activities during 1994, 1995 and the first quarter
of 1996, respectively. Through March 31, 1996, the Company has advanced an
aggregate of $10,306,950 to BIA; however, BIA has made no distributions to the
Company. At September 30, 1995, the Company elected to forgive $4,042,255 of
debt from BIA as it was deemed to be uncollectible. In connection with the
Company's interest in Air Baltic, the Company is committed to make additional
advances to BIA in the amount of $654,935 at March 31, 1996, which amount will
be paid from the remaining proceeds of the sale of the Air Baltic stock to be
received from SAS. These advances will be used by BIA to satisfy certain
obligations relating to its discontinued passenger service airline operations.
The Company may, in its discretion, make additional advances to BIA in support
of BIA's future development of charters or cargo operations. Any such
discretionary advances to BIA will be made through internally generated cash
flows or external financing as may be necessary. As of March 31, 1996, the
Company had recorded an advance to Air Baltic of $937,200. The Company will be
dependent upon Air Baltic generating sufficient cash flow and profitability from
operations, of which there can be no assurance, in order to maintain the
Company's collectibility of the advance. The Company has no obligation to make
further advances to Air Baltic. Air Baltic may make capital calls of its
shareholders including the Company. The Company has no obligations under any
such capital calls and may take a dilution in its ownership of Air Baltic or at
the Company's option may make additional contributions to maintain or increase
its ownership percentage. The Company's influence over and participation in the
management of Air Baltic is nominal.
The Company's operations have been and are expected to continue to be
insufficient as a source of funds to meet the Company's capital requirements and
other liquidity needs. Therefore, the Company will likely be required to seek
additional debt or equity financing during 1996 to meet its obligations in order
to meet its short-term and long-term liquidity needs as well as to pursue
business opportunities. However, management has no specific plans or commitments
with respect thereto for the Company, and there can be no assurance the Company
will be successful in any such effort. Moreover, any such action, even if
successful, could cause dilution to shareholders, and consequently, a reduction
in the price of the Common Stock. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
7
MODIFIED OPINIONS REGARDING FINANCIAL STATEMENTS
Both the Company's and BIA's internally generated cash flows from
operations have historically been insufficient for cash needs. BIA historically
relied upon financing provided by the Company to supplement its operations. The
Company's current independent accountants modified their opinion with respect to
the Company's and BIA's financial statements for the year ended December 31,
1995 to reflect that incurred losses from operations have raised substantial
doubt about the ability of the Company and BIA to continue as going concerns.
Furthermore, these financial statements do not include any adjustments that
might result from the outcome of such uncertainty. The reports of the Company's
prior independent accountants on the financial statements of the Company and BIA
as of December 31, 1994 and for each of the two years in the period then ended
included an explanatory paragraph indicating that the Company's financial
statements included a significant investment in Baltic International Airlines
which has incurred losses from operations that raise substantial doubt about its
ability to continue as a going concern and that BIA had incurred losses from
operations that also raised substantial doubt about its ability to continue as a
going concern. The Company's prior independent accountants also noted in each of
the explanatory paragraphs that the financial statements did not include any
adjustments that might result from the outcome of such uncertainty. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's and BIA's financial statements included elsewhere
in this prospectus.
MAJOR ASSET IS A START-UP AIRLINE
Until recently, the Company's major asset was its 49% ownership
interest in BIA, a start-up carrier that provided passenger service in the
Baltic region from June 1992 through September 1995. The scheduled passenger
service operations of BIA, which operations represented substantially all of
BIA's business operations, were transferred to Air Baltic on October 1, 1995 and
the Company's advance to Air Baltic is now the Company's major asset. As a new
air carrier, Air Baltic must establish a reputation as a carrier that offers
reliable and high quality service to passengers, and its success depends upon
many factors that are beyond its or the Company's immediate control. Problems,
delays, start-up and operating expenses and difficulties typically encountered
by businesses in the start-up phase include, but are not limited to, anticipated
problems or costs relating to operations, compliance with applicable
regulations, marketing, development of new markets and competition. There can be
no assurance that either BIA as a charter and cargo operation or Air Baltic as a
passenger airline will be profitable.
OPERATIONS OF BIA AND AIR BALTIC
The Company has historically been dependent to a large extent on the
receipt of sales commissions and rental income from BIA as its principal source
of revenues. The revenue from BIA recorded by the Company was $558,845 and $0
for the years ended December 31, 1995 and 1994, respectively. No revenue from
BIA was recorded by the Company for the first quarter of 1996. In addition to
operating revenues from BIA, the Company is entitled to its pro rata share of
BIA's profits. However, to date, BIA has made no profits. The Company
transferred substantially all of BIA's business operations to Air Baltic
effective October 1, 1995. Currently, the Company has no agreements with Air
Baltic which would result in any revenues to BIUSA. The Company is entitled to
its pro rata share of any net profits of Air Baltic; however, as of the date of
this Prospectus, no distributions from profits have been made by Air Baltic.
LACK OF CONTROL OVER AIR BALTIC
Historically, the Company's primary asset has consisted of its 49%
equity interest in BIA. While the Company still maintains its 49% interest in
BIA, BIA's passenger airline operations were contributed to Air Baltic in
October 1995, in exchange for which the Company acquired an 8.02% interest in
Air Baltic. Under the terms of the BIA Joint Venture Agreement, the Company is
authorized to designate four out of the ten members of BIA's board. In addition,
the attendance of six members, including one of the Company's designees, is
required to establish a quorum at BIA board meetings, and all decisions made by
the BIA board require the vote of at least 66% of the directors present at any
meeting. Certain major decisions, such as a merger or dissolution, require the
approval of 80% of all directors. Current officers and directors of the Company
serve as officers and directors of BIA. In addition to the Company's ability to
effectively participate in BIA's management, the existence of a management
agreement between the
8
Company and BIA allowed the Company to exercise a significant level of control
over the day-to-day operations of BIA. However, under the terms of the Air
Baltic Joint Venture Agreement, the Company does not have the authority to
designate any directors of the Air Baltic board Furthermore, the Air Baltic
Joint Venture Agreement provides that the holders of 75% of the outstanding
interests shall constitute a quorum at meetings of the participants, and certain
major decisions have quorum and voting requirements of 90%. Therefore, as a
minority participant, the Company has no control, voting or otherwise, over Air
Baltic. See "Business--Airline Operations--BIA Joint Venture Agreement" and
"--Air Baltic Joint Venture Agreement."
DISPUTE RESOLUTION UNDER JOINT VENTURE AGREEMENTS; LACK OF UNITED STATES
JURISDICTION
Both the BIA and Air Baltic joint venture agreements provide that
disputes that cannot be resolved between the parties be submitted to binding
arbitration under the rules of the Arbitration Institute of the Stockholm
Chamber of Commerce in Stockholm, Sweden. Disputes under the BIA joint venture
agreement will be governed by the Republic of Latvia Law on Limited Liability
Companies to the extent such law is applicable; otherwise, Swedish law will be
applied. The Air Baltic Joint Venture Agreement is governed by Swedish law,
except where Latvian law is mandatory. Therefore, any such dispute would not be
resolved in the courts of the United States. As substantially all of the assets
of BIA and Air Baltic are located outside of the United States, the Company may
have difficulty in enforcing a judgment against BIA or Air Baltic. Moreover,
investors in the Company may have difficulty prosecuting a claim, or enforcing
any judgment, against the Company due to these factors.
DEFAULT UNDER JOINT VENTURE AGREEMENTS
The BIA joint venture agreement provides that in the event of a default
of the terms and provisions of the joint venture agreement by the Company or the
Latvian Partner, the nondefaulting party has the right to continue the business
of BIA. The nondefaulting party may do so by paying the defaulting party 10% of
the fair market value (which shall be deemed to be two times the annual gross
revenues of BIA times the defaulting party's percentage of ownership in BIA) in
hard currency as a down payment, with the balance to be paid in monthly
installments of principal and interest for a period of 10 years at a rate of 10%
per annum. The nondefaulting party has 180 days after termination of the joint
venture agreement to exercise the right to carry on the business and purchase
the defaulting party's shares in BIA or liquidate BIA. The agreement provides
for a 30-day cure period in the event of a default, except in the case of
default for failure to make subordinated debt funds available, in which case the
cure period is 10 days. See "Business-- Airline Operations--BIA Joint Venture
Agreement."
The Air Baltic Joint Venture Agreement provides that in the event of a
default of the terms and provisions of the Air Baltic Joint Venture Agreement by
any of the parties thereto, the nondefaulting parties have the right to continue
the business of Air Baltic. The nondefaulting parties may do so by paying any
defaulting party the nominal value ($100 per share) of the defaulting party's
percentage share ownership in hard currency. The Company owns 9,372 shares of
Air Baltic; and, therefore, the Company would receive $937,200 if it were to
default. The Air Baltic Joint Venture Agreement provides for a 30-day cure
period in the event of a default; provided, however, that the cure period for a
default caused by failure to make subordinated debt financing available is 10
days. See "Business--Airline Operations-Air Baltic Joint Venture Agreement."
GOVERNMENT FACTORS AND LICENSING
The Company currently operates in Latvia and intends to expand its
operations to the other Baltic States and the Newly Independent States, a region
that is in the early stages of developing a market economy. New laws are being
enacted but many remain untested. Although the Company believes that the
Republic of Latvia has advanced in the area of commercial law, Latvian laws and
courts are not well tested in contract enforcement. While Latvia's law on
foreign investment provides guarantees against nationalization and
expropriation, there is little or no judicial precedent in this area.
Additionally, the Latvian law on foreign investment currently allows free
repatriation of funds and includes certain tax holiday provisions; however, no
assurances can be given that these provisions will not be modified or repealed
in the future.
9
Regularly-scheduled passenger service requires the receipt and
retention of traffic rights and operating licenses. Existing regulations could
allow transportation authorities in these emerging countries, including Latvia,
to award traffic rights to other carriers, and government authorities may grant
licenses to other carriers for competitive markets. Traffic rights to
destinations in certain foreign countries are subject to approval by, and
successful negotiation of bilateral agreements with, the destination country.
While Air Baltic has obtained traffic rights where required for its current
operations, there can be no assurance that it will be able to obtain additional
traffic rights in the future or that current traffic rights will not be modified
or repealed. Accordingly, there can be no assurance that the Republic of Latvia
or governments of the other Baltic States and Newly Independent States will not
enact or modify legislation or certification procedures to adversely affect Air
Baltic's operations. The Latvian government is in the process of developing and
refining procedures for registration and certification of Western aircraft.
There can be no assurances that these aircraft certification procedures will not
delay the licensing and initiation of aircraft service. See "Business--Airline
Operations--Route Systems" and "--Government Regulation."
JET FLEET COMPOSITION; MAINTENANCE AND FUEL COSTS
BIA's fleet includes one TU134 aircraft which is owned by BIA and two
Boeing 727 aircraft which are leased. The Boeing aircraft were subleased to and
operated by Air Baltic through December 31, 1995. BIA's jet fleet is
contemporary by standards of the former Soviet Union but not by Western
standards. After 1997, the current BIA fleet may not be able to fly into certain
European airports because of noise limitations. The age of the TU134 aircraft is
approximately 14 years, and the average age of the Boeing 727 aircraft is
approximately 25 years. The average number of monthly takeoff and landing cycles
is approximately 30. Older aircraft tend to have higher maintenance costs than
new aircraft as aircraft components are required to be replaced after a
specified number of flight hours or take-off and landing cycles, and older
aircraft technology may be required to be retrofitted. To date, BIA has
experienced no difficulty in obtaining parts for the TU134 aircraft; however,
there can be no assurance that such parts will be available in the future. If
such parts were to become scarce or prohibitively expensive, such shortage could
have an adverse effect on BIA's operations in the future. Maintenance and
related costs can vary significantly from period to period as a result of
unscheduled repairs and maintenance, government mandated inspection and
maintenance programs and the time needed to complete required maintenance
checks. The occurrence of substantial additional maintenance expenses for its
aircraft could have a material adverse effect on BIA. The cost of fuel is a
major operating expense for all airlines, including BIA and Air Baltic. Both the
cost and availability of fuel are subject to many economic and political factors
and events occurring throughout the world. BIA's and Air Baltic's price for fuel
varies directly with market conditions, and neither BIA nor Air Baltic has
guaranteed long-term sources of supply. Air Baltic and BIA intend to follow
industry trends in seeking to raise fares in response to significant fuel price
increases. However, Air Baltic and BIA's ability to pass on increased fuel costs
through fare increases may be limited by economic and competitive conditions,
and inability to pass such increased costs through fare increases would likely
have a material adverse effect on operating results or result in a reduction of
Air Baltic and BIA's services, or both. Similarly, a reduction in the
availability of fuel would likely have a material adverse effect on the
operating results of BIA and Air Baltic.
The two Boeing 727 aircraft subleased from the Company are not part of
the permanent fleet of Air Baltic. The Boeing aircraft are not currently being
utilized. The Company will return the aircraft to the owner. Air Baltic has
entered into an agreement with Avro International Aerospace to lease three Avro
RJ70 aircraft for seven years.
UNFAVORABLE OPERATING COSTS OR POLITICAL DEVELOPMENTS
The Company's business strategy is to identify aviation-related
business opportunities in Latvia, the other Baltic States and Newly Independent
States. This strategy is based on the Company's view that this region has a low
cost work force, and generally lower costs to conduct business as compared to
such costs in Western Europe and in the United States. In the event that
inflation or other factors were to increase the cost of doing business in
Latvia, the other Baltic States and Newly Independent States, or if a change in
the political or economic climate occurred, many perceived business
opportunities based on
10
cost advantage may not be available. Political stability in Latvia, the other
Baltic States and Newly Independent States remains dependent, in part, on
political events in neighboring republics. Without significant armed forces for
self-defense, the Baltic States and Newly Independent States remain dependent on
support from Europe and the United States, and the development of pro-Democracy
and pro-Western political forces in Russia and neighboring regions. Although
Russian troops were withdrawn from Latvia in August 1994, the proximity of
Russian armed forces represents a political risk. It is presumed that Russian
political influence will remain strong in the Baltic States and Newly
Independent States in which the Company intends to operate. Accordingly,
unforeseeable and uncontrollable costs and political factors could adversely
affect the Company's operations and ability to implement its business strategy.
The Company believes that there currently exists a favorable market for used and
new aircraft; however, there can be no assurance that the Company will be able
to acquire additional aircraft on favorable terms, if at all.
DEPENDENCE ON KEY PERSONNEL; MANAGEMENT OF FOREIGN OPERATIONS; MANAGEMENT OF
GROWTH
The success of the Company is dependent upon, among other things, the
expertise of Messrs. Knauss, Davier, Gregory and James Goodchild. The Company
has entered into an employment agreement, including non-competition provisions,
with Mr. Knauss which expired in December 1995. The Company intends to extend
this employment agreement during 1996. The Company is the beneficiary of $1
million of key-man insurance on the life of Mr. Davier. The loss of the services
of Messrs. Knauss, Davier, Gregory or Goodchild would have an adverse effect on
the Company's operations. In order to manage the Company's business operations,
management must continue to improve and expand the level of expertise of its
personnel and must attract, train and manage qualified managers and employees to
oversee and manage the foreign operations. Management of foreign operations is
subject to political and socioeconomic factors different from operating a
business in the United States. Accordingly, if the Company is unable to manage
the foreign operations of its business interests effectively, operating results
will be adversely affected. Additionally, the success of the Company's business
strategy is dependent, in part, on the ability of the Company and of its joint
venture operations to acquire the equipment, personnel and financing necessary
to support the Company's operations and growth. There can be no assurance that
the Company or its joint venture operations will be able to successfully finance
equipment acquisitions on favorable terms, attract and train qualified
personnel, obtain additional financing, or manage a larger operation. See
"Management."
EXCHANGE RISK
The Company operates its current ventures in convertible currencies.
The Latvian currency ("Lat") is currently freely convertible, but there can be
no assurance that other governments will not place restrictions on currency
conversion. If this were to occur, the Company's earnings would be subject to
exchange-rate risk on those sales that occur in the local market. If the Company
expands into other Baltic States or Newly Independent States with less stable
currencies, exchange-rate risks could be greater. In Western markets in which
the Company operates, the exchange-rate risk would be that of exchange rate
fluctuations among major currencies (such as the United States dollar to the
German mark). There can be no assurance that currency exchange rates will not
fluctuate, or that adverse currency restrictions will not be imposed, in the
future.
EFFECTS OF SEASONALITY
The airline industry is significantly affected by seasonal factors.
Historically, BIA experienced reduced demand for scheduled passenger services
from January to March and its strongest operating results for its scheduled
passenger and charter services from April through December as a result of the
seasonal demand for leisure travel. As such, results of operations have
fluctuated quarter to quarter. Air Baltic is expected to experience similar
seasonal fluctuations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
11
INSURANCE COVERAGE AND EXPENSES
The operations of BIA and Air Baltic are exposed to potential losses
that may be incurred in the event of an aircraft accident. Any such accident
could involve not only repair or replacement of a damaged aircraft and its
consequent temporary or permanent loss from service, but also significant
potential claims of injured passengers and other third parties. Air Baltic and
BIA currently maintain comprehensive airline liability insurance in amounts each
believes adequate; however, there can be no assurance that the amount of such
coverage is or will be sufficient in the event of an accident, that it will not
be changed in the future, or that Air Baltic and BIA will not be forced to bear
substantial losses from accidents in excess of policy limits. Air Baltic
maintains similar coverage on its leased SAAB 340 and expects to obtain similar
coverage on any permanent future aircraft selected for the airline. Substantial
claims resulting from an accident in excess of related insurance coverage could
have a material adverse effect on BIA or Air Baltic. BIA does not carry property
damage insurance on its Tupolev aircraft because management believes that such
coverage is uneconomical. It does carry property damage insurance on its leased
Boeing 727 aircraft, although this coverage carries a significant deductible in
the case of partial damage. In addition, BIA's insurance expenses could
significantly increase if it decided to provide service to destinations where
military action is taking place. Any such increases in expenses could have a
material adverse effect on BIA, and also on the Company. See
"Business--Insurance."
COMPETITION
The Company's operations encounter varying degrees of competition from
diverse markets. Air Baltic competes on the basis of price, quality of service
and convenience. Many of the airlines against which Air Baltic competes against,
have longer operating histories, greater name recognition, greater financial
resources, more extensive facilities and equipment, and better marketing
resources than those available to Air Baltic. Many scheduled carriers compete
for customers in a variety of ways, including wholesaling to tour operators,
discounting seats on scheduled flights, promotions to travel agents,
prepackaging tours for sale to retail customers and selling discounted,
excursion airfare-only products to the public. As a result, Air Baltic is
required to compete for customers against the lowest revenue generating seats of
the scheduled airlines. During periods of dramatic fare cuts by scheduled
airlines, Air Baltic may be forced to respond with reduced fares, which could
have a material adverse effect on operating results. BIA may also compete
directly against charter airlines, many of which would likely have greater
financial resources and better distribution capabilities, including exclusive or
preferential relationships with affiliated tour operators. Certain of these
charter airlines are affiliates of major scheduled airlines or tour operators.
Air Baltic competes with private carriers on certain of its routes. Competition
may also be affected by governmental actions including licensing, bilateral
agreements and other regulatory actions. There can be no assurance that
competitive conditions will not have an adverse effect on BIA's or Air Baltic's
operations. See "Business--Competition."
CONFLICTS OF INTERESTS; DIFFICULTY IN EVALUATING FINANCIAL STATEMENTS
The management of the Company also has management responsibilities for
the day-to-day affairs of BIA, BCS, BWAF, ADC, ACS and RCS. The Company will
also have day to day management responsibilities of LAMCO and is currently
coordinating all pre-operating and registration activities of that venture.
Additionally, these ventures have or will enter into contracts and business
relationships with each other and with other third parties. An inherent conflict
of interest exists due to the interests of the Company through its ownership of
BWAF and ADC and, as joint venture partner-operator of BIA, BCS, ACS, RCS and
Air Baltic when such ventures and other companies of the Company enter into
business relationships with each other. A potential for pecuniary gain to
management of the Company and for the compromise of management's fiduciary
duties exists in any related party transaction. No independent determination has
been made as to the fairness and reasonableness of any related party transaction
and no guidelines have been established to resolve any conflicts of interest. It
should be assumed that all agreements and arrangements between and among the
ventures are not negotiated on an arm's length basis; however, all agreements
and arrangements by and between the ventures and third parties are negotiated at
arm's length and are approved by management of the respective parties and those
relating to BIA and Air Baltic are approved by the board of directors of BIA and
Air Baltic. The
12
Company's joint venture partners handle contract negotiations between the joint
ventures. In dealings between and among the Company, BIA, BCS, ACS, RCS, BWAF
and Air Baltic, management of the Company will seek to have potential
conflicting matters approved by its independent directors, or will seek the
advice of independent counsel. Management may be faced with the issue of whether
to bring opportunities to the attention of the Company for its participation or
to other affiliated firms. See "Business--Airline Operations" and "--Other
Aviation-Related Ventures."
In addition, the Company is a joint venture partner in a group of
affiliated companies and has extensive transactions and relationships with
members of the group. Therefore, the Company's financial statements may be
difficult to evaluate. See Financial Statements.
NO DIVIDEND HISTORY
The Company has never paid cash dividends on its Common Stock and
presently intends to retain any earnings to finance the expansion of its
business. See "Price Range of Common Stock and Dividend Policy."
NEED TO MAINTAIN A CURRENT PROSPECTUS
The Company must maintain a current prospectus in order for the Selling
Stockholders to sell the shares of Common Stock to which this Prospectus
relates. In the event the Company is unable to maintain a current prospectus due
to lack of sufficient financial resources or for other reasons, the Selling
Stockholders will be unable to resell their shares in any public market.
SHARES RESERVED FOR ISSUANCE
The Company has 4,090,146 shares of Common Stock reserved for issuance
upon the exercise of the outstanding Warrants, Options and other outstanding
warrants, as well as upon the conversion of the Series A Preferred Stock, the
Convertible Note and the Series B Preferred Stock. These convertible securities
are convertible or exercisable at prices that range from $.50 to $2.40 per share
and expire on various dates extending to March 2001. The shares to be issued
upon exercise of the Compensation Warrants and Public Warrants are being offered
by the Company on a "best efforts - no minimum" basis, and the Company will
retain all proceeds from the exercise of the Compensation Warrants and Public
Warrants regardless of the amount exercised. There can be no assurance that any
of these securities will be converted or exercised, or that the Company will
receive any proceeds from the conversion or exercise thereof. The exercise or
conversion of these securities, and the resale of the underlying shares, could
have a dilutive effect on the prevailing market price of the Common Stock. See
"Management--Stock Options" and "Description of Securities."
13
USE OF PROCEEDS
Assuming exercise of all of the Compensation Warrants and Public
Warrants, the Company will receive aggregate proceeds of approximately
$2,500,000 prior to deducting estimated offering expenses of approximately
$100,000. The Company will use the proceeds, if any, for working capital and
will have broad discretion in the application of such proceeds. As there are no
commitments from the holders of the Compensation Warrants and Public Warrants to
exercise such securities, there can be no assurance that the Compensation
Warrants and Public Warrants will be exercised. The Company will receive no
proceeds from the resale of shares by the Selling Stockholders. See "Plan of
Distribution and Selling Stockholders."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the Nasdaq Small-Cap Market
under the symbol "BISA." Public trading of units (consisting of one share of
Common Stock and one Public Warrant) ("Units") on Nasdaq commenced on April 28,
1994. The Units separated and public trading of the Common Stock and Public
Warrants on Nasdaq commenced on June 27, 1994. The following table sets forth
the high and low last sales prices of the Common Stock for the periods
indicated:
PRICE RANGE
----------------------
FISCAL YEAR HIGH LOW
1994 ----- -----
Second Quarter (commencing June 27, 1994)..... $5.000 $4.250
Third Quarter................................. 4.750 3.625
Fourth Quarter................................ 3.875 1.750
1995
First Quarter................................. $2.375 $1.250
Second Quarter................................ 2.000 0.688
Third Quarter................................. 3.625 1.313
Fourth Quarter................................ 3.500 0.938
1996
First Quarter.................................. $2.750 $1.000
The Units traded on Nasdaq from April 28, 1994 through June 26, 1994, and the
high and low bid prices of the Units during this period were $7.00 and $4.625,
respectively. On May 29, 1996, the last sales price for the Common Stock was
$1.0625, and the Company believes there were approximately 1,100 beneficial
owners of its Common Stock.
The Company has not paid, and the Company does not currently intend to
pay cash dividends on its Common Stock. The current policy of the Company's
Board of Directors is to retain earnings, if any, to provide funds for operation
and expansion of the Company's business. Such policy will be reviewed by the
Board of Directors of the Company from time to time in light of, among other
things, the Company's earnings and financial position.
14
CAPITALIZATION
The following table sets forth the capitalization of the Company at
March 31, 1996. This table should be read in conjunction with the Company's
financial statements and notes thereto that are included elsewhere in this
Prospectus.
MARCH 31, 1996(1)
Stockholders' equity:
Preferred stock:
Series A, $2 convertible, $10 par value, 500,000 shares
authorized, 123,000 shares issued and outstanding ........ $ 1,230,000
Series B, convertible, $25,000 stated value and $10 par value,
70 shares authorized, 50 shares issued and outstanding ... 1,250,000
Common stock, $.01 par value, 20,000,000 shares outstanding,
5,905,592 shares issued and outstanding .................... 59,056
Additional paid-in capital ................................... 8,691,561
Accumulated deficit .......................................... (9,590,059)
-----------
Total stockholders' equity ................................... $ 1,640,558
===========
- -----------------
(1) Does not give effect to the issuance of (i) 845,620 shares of Common
Stock upon exercise of the Warrants; (ii) 399,975 shares upon exercise
of the Public Warrants; (iii) 602,800 shares upon exercise of
outstanding Options; (iv) 615,000 shares upon conversion of the Series
A Preferred Stock; (v) 300,000 shares upon conversion of Convertible
Note; (vi) 255,001 shares for services rendered ; and (vii) 101,723
shares of Common Stock issued subsequent to March 31, 1996.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.
GENERAL
The Company was formed in March 1991 as a vehicle for identifying,
forming and participating in aviation-related ventures in the Baltic States and
Newly Independent States. In June 1991, the Company entered into a joint venture
agreement with the LCAB, an agency of the government of Latvia, and created BIA
as a joint venture-limited liability company under the laws of Latvia. The
Company owns a 49% joint venture interest in BIA, which provided passenger
airline service from June 1992 through September 1995. In September 1992, the
Company formed BWAF which commenced operations in 1993. In March 1993, BCS was
formed and commenced operations. Substantially all of the Company's revenues
have historically been derived from BIA.
Pursuant to the Air Baltic Joint Venture Agreement, the Company
acquired a 8.02% interest in the capital of Air Baltic. The joint venture
partners of BIA contributed BIA's current scheduled passenger service operation
to Air Baltic which commenced operations in October 1995. From October 1, 1995
to December 31, 1995, the Company managed the interim flight operations of the
new airline, subleased two western aircraft previously operated by BIA and
provided crews for such aircraft. In addition, Air Baltic has paid a $1.5
million fee to the Company for services rendered in connection with the training
of Latvian cockpit, cabin and ground personnel. The Company intends to operate
BIA as a cargo and charter carrier.
BIA's operations are expected to become insignificant with respect to
their overall impact on the financial condition of the Company. As Air Baltic is
in the start-up phase, there is no financial history to evaluate.
Both the Company's and BIA's internally generated cash flows from
operations have historically been and continue to be insufficient for their cash
needs. BIA has historically relied upon financing provided by the Company to
supplement its operations and continues to rely upon such financing. The Company
also continues to rely on external financing to supplement its operations. The
Company's current independent accountants have modified their opinion with
respect to the Company's and BIA's financial statements for the year ended
December 31, 1995 to reflect that incurred losses from operations have raised
substantial doubt about the ability of the Company and BIA to continue as a
going concern. The reports of the Company's prior independent accountants on the
financial statements of the Company and BIA as of December 31, 1994 and for each
of the two years in the period then ended included an explanatory paragraph
indicating that the Company's financial statements included a significant
investment in Baltic International Airlines which has incurred losses from
operations that raise substantial doubt about its ability to continue as a going
concern and that BIA had incurred losses from operations that also raised
substantial doubt about its ability to continue as a going concern. The
Company's prior independent accountants also noted in each of the explanatory
paragraphs that the financial statements did not include any adjustments that
might result from the outcome of such uncertainty. If it appears at any time in
the future that the Company is again approaching a condition of cash
insufficiency, the Company will be required to seek additional debt or equity
financing, curtail operations, sell assets, or otherwise bring cash flow in
balance. Management does not anticipate a need for any such action and therefore
has no specific plans or commitments with respect thereto for the Company.
However, if such action were required, there is no assurance that the Company
would be successful in any such effort.
The Company's operations have been insufficient as a source of funds to
meet the Company's capital requirements and other liquidity needs. The Company
believes it can raise sufficient amounts of additional equity and obtain debt
financing in order to meet its liquidity requirements for the remainder of the
year ending December 31, 1996. However, management has no specific plans or
commitments with respect thereto for the Company, and there can be no assurance
the Company will be successful in any effort. Historical earnings history of the
Company have been directly affected by the consistent advances to BIA. The other
operating interests of the Company do not require significant advances and are
currently profitable. However, there can be no assurances that Company, as a
whole, will not continue to experience liquidity difficulties or losses.
16
BALTIC INTERNATIONAL USA, INC.
The Company's revenues have historically been derived from its equity
in the net income of its joint ventures; fees for management services rendered
pursuant to a management agreement between BIA and the Company; commissions due
from sales of airline tickets under the international promotional sales
agreement between BIA and the Company; and the Boeing 727 aircraft rental
charged to BIA. During 1994, the Company contributed its revenues earned from
BIA because of the uncertain collectibility of such fees. The Company does not
charge management fees to its other ventures. Substantially all of the
operational activity of the Company is reflected in the fees from, and the net
equity in earnings and losses of, joint venture investments, as the Company uses
the equity method to record its interest in its joint ventures owned 50% or
less. The Company's losses relating to joint venture activities were $4,339,676
for 1994, $3,440,445 for 1995 and $529,564 for the three months ended March 31,
1996. Furthermore, the Company contributed $969,561 of revenues earned from BIA
during 1994.
Current Latvian law does not restrict the repatriation of cash to
foreign participants in joint ventures and recent amendments to the foreign
investment law have reaffirmed the structure permitting repatriation of profits.
However, there can be no assurances that repatriation of profits in the future
will not be restricted. Since the Company's ventures currently generate revenues
in United States dollars or in other major currencies, repatriation of cash has
not been historically affected by exchange rate differentials between the Lat
and the United States dollar.
Beginning in 1994, the Company contributed certain of its charges to
BIA due to the uncertain collectibility of such charges from BIA. Management
fees were charged by the Company to BIA pursuant to the terms of a management
agreement with BIA which expired on December 31, 1994. This agreement provided
that the Company will provide certain managerial and professional services and
facilities to BIA and be reimbursed by BIA. In 1994, the Company charged BIA for
actual costs incurred on behalf of BIA, primarily pilots' salaries, consulting
fees and an allocation of officers' salaries. Sales commissions are charged on
sales of airline tickets pursuant to the terms of the international promotional
sales agreement between BIA and the Company. The Company uses the accrual basis
of accounting for its expenses and other investments. The Company has incurred
consulting expenses for services rendered by an unrelated party in connection
with the acquisition of aircraft and for marketing and sales services rendered
by an affiliate of Mr. Davier.
Property and equipment includes computers and other office equipment,
is stated at cost, and depreciated to estimated residual value using the
straight-line method over the estimated useful lives of three to twenty years.
In December 1993, the Company issued 116,800 options exercisable over a
three-year period at $.50 per share which will result in a compensation expense
to the Company amortized over a three-year period. Options to purchase 21,000
shares of common stock have been canceled unexercised. The compensation expense
recorded by the Company for options issued at an exercise price lower than the
market price at the date of grant was $190,145 and $97,668 for the years ended
December 31, 1995 and 1994, respectively.
From January through March 1995, the Company issued $800,000 in bridge
financing notes payable, pursuant to which warrants to purchase 80,000 shares of
Common Stock of the Company at $1.00 per share were issued. In the third quarter
of 1995, the Company issued additional warrants to purchase an aggregate of
171,000 shares to consultants for services rendered. These warrants are
exercisable for $1.00 per share and expire in August 2000. Effective June 30,
1995, an aggregate principal amount of $1,185,000 of bridge notes payable was
converted to 118,500 shares of Series A Preferred Stock convertible into 592,500
shares of Common Stock, and $145,000 in short-term debt was converted into
116,000 shares of Common Stock. In September 1995, an additional $45,000 of
bridge notes were converted to 4,500 shares of Series A Preferred Stock
convertible into 22,500 shares of Common Stock. Also from March 1995 through
March 1996, the Company received proceeds of approximately $2,809,895 relating
to the issuance of 2,841,192 shares of Common Stock pursuant to private sales
and the exercise of outstanding stock options. In November 1995, the Company
issued warrants for an aggregate of 15,000 shares of Common Stock to employees
at an exercise price of $2.25 per share for services rendered. In
17
December 1995, the Company issued $100,000 in bridge financing notes payable,
pursuant to which warrants to purchase 10,000 shares of Common Stock at $1.00
per share were issued. These notes were repaid in March 1996. Also in December
1995, the Company issued warrants to purchase an aggregate of 90,000 shares of
Common Stock to employees at an exercise price of $1.375 per share and options
to purchase an aggregate of 213,000 shares of Common Stock to employees and
directors at an exercise price of $1.375 per share.
Effective February 22, 1996, the Company created its Series B
Convertible Redeemable Preferred Stock ("Series B Preferred Stock"). The Company
is authorized to issue 70 shares of Series B Preferred Stock, $25,000 stated
value and $10 par value per share. The Company issued 50 shares thereof for
aggregate net proceeds of $1,093,750 in February and March 1996. The Series B
Preferred Stock: (i) is not entitled to receive dividends; (ii) is convertible
at any time by the holders thereof on or after the 55th day after the date that
the shares were issued at a conversion price equal to the lesser of $2 per share
or 82% of the 5-day average closing bid price of the Company's Common Stock;
(iii) is non-voting; (iv) carries a liquidation preference of $25,000 per share
plus interest equal to 10% of the stated value per annum since the issuance
date, and after payment in full of the Series A Preferred Stock; and (v) is
redeemable only at the option of the Company if the conversion price is $0.75 or
less per share. In connection with the sale of Series B Preferred Stock, the
Company issued warrants to purchase an aggregate of 78,125 shares of Common
Stock at an exercise price of $2.40 per share, which warrants expire in March
2001. In May 1996, 73,723 shares of Common Stock were issued upon conversion of
three shares of outstanding Series B Preferred Stock.
On April 5, 1996, the Company entered into a Convertible Note Agreement
in connection with a $250,000 loan to the Company ("Convertible Note").
Principal and interest at an annual rate of 10% are due on October 5, 1996. The
holder of the Convertible Note may at any time on or after July 5, 1996 convert
the Convertible Note to shares of the Company's Common Stock at a conversion
price equal to the lesser of $1.50 or 70% of the closing bid price per share of
Common Stock on the trading date immediately preceding the date of conversion.
THE COMPANY'S JOINT VENTURES
BALTIC INTERNATIONAL AIRLINES. BIA utilizes the accrual basis of
accounting, and revenues are recognized when earned and expenses are recognized
when goods and services are acquired or provided. Revenues are recognized when
the transportation is provided rather than when the ticket is sold. Passenger
traffic commissions are recognized when the transportation is provided and the
related sales are recognized. Revenues not yet recognized are reflected as
unearned revenue, a current liability. However, since October 1995, BIA has not
conducted any substantive business operations.
BIA's intangible assets include developmental and preoperating costs,
most of which were incurred prior to commencement of operations in June 1992.
Developmental and preoperating costs include the cost associated with
inaugurating service over BIA's routes, the development of such routes, pilot
training and the cost of acquiring aircraft and access to airports, reservation
systems and other operating assets, which costs are amortized over a three-year
period. BIA had intangible assets consisting of net developmental and
preoperating costs of $548,754, $217,755 and $0 at December 31, 1993, 1994 and
1995, respectively.
Property and equipment consist of aircraft and improvements, furniture
and fixtures, leasehold improvements and ground transportation equipment,
depreciated over the estimated useful lives of such assets. The salvage value of
aircraft and improvements has been assumed to be zero. BIA uses the deferred
method of accounting for overhauls whereby overhaul costs are capitalized when
incurred and amortized until the next expected overhaul. In February 1996, BIA
and the Company entered into an agreement to return the two leased aircraft to
the owner. As a result, BIA accelerated the depreciation on leasehold
improvements which have a net book value of $0 at December 31, 1995.
In November 1991, the Republic of Latvia enacted a law on foreign
investments, which provides certain exemptions from profit taxes on
foreign-owned joint ventures beginning with the year in which the first profit
is made. There are no income tax benefits associated with losses incurred.
18
AIR BALTIC. Air Baltic utilizes the accrual basis of accounting, and
revenues are recognized when earned and expenses are recognized when goods or
services are acquired or provided. Revenues are recognized when the
transportation is provided rather than when the ticket is sold. Passenger
traffic commissions are recognized when the transportation is provided and the
related sales are recognized. Revenues not yet recognized are reflected as
unearned revenue, a current liability. Air Baltic produces its financial reports
consistent with international GAAP. While Air Baltic's operations did not
commence until October 1, 1995, the company was formed in January 1995, which
permitted Air Baltic the opportunity to take advantage of the Republic of
Latvia's Law on Foreign Investments, which provides for certain exemptions from
profit taxes on foreign-owned joint ventures beginning with the year in which
the first profit is made. However, there will be no income tax benefits
associated with losses incurred. The Company's influence over and participation
in the management of Air Baltic is nominal.
OTHER JOINT VENTURES. Prior to 1995, the Company has not earned
significant equity in the net income nor has it received significant
distributions from its joint venture interest in BCS or from BWAF and,
accordingly, such impact on the Company's operations has not been material.
During 1994, the Company received cash distributions from BCS of approximately
$132,000. The operations of BWAF have been consolidated for 1995.
On September 28, 1995, the Company executed Articles of Incorporation
with the joint stock company Siauliai Aviacija, presently 100% owned by the
Ministry of Transportation of the Republic of Lithuania, and the Municipality of
Siauliai City to form Lithuanian Aircraft Maintenance Corporation ("LAMCO"), a
Lithuanian closed stock company, for the purpose of establishing an aircraft
maintenance facility in Lithuania. The lines of business of LAMCO have been
amended to include production of metal buildings, production of plastic
articles, retail trade in non-specialized shops and wood cutting in addition to
establishing an aircraft maintenance facility.
In March 1996, the founders of LAMCO amended the Articles of
Incorporation changing the authorized capital from $5,000,000 to $1,538,482. The
authorized capital may be increased from additional contributions made by the
founders. The Company does not expect LAMCO to be fully operational until late
1996 or early 1997, if at all. The Company has the right to own up to 50% of
LAMCO; however the Company's initial investment will total only 2.6% of LAMCO.
Further purchases of shares are anticipated during 1996 as the business plans
for the operating entities of LAMCO are concluded. Siauliai Aviacija currently
owns 96.6% of LAMCO and 0.8% is owned by the Municipality of Siauliai City. The
Company will have the right to nominate the general manager, chief financial
officer and department heads for approval by LAMCO's board for a period of 10
years. The Company will also have the authority to negotiate a line of credit
for LAMCO.
The Lithuanian partners have made their cash capital contributions. The
Company's initial capital contribution is $40,000 of which 25% was contributed
on March 26, 1996, with the remainder of the Company's initial capital
contributed in May 1996. In the event the Company is unable to meet its capital
contribution obligations, any interest it may have in LAMCO may be forfeited.
In connection with the creation of Air Baltic in August 1995, the
Company purchased a 25% interest in Latvian Airlines, which was formerly owned
100% by the Latvian government. The Company also took over the operational
management of Latvian Airlines and transferred its routes to Air Baltic.
Subsequent to the Company's purchase of its 25% interest in Latvian Airlines in
September 1995, the Commercial Court of the Republic of Latvia ruled to
temporarily halt the further privatization and restructuring of the charter and
cargo operations of Latvian airlines proposed by the Company. The Court in March
1996 ruled that Latvian Airlines is to be liquidated. The Company cannot yet
determine the potential recovery of its investment in Latvian Airlines and
currently has a 100% reserve against the investment in Latvian Airlines.
19
RESULTS OF OPERATIONS
BALTIC INTERNATIONAL USA, INC.
THREE MONTHS ENDED MARCH 31, 1996 AND 1995. For the quarter ended March
31, 1996, the Company had revenues of $146,130 compared with $233,429 for the
quarter ended March 31, 1995. The 37% decrease is principally due to less
freight revenue for 1996 as compared to 1995.
The Company's operating expenses for the quarter ended March 31, 1996
were $1,027,300 compared to $1,198,329 for the same quarter in 1995. Cost of
revenue decrease by $217,526 primarily as the result of no aircraft rental
expense in 1996 as compared to $155,289 in 1995. The Boeing aircraft were
returned to the owner in 1996. General and administrative expenses increased
from $249,892 in 1995 to $387,249 in the same quarter of 1996. The expenses
incurred for the return of the aircraft were accrued as of December 31, 1995 on
BIA's books. This increase was due primarily to compensation expense payable
through the issuance of common stock for services rendered. These shares have
not been issued as of March 31, 1996 and an additional $76,168 was expensed in
1996 for vesting of additional shares and the change in the market price of the
stock from December 31, 1995 to March 31, 1996.
Interest expense decreased 80% from $67,038 in the first quarter of
1995 to $13,240 in 1996, reflecting the conversion of $1,288,137 of notes
payable to equity during the second and third quarters of 1995 and reduced
borrowings incurred through March 31, 1996.
The Company recorded a gain of $297,200 on the sale of 12% Air Baltic
stock to SAS during the first quarter of 1996. No such gain was recorded in
1995.
The Company had a net loss of $597,195 for the quarter ended March 31,
1996 compared to a net loss of $1,001,434 for the quarter ended March 31, 1995.
The decrease in net loss is due to the gain recorded on the sale of Air Baltic
stock and reduction of aircraft rental expense.
YEARS ENDED DECEMBER 31, 1995 AND 1994. Revenues for 1995 increased by
$4,201,167 to $4,527,295 compared to $326,128 for 1994. This increase is
principally due to a non-recurring fee of $1,500,000 collected from Air Baltic
in payment of market development and training for Latvian pilots, flight
attendants and mechanics and non-recurring wet lease revenue of $1,500,000
received from Air Baltic. Also, payments made to the Company from BIA for
aircraft rental income, commissions paid on the sale of airline tickets, and
freight revenue contributed to the increase of which no such corresponding
revenue was recorded in the prior year. The revenue improvement was also due to
an increase in the Company's earnings from its investment in BCS and the
consolidation of BWAF and its freight revenue beginning October 1, 1994.
Operating expenses increased 5% to $6,805,079 for 1995 compared to
$6,498,872 for 1994. This increase was due to an increase in costs related to
aircraft rental, freight, catering, food distribution, personnel and consulting
and in general and administrative expenses partially offset by a decrease in net
equity in losses of BIA. The increase in general and administrative expenses is
due primarily to the reserve of the Latvian Airlines investment of $468,950. The
additional increase in cost of revenue is due to freight costs related to
BIUSA's purchase in October 1994 of its joint venture partner's interest in
BWAF. The purchase of the joint venture partner's interest changed the
accounting treatment of BWAF from the net equity method to consolidated
accounting, resulting in the expenses of BWAF being reflected in BIUSA's
operating expenses. The additional increase in rental expense is from the
addition of the second Boeing 727 aircraft lease which was not in place for the
full comparable period in 1994.
Interest expense increased by $76,271 or 63% to $197,505 for 1995 from
$121,234 in 1994, due to higher borrowings in 1995.
Interest income increased from $8,510 for 1994 to $195,415 for 1995.
This increase is due primarily to interest paid by BIA on outstanding debt to
the Company.
The Company had a net loss of $2,127,624 for 1995 compared to a net
loss of $6,343,195 for the 1994. The decrease in net loss is due primarily to
the decrease in the Company's net equity in losses of BIA and the revenues
received from Air Baltic.
20
YEARS ENDED DECEMBER 31, 1994 AND 1993. Revenues for 1994 decreased 16%
to $326,128 compared to $389,299 for 1993. This decrease was due to the Company
deferring revenues earned from BIA in 1994, offset by an increase of $187,601 or
351% in the Company's equity in earnings of BWAF and BCS during the same period
and an increase of $85,000 in revenues earned on freight transportation since
the acquisition in October 1994 of the remaining interest in BWAF.
The Company's operating expenses for 1994 were $6,498,872 compared to
$799,774 for 1993. This increase was attributable to (i) the increased level of
operations in 1994; (ii) the addition of Boeing 727 aircraft leases in 1994
resulting in rental expenses of $370,196 in 1994 versus $0 in 1993; and (iii) an
increase in equity in losses of BIA. The Company's portion of the losses of BIA
was $4,580,752 for 1994 as compared to $490,954 for 1993, an increase of
$4,089,798 or 833%. This increase is attributable to three factors: (i)
increased net losses incurred by BIA from $1,311,955 for 1993 to $5,112,664 for
1994, reflecting BIA's additional start-up and development activities during
1994 and a loss on the sale of an aircraft of $876,677; (ii) the Company's
increased percentage ownership of BIA from 33% to 40% in July 1993 and further
to 49% on September 15, 1994; and (iii) the provision for loss by the Company in
1994 of $2,322,682 relating to its investment in and advances to BIA due to the
uncertain realization of such investment in and advances to the extent that the
Company has funded losses of BIA attributable to the Latvian Partner's interest.
Personnel and consulting expenses increased to $461,490 for 1994 from
$194,801 in 1993; an increase of 137%, due to the hiring of additional contract
and full time personnel, salaries of executive officers which commenced in May
1994, recognition of stock option compensation expenses, and the use by the
Company of consultants and advisors in connection with its strategy of
participating in investment opportunities. Aircraft rent expense increased
$370,196 for 1994 from zero in 1993 due to the acquisition of two Boeing 727
aircraft leases in May 1994. Legal, professional, and other general and
administrative expenses increased 473% to $654,171 for 1994 from $114,019 for
1993, due primarily to increased occupancy costs, travel, and professional fees
associated with the increased level of operations and the investigation and
negotiation of additional joint venture opportunities. Additionally, in 1994,
the Company incurred expenses of approximately $374,000 related to a postponed
public debt offering.
Interest expense increased $78,449 to $121,234 for 1994 as compared to
$42,785 for 1993. The increase resulted primarily from borrowings of $1,393,340
of bridge financing notes between August 1993 and April 1994, at interest rates
ranging from prime plus 1% to 15%. Such borrowings were repaid in May 1994.
Subsequently, the Company borrowed $955,000 in deferred lease credits and in
bridge financing between October and December 1994, the majority of which bears
interest at 10%.
During 1994, the Company recorded an extraordinary loss of $78,587
resulting from the write off of the unamortized discount on debt which was
retired early upon completion of the Company's initial public offering, and an
extraordinary gain of $14,000 upon settlement of a long-term obligation for less
than the recorded amount of such obligation.
The Company had a $6,285,468 loss before income taxes and extraordinary
item for 1994 compared to a loss before income taxes of $423,837 for 1993. Net
loss for 1994 and 1993 was $6,343,195 and $430,697, respectively.
The Company conducts all of its transactions in U.S. dollars.
BALTIC INTERNATIONAL AIRLINES
THREE MONTHS ENDED MARCH 31, 1996 AND 1995. BIA has not conducted any
substantive business operations since October 1995. Revenues for the first
quarter of 1996 were $0 as compared to $2,257,188 for the same period in 1995.
Operating expenses for the quarter ended March 31, 1996 were $134,972
compared to $3,626,961 for the same quarter in 1995. The operating expenses for
1996 represent general and administrative expenses, depreciation and interline
billings received in 1996 for 1995 activities which were not accrued for at
December 31, 1995. These interline expenses are not considered material to the
1995 and 1996 financial statements, and therefore, the 1995 financial statements
have not been restated.
21
During 1996, BIA changed its estimate for the provision for operating
losses during the phase-out period based on further negotiations with the owner
of the leased aircraft. BIA recorded an additional $85,000 loss on disposal for
the three months ended March 31, 1996.
BIA's net loss decreased from $1,448,078 for the first quarter of 1995
to $157,893 for the first quarter of 1996.
YEARS ENDED DECEMBER 31, 1995 AND 1994. Revenues for 1995 increased by
$1,250,628 (17%) to $8,760,990 compared to $7,510,362 for 1994. The increase was
due primarily to an increase in passenger revenues reflecting an increase in the
number of passengers per sector flown. Actual load factors remained constant for
the comparable period; however, capacity was increased, through the completion
of the introduction of Boeing equipment, from 72 seats to 108 seats per flight,
effective February 1995. While capacity has been increased by 50%, load factors
have remained constant for 1995 versus 1994. Additionally, passenger service
revenue increased with the addition of expansion of service to Amsterdam twice a
week which began in February 1995. BIA carried 34,920 revenue passengers for the
nine months ended September 30, 1995 versus 30,437 revenue passengers for the
year ended December 31, 1994.
Operating expenses for 1995 increased 33% to $16,518,257 compared to
$12,406,159 for 1994. The increase was due primarily to (i) higher operating
costs of the two Boeing 727 aircraft compared to the Tupolev 134 aircraft
previously used by BIA; (ii) additional operating expense related to the
addition of the service to Amsterdam; (iii) increased lease training and (iv)
increased depreciation of leasehold improvements on the Boeing 727 aircraft
which were put in service in February 1995.
Airport handling and navigation expense increased 42% to $7,081,284
from $5,003,261 for 1994 reflecting increased costs of navigation and handling
of the larger and heavier 727 aircraft. As a percentage of revenue airport
handling and navigation expense was 81% for 1995, versus 67% of revenue for
1994.
Fuel costs increased 21% to $2,060,950 from $1,701,436 for 1994. The
increase is due primarily from the increased fuel consumption of the 727 over
the Tupolev 134 due to heavier weight and a third engine on the Boeing 727
versus two on the Tupolev. Fuel costs as a percentage of revenue increased
slightly at approximately 24% for 1995 versus 23% for 1994. Fuel prices remain
relatively consistent to prices paid in 1994 and did not impact the increased
cost of fuel for 1995.
Lease costs increased 22% to $856,482 from $648,823 for 1994. The lease
expense increase is attributable to the use of both Boeing 727 aircraft for 1995
versus possession for only approximately four months of 1994.
Other costs of services include aircraft maintenance and reserve,
training and education, insurance, flight payroll and interline payments. Such
costs in the aggregate increased 133% to $3,759,095 from $1,613,633 for 1994.
Approximately 48% of the increase is attributable to the use of the 727 aircraft
for 1995 versus approximately four months of possession but no use of the Boeing
727 aircraft for 1994. Insurance increased 63% to $523,070 from $321,794 for
1994. The increase is attributable to insurance coming into effect reflecting
passenger service use of the Boeing 727 aircraft versus insurance costs at
December 31, 1994 reflecting possession of the 727 aircraft but prior to
implementation of service. Aircraft maintenance and repair and maintenance
reserve expense increased to $1,688,028 from $270,454 for 1994. The increase is
attributable to routine maintenance performed on the Boeing 727 aircraft for
passenger service operation which did not exist at December 31, 1994. Catering
costs increased 83% to $518,334 from $283,260 for 1994. The increase was due
primarily to the increased level of passengers, an increase in the prices for
both business and economy meals and also due to an enhanced business class menu
on the Boeing 727 service.
BIA uses the deferred method of accounting for overhaul costs on its
owned aircraft, whereby overhaul costs will be capitalized when incurred and
amortized over the period until the next expected overhaul. BIA uses the accrual
method of accounting for overhaul costs on its leased aircraft. The two leased
aircraft are being returned to the owner. The next scheduled overhaul on the
reserve Tupolev aircraft is scheduled for May 1996 and is expected to cost
approximately $50,000.
22
General and administrative expenses increased 48% to $1,694,578 from
$1,146,834 for 1994. The increase was primarily due to increased travel and
lodging expense associated with training of Latvian cockpit and cabin personnel
in the operation of the 727 aircraft, increased salary expense and payroll taxes
and communication expense. Depreciation and amortization increased 27% to
$657,078 from $516,643 for 1994. The increase was due primarily to increased
depreciation on the Boeing 727 aircraft which were put in service in February
1995.
Interest expense increased by $223,202 or 106% to $433,613 for 1995
from $210,411 in 1994 due to higher borrowings in 1995.
On August 29, 1995, the joint venture partners of BIA entered into the
Air Baltic Joint Venture Agreement, pursuant to which they contributed the
scheduled passenger carrier service of BIA to Air Baltic. These business
operations were transferred on October 1, 1995. The losses of BIA related to
these discontinued operations are $8,010,374 and $4,943,820 for 1995 and 1994,
respectively. BIA recorded a loss on the disposal of these operations of
$1,712,237 included in the statement of operations for the year ended December
31, 1995. At September 30, 1995, the Company elected to forgive $4,042,255 of
debt previously written off from BIA and this forgiveness has been recorded as
an extraordinary item on the statement of operations of BIA.
YEARS ENDED DECEMBER 31, 1994 AND 1993. Revenues for 1994 increased
108% to $7,510,362 compared to $3,608,575 for 1993. This increase was due
primarily to an increase in passenger revenues reflecting increased load factors
from 22% to 34%, and a 49% increase in available seat miles resulting from
increased frequencies during certain months, the addition of a DC9 aircraft
during January and February 1994, and the addition of service to Estonia in
September 1994. These factors were partially offset by an approximate 5%
decrease in yield during 1994 from $0.21 per revenue passenger mile to $0.20 per
revenue passenger mile. BIA carried 32,264 revenue passengers in 1994 as
compared to 14,142 in 1993.
Operating expenses for 1994 increased 155% to $12,406,159 compared to
$4,873,490 for 1993, due primarily to (i) increased costs for developing new
routes; (ii) leasing additional aircraft for seven months in 1994; (iii)
increased ground handling and navigation fees; (iv) increased management fees
and pilots' salaries charged by the Company; and (v) a loss of $876,677 on the
sale in December 1994 of a TU134 aircraft. BIA recorded $648,823 in aircraft
rental expense in 1994 as compared to $0 in 1993. For 1994, BIA recorded
$590,823 in aircraft rental expense on the Boeing 727 aircraft which are
subleased from the Company but were not operational during that time. The
remaining $58,000 related to rentals on a DC9 aircraft operated in January and
February 1994 and on a charter flight.
Fuel costs increased 94% from $875,897, or 24% of revenues for 1993, to
$1,701,436, or 23% of revenues for 1994. The increase is attributable almost
entirely to increased level of operations as fuel prices remained relatively
constant during the periods, averaging approximately $0.87 per gallon. BIA's
results of operations are sensitive to fluctuations in fuel prices. There can be
no assurances that fuel prices will not increase in the future.
Ground handling, airport charges and navigational charges increased
147% from $2,059,104 during 1993 to $5,003,261 for 1994, due to the increased
frequencies operated in 1994. In addition to adding service to Estonia in
September 1994, BIA increased its frequencies to Frankfurt, London and Hamburg
during the year ended December 31, 1994 as compared to the same period in 1993,
which increased its costs of ground handling, airport and navigational fees
accordingly.
Commission expenses increased from $295,120, or 8% of revenue in 1993
to $345,553, or 5% of revenue in 1994. The increase in commissions is a result
of the increase in operations and revenues. The decrease in commissions as a
percent of revenues relates to the increase in sales in 1994 from airport ticket
locations, particularly in Riga, Latvia.
Other costs of services includes primarily catering, insurance,
maintenance and flight payroll. Such costs in the aggregate increased 206% from
$527,997 to $1,613,633 in 1994. Approximately 20% of the increase was the result
of insuring the additional western aircraft acquired in 1994. Insurance costs
increased from $100,280 during 1993 to $321,794 during 1994, resulting from the
fact that BIA has insured
23
its Boeing 727 aircraft acquired in May 1994 and does not carry hull insurance
on its Tupolev aircraft because it would be uneconomical. Additionally,
maintenance expenses totaled $270,453 in 1994 as compared to $26,704 in 1993, a
913% increase resulting from the western aircraft.
BIA uses the deferred method of accounting for overhaul costs on its
aircraft, whereby overhaul costs will be capitalized when incurred and amortized
over the period until the next expected overhaul.
General and administrative expenses increased 91% to $1,146,834 for
1994 from $599,998 for 1993, primarily reflecting increased salaries, consulting
costs and travel costs. Depreciation and amortization increased 19% to $516,643
for 1994 from $434,506 for 1993. As a result of the aforementioned factors,
including BIA's expansion and efforts to obtain and insure Western aircraft,
BIA's operating expenses per available seat mile increased from $.05 for 1993 to
$.08 for 1994. The increase, when combined with a reduction in yield per revenue
passenger mile from $0.21 for 1993 to $.20 for 1994, resulted in an increase of
BIA's break-even load factor from 30% for 1993 to 45% for 1994.
During 1994, BIA incurred $553,299 of nonrecurring costs relating to
acquiring the Boeing 727 aircraft and developing new markets and routes. BIA
began service on a code-share basis on one of the new routes, from Riga to
Tallinn, in September 1994. BIA commenced service between Riga and Amsterdam two
times a week in January 1995. Management of the Company and BIA anticipate that
substantially all of the expenses related to acquiring the Boeing 727 aircraft
and developing these routes have been incurred and are reflected in BIA's
results of operations for 1994.
In December 1994, BIA sold one of its TU134 aircraft for $350,000. As a
result, BIA incurred a loss of $876,677.
BIA had a loss from operations of $4,895,797 for 1994 compared to
$1,264,915 for 1993, due primarily to increased costs incurred in developing new
routes and the loss on the sale of the aircraft. During 1994, the Company had
non-operating expenses comprised primarily of interest expense to the Company of
$210,411. Net loss for 1994 was $5,112,664 compared with $1,311,955 for 1993.
BIA conducts its operations in several currencies and as such is
subject to foreign currency exchange gains and losses. BIA's sales revenues are
collected primarily in Latvian Lats or U.S. Dollars, and to some extent in
German Marks and British Pounds Sterling Historically, BIA's gains and losses on
translation of its sales revenues have been immaterial due to the close
relationship between the values of the Lat and the U.S. Dollar. BIA's expenses
are incurred and paid in U.S. Dollars, Marks and Pounds Sterling.
BIA has continued to expand its route structure and increase the
frequency of its service during 1994. The expenses associated with the opening
of additional routes in 1994, and the costs of introducing Western aircraft
service are primarily responsible for the increased loss for 1994.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1996 the Company had a working capital deficit of $373,126
compared to a working capital deficit of $2,129,236 at December 31, 1995. The
decrease in working capital deficit is due primarily to an increase in cash of
$272,115, an increase in accounts receivable of $956,298 and a decrease in
commitments for guarantees on BIA liabilities of $364,586. The increase in
accounts receivable is the result of the Company having a balance of $954,030
due from SAS at March 31, 1996 for the unpaid amount of the sale of the 12% of
Air Baltic stock. The Company had stockholders' equity of $1,640,558 at March
31, 1996.
Net cash provided by operating activities was $2,531,097 for 1995,
compared to net cash used by operating activities of $1,410,874 for 1994. The
increase in cash provided by operating activities was primarily due to the
non-recurring fee of $1,500,000 collected from Air Baltic in payment of market
development and training of Latvian pilots, flight attendants and mechanics. Net
cash used by operating activities for the first quarter of 1996 was $835,121.
Net cash used by investing activities was $6,092,394 for 1995, compared to
$2,752,817 for 1994. The increase in cash used by investing activities was
attributable to the increase in advances made to BIA. Net cash used by investing
activities for the first quarter of 1996 was $51,916. Net cash provided by
financing activities was $3,059,106 for 1995, compared
24
to $4,244,746 for 1994. The decrease in cash provided by financing activities in
these periods was attributable primarily to the decrease in the price of the
issuance of stock. Net cash provided by financing activities of the first
quarter of 1996 was $1,159,152.
The Company has financed its growth primarily from the issuance of
Common Stock and borrowings. During 1993 and through April 1994, the Company
borrowed $1,343,340. Net proceeds available to the Company from its initial
public offering completed in May 1994 were approximately $4.4 million. All of
the Company's outstanding debt was retired in May 1994 using proceeds from the
Company's initial public offering. From October 1994 through December 1995, the
Company borrowed an aggregate principal amount of $2,136,000 including deferred
lease credits, bridge financing and bank debt. From March 1995 through March
1996, the Company issued 2,841,192 shares of Common Stock for proceeds of an
aggregate of $2,809,895. The Company's other long-term liabilities include
deferred compensation expense for the vested portion of certain stock options
granted in 1993.
The Company contributed 25% of its initial capital contribution
($40,000) to LAMCO on March 26, 1996. The remainder of the Company's initial
capital contribution was contributed in May 1996. If the Company is unable to
meet its capital contribution obligations, any interest it may have in LAMCO
will be forfeited.
The Company has negotiated an early termination of the leases on the
Boeing aircraft which represent the Company's only significant cash commitments.
The Company will be required to pay approximately $500,000 to the owner of the
Boeing aircraft for the early termination of the leases. This cash requirement
will be paid from financings that the Company has received during the first
quarter of 1996.
The Company will likely be required to seek external financing to meet
its goals with respect to ACS. The Company anticipates that its capital
requirements with respect to ACS over the next 12 months will be approximately
$450,000. However, the amount of capital to be contributed to ACS by the Company
will depend on the number of catering kitchens started in this period of time.
Therefore, the actual amount to be contributed may be higher or lower.
Furthermore, the Company cannot currently determine when any such amounts may
become payable. The Company's activities related to ADC's distribution of Kraft
and Miller products are financed through the internal resources of ADC and the
Company does not expect to seek any external financing to fund these activities.
As of March 31, 1996, the Company's sources of external and internal
financing were limited. It is not expected that the internal source of liquidity
will improve until net cash is provided by operating activities, and, until such
time, the Company will rely upon external sources for liquidity. The Company has
not established any lines of credit or other significant financing arrangements
with any third-party lenders. Historically, the Company has identified and
negotiated on an individual-by-individual basis its financing arrangements.
There can be no assurance that the Company will be able to obtain additional
financing on reasonable terms, if at all, in the future. Lower than expected
earnings from the joint ventures resulting from adverse economic conditions or
otherwise, could restrict the Company's ability to expand its business as
planned, and, if severe enough, may curtail operations, or cause the Company to
sell assets.
At March 31, 1996, BIA had a working capital deficit of $2,283,315
compared to a working capital deficit of $3,747,181 at December 31, 1995. For
the three months ended March 31, 1996 and the years ended December 31, 1995 and
1994, BIA used $1,673,713, $5,278,344 and $2,942,993, respectively, in operating
activities, resulting primarily from its continued losses from start-up
operations. These continued losses from operations and the nonrecurring losses
and expenses have resulted in BIA having an accumulated deficit of $12,566,417
at March 31, 1996. Historically, BIA has relied upon capital contributions and
advances from the Company in order to meet its capital requirements and it
continues to so rely upon such financing.
The Company advanced $5,380,804 and $2,478,136 to BIA during the years
ended December 31, 1995 and 1994, respectively. During the three months ended
March 31, 1996, the Company advanced $1,476,971 to BIA. At September 30, 1995,
the Company elected to forgive $4,042,255 of debt from BIA as
25
it was deemed to be uncollectible. At March 31, 1996, the Company has net
advances to BIA of $500,000 recorded on its books. The Company believes this
amount is collectible based on the Latvian partner's commitment to contribute
assets to BIA with a market value of $500,000 to $2,000,000. In connection with
the Company's interest in Air Baltic, the Company is committed to make
additional advances to BIA in the amount of $654,935 at March 31, 1996, which
amount will be paid from the remaining proceeds of the sale of the Air Baltic
stock to be received from SAS. These advances will be used by BIA to satisfy
certain obligations relating to its discontinued passenger service airline
operations. The Company may, in its discretion, make additional advances to BIA
in support of BIA's future development of charters or cargo operations. Any such
discretionary advances to BIA will be made through internally generated cash
flows or external financing as may be necessary.
As of March 31, 1996, BIA owed the Company, pursuant to advances for
payment of liabilities incurred by BIA from operating the scheduled passenger
carrier service, approximately $4.4 million. The Company will be dependent upon
BIA generating sufficient cash flows from operations, or obtaining alternative
financing, to repay these advances or the Company will forgive additional debt
or the Latvian Partner will make additional contributions. Furthermore, the
Company may in the future convert additional advances to increase its percentage
ownership of BIA, if appropriate. In September 1994, the Company converted
$2,000,000 of its advances to BIA into equity thereby increasing its percentage
ownership of BIA to 49% from 40%. This action was a part of a long-range plan
between the Company and the Latvian Partner. In connection with the Company's
action, the Latvian Partner has signed a commitment to contribute real property
and/or other operating assets with a value of approximately $500,000 to
$2,000,000 to BIA. However, as of March 31, 1996, the Latvian Partner had not
yet completed its contribution. Management of the Company believes that the
Latvian Partner's contribution has been delayed by political factors in the
Republic of Latvia relative to new privatization laws. Other than the delay in
the contribution by the Latvian Partner, each party has performed its
obligations pursuant to their agreement. Management believes that the Latvian
Partner's contribution will be made during 1996. There will be no change in the
percentage ownership interests of either party as a result of the Latvian
Partner's contribution. Also in 1994, the Company contributed $969,521 of
charges previously billed to BIA. The proceeds from the sale of the Air Baltic
stock to SAS will primarily be used to pay liabilities of BIA.
The TU134 aircraft currently owned by BIA will not be able to fly into
certain Western European airports because of noise limitations after 1997.
However, BIA terminated its leases on the Boeing aircraft and therefore will not
be responsible for compliance with noise limitation practices relative to the
Boeing aircraft. The TU134 aircraft will not be subject to noise reduction
requirements at most Western European airports for at least five years due to
the moderate age of the aircraft.
BIA elected not to carry property insurance on the TU134 aircraft as
the market value for such aircraft, when measured against the annual premium for
such insurance, render such insurance uneconomical. In the event that BIA
expands its fleet with Boeing 727 aircraft, the amount of insurance premiums
will likely increase. Furthermore, BIA does not insure certain ground equipment.
In the event that BIA elects in the future to insure such ground equipment, such
insurance will result in additional premiums.
BIA operated its TU134 aircraft at its historical utilization rate
until the third quarter of 1995, when BIA began full utilization of its second
Boeing 727 aircraft. At that time, the TU134 was used principally as a spare and
for charter flights. This is estimated to result in utilization of approximately
35 hours per month. The Company believes its costs associated with the TU134
aircraft are fully recoverable within three to five years.
On January 10, 1996, the Company entered into an agreement to sell 12%
of Air Baltic stock to SAS for $1.7 million in cash and the assumption by SAS of
the remaining subordinated debt obligations of the Company to Air Baltic of
$2,175,000. The Company will retain a 8.02% interest in Air Baltic. SAS assumed
and funded the Company's share of the subordinated debt immediately after
agreement of the terms of the share purchase were reached in January 1996.
26
SEASONALITY
The airline business is significantly affected by seasonal factors.
Historically, BIA experienced reduced demand for scheduled passenger services
from January to March due to a decrease in the seasonal demand for leisure
travel during these months. The Company expects Air Baltic to experience similar
seasonal fluctuations. The Company has historically experienced its strongest
operating results for its scheduled passenger and charter services during the
period from April through December.
INFLATION
Inflation has not had a significant impact on the Company during the
last two years. However, an extended period of inflation could be expected to
have an impact on the Company's earnings by causing operating expenses to
increase. It is likely that Air Baltic and BIA would attempt to pass increased
expenses to customers. If Air Baltic and BIA are unable to pass through
increased costs, their operating results could be adversely affected which would
adversely affect the Company's operating results.
27
BUSINESS
The Company is a Texas corporation which currently owns interests in,
and participates in the management of, aviation-related businesses operating
primarily in the Baltic States. The Company is identifying and developing
additional aviation-related and other business opportunities in the Baltic
States and the Newly Independent States. The Company owns 49%, and assists in
the management, of BIA, a Latvian joint venture-limited liability company based
in Riga, Latvia. BIA operated as a passenger airline from June 1992 through
September 1995. The routes and passenger service operations of BIA were
transferred to a new Latvian carrier, Air Baltic, effective October 1, 1995. The
Company will continue to manage and operate BIA which it intends to operate as a
cargo and charter carrier and aviation services company. However, since October
1995, BIA has not conducted any substantive business operations. The Company
also provides aviation-related support services to Air Baltic, BIA, and other
airlines, through other ventures. The Company provides freight marketing
services through BWAF, a wholly owned subsidiary, food distribution services
through ADC, a wholly owned subsidiary, and owns a 50% joint venture interest in
BCS, an aviation catering and distribution company.
RECENT DEVELOPMENTS
On August 29, 1995, the Company entered into the Air Baltic Joint
Venture Agreement which resulted in the establishment of a new Latvian passenger
carrier, Air Baltic. The new airline began operations on October 1, 1995.
Pursuant to the Air Baltic Joint Venture Agreement, the Company has acquired an
8.02% interest in Air Baltic. The joint partners of BIA contributed BIA's
current scheduled passenger service operation to the new airline, and ceased
operations as a scheduled service carrier when Air Baltic commenced operations
in October 1995. From October to December 1995, the Company managed the interim
flight operations of Air Baltic, subleased the two western aircraft previously
operated by BIA to Air Baltic and provided crews for these aircraft for an
aggregate fee of $1,500,000. In addition, Air Baltic has paid a $1.5 million fee
to the Company for services rendered in connection with the training of Latvian
cockpit, cabin and ground personnel. The Company's influence over and
participation in the management of Air Baltic is nominal.
In connection with the creation of Air Baltic in August 1995, the
Company purchased a 25% interest in Latvian Airlines, which was formerly owned
100% by the Latvian government. The Company also took over the operational
management of Latvian Airlines and transferred its routes to Air Baltic.
Subsequent to the Company's purchase of its 25% interest in Latvian Airlines in
September 1995, the Commercial Court of the Republic of Latvia ruled to
temporarily halt the further privatization and restructuring of the charter and
cargo operations of Latvian Airlines proposed by the Company. The Court in March
1996 ruled that Latvian Airlines is to be liquidated. The Company cannot
determine the potential recovery of its interest in Latvian Airlines and
currently has a 100% reserve against the investment in Latvian Airlines.
On September 28, 1995, the Company executed Articles of Incorporation
with Siauliai Aviacija, a joint stock company wholly owned by the Ministry of
Transportation of the Republic of Lithuania, and the Municipality of Siauliai
City to form Lithuanian Aircraft Maintenance Corporation ("LAMCO"), a Lithuanian
closed stock company, for the purpose of establishing an aircraft maintenance
facility in Lithuania. The lines of business of LAMCO have been amended to
include production of metal buildings, production of plastic articles, retail
trade in non-specialized shops and wood cutting in addition to establishing an
aircraft maintenance facility. The Company does not expect LAMCO to be fully
operational until late 1996 or early 1997, if at all.
In March 1996, the founders of LAMCO amended the Articles of
Incorporation changing the authorized capital from $5,000,000 to $1,538,482. The
authorized capital may be increased from additional contributions made by the
founders. The Company has the right to own up to 50% of LAMCO; however, the
Company's initial investment will total only 2.6% of LAMCO. Further purchases of
shares are anticipated during 1996 as the business plans for the operating
entities of LAMCO are concluded. Siauliai Aviacija currently owns 96.6% of LAMCO
and 0.8% is owned by the Municipality of Siauliai City. The Company will have
the right to recommend the general manager, chief financial officer and
28
department heads for approval by LAMCO's board for a period of 10 years. The
Company will also have the authority to negotiate a line of credit for LAMCO.
The Lithuanian partners have made their cash capital contributions.
The Company's initial capital contribution is $40,000 of which 25% was
contributed on March 26, 1996, with the remainder contributed in May 1996.
In February 1996, the Company entered into a joint venture agreement
with Topflight AB, a Stockholm-based airline catering company, which resulted in
the establishment of a new catering company, ACS. The Company owns 51% of ACS
and Topflight owns 49%. On April 2, 1996, the catering operations of BCS were
acquired by Riga Catering Services ("RCS"), previously owned by Topflight AB, in
exchange for shares in RCS. RCS is currently owned 35% by ACS, 23.5% by the
Company and 41.5% by the principals of the Company's partner in BCS. ACS will
develop additional airline catering companies in selected markets of the Baltic
States and the Newly Independent States. ACS is preparing a business plan which
will identify the areas which may demonstrate the best opportunity for
development of in-flight catering operations. There can be no assurances that
definitive agreements will be entered into or that business operations will
result from this joint venture.
On January 25, 1996, the Company submitted a proposal to the Estonian
Privatization Agency for the privatization of Estonian Air, the national airline
of the Republic of Estonia. The proposal submitted by BIUSA contemplates the
purchase of 66% of the shares of Estonian Air by private companies and/or
institutions. BIUSA has proposed to arrange for the sale of the shares which the
government wishes to privatize. The privatization process is a competitive one
and five parties, including BIUSA, have submitted proposals. BIUSA's proposal
does not anticipate that BIUSA will use any of its internal resources to acquire
shares or seek external equity funds to acquire shares. There can be no
assurances BIUSA will be successful in its efforts to participate in the
privatization of Estonian Air.
BACKGROUND
Prior to the break-up of the former Soviet Union, the civil aviation
industry of the Republics of the Soviet Union was wholly owned and managed by
Aeroflot, a Soviet state enterprise that operated under the direction of the
Ministry of Civil Aviation. The airline operations of each Republic were
divisions of Aeroflot. At the time of the demise of the Soviet Union, the former
Republics acquired the aviation assets of their respective Aeroflot divisions.
The management of Aeroflot was highly centralized and most upper
management personnel were located in Moscow. After independence, the former
Republics were left with a shortage of qualified administrative and operational
management personnel. Additionally, their aviation assets including aircraft,
reservations equipment, air traffic control and terminal facilities, were not of
acceptable international standards. While the national governments of the Baltic
States and Newly Independent States desired to improve their respective aviation
industries to attract Western businesses and tourists, they were hampered by
lack of qualified personnel and modern equipment and facilities.
The void in international aviation expertise and the poor quality of
operating assets was compounded by the failure of former Soviet state
enterprises to become viable economic entities under free market reforms. New
national carriers lacked an economic basis for operating much of their previous
flight schedules. The Baltic States and Newly Independent States lacked both the
capital infrastructure and expertise to survive in a free market environment.
Moreover, the breakup of the former Soviet Union disrupted traditional markets.
The decline in the economy throughout the former Soviet Union meant a limited
domestic demand for air travel.
In this dynamic environment, the Company believes that three trends
became evident: (i) state aviation enterprises were unable to successfully
effect the transition to a free market operation; (ii) state aviation
enterprises lacked the ability to attract sufficient capital for upgrading of
services and operations; and (iii) private companies or Western joint ventures
free of the excessive overhead and bureaucratic burdens of state aviation
enterprises have fared better.
29
Many of the Baltic States and Newly Independent States entered into
"free sky policies" or liberal bilateral aviation agreements with Western
aviation authorities to encourage Western carriers to serve these new markets.
The entry of Western carriers into these new markets created a new demand for
support services. In addition to maintenance, Western carriers require
international standard catering and other inflight support services. At present,
the Company believes that the demand for such support services is not being met
in the vast majority of the Baltic States and Newly Independent States. Such
conditions require the Western carriers to provide for services in advance of
both legs of a round-trip, which increases costs due to weight considerations
and reduced cargo capacity.
BUSINESS STRATEGY OF THE COMPANY
The Company was created as a vehicle for identifying, forming, and
participating in aviation-related business ventures in the Baltic States and
Newly Independent States. The Company's initial business venture was to form and
develop BIA. In connection with developing BIA, the Company formed related
aviation ventures to provide support services through BIA, including a catering
service and a freight marketing company. The Company is entitled to its pro rata
share of profits and losses from the operations of all of its business ventures.
The Company intends to continue to form and operate ventures in the
Baltic States and Newly Independent States. Management believes that there are
many low cost opportunities due to the general underdeveloped nature of the
marketplace and the need for essential services in the region, such as air
transportation and aviation-related services. Management believes that an
opportunity exists to utilize its expertise in order to establish business
opportunities to take advantage of existing market conditions.
Components of the Company's strategic plan in developing BIA are
outlined below. The Company believes these activities are essential to the
development of any western-standard passenger service airline operation. The
Company believes that its implementation of this strategic plan on behalf of BIA
has been and will continue to be instrumental in attracting additional
airline-related business opportunities.
ALLIANCE WITH GOVERNMENTAL PARTNERS IN AIRLINE VENTURES. The Company
seeks airline partnerships, as a minority partner, with governmental entities.
When BIA was formed, the Latvian government's role as the majority partner was
beneficial to BIA in the area of bilateral agreement negotiations, as well as in
other areas during the development and start-up phase of BIA.
MEMBERSHIP IN INTERNATIONAL AVIATION ORGANIZATIONS. When the Company
commenced operations, no former division of Aeroflot had gained admission to the
various international aviation organizations, including one of the most
important, the International Air Transport Association ("IATA"). Management
believes that international aviation organizations were concerned with the
political implications of admitting former Aeroflot divisions. BIA was the first
airline of the Baltic States or Newly Independent States to become a member of
all the departments of IATA including full tariff coordination, membership in
automatic interline agreements with approximately 280 international airlines,
and clearing house membership.
INSURING AIRLINE OPERATIONS ACCORDING TO INTERNATIONAL STANDARDS. As
an independent carrier, BIA was, for example, required to maintain insurance
coverage meeting the requirements of international aviation organizations and
Western airport authorities. The Company retained aviation insurance specialists
to study in detail the safety and maintenance records of the former Latvian
Aeroflot division and to observe safety and maintenance procedures. On the basis
of these visits, Alexander Howden Aviation prepared a report for insurance
underwriters of Lloyds of London, which led to the successful underwriting of
BIA's insurance in the London market at rates the Company believes to be
comparable to Western carriers.
MARKETING ORGANIZATION. When the Company commenced operations, most
former Aeroflot divisions were served by Aeroflot as their marketing
representative in the West. The Company succeeded in setting up an international
marketing network for BIA by recruiting general sales agents in various markets.
General sales agents supply a wide array of services, such as advertising,
airport
30
services and lost and found. The Company is prepared to set up marketing
services directly for other start-up airlines in the Baltic States and Newly
Independent States.
TICKET STOCK. An airline's ticket stock can be printed only if it has
been assigned a two-letter IATA code and a three-letter IATA ticketing code. The
Company succeeded in obtaining the two- and three-letter codes for BIA which
allowed it to print its own ticket stock according to international standards.
BIA was the first airline from the former Soviet Union to have its own ticket
stock recognized by international aviation organizations and international
carriers.
INTERLINE AGREEMENTS. No international airline can operate without
interline agreements, which permit one airline to write ticket segments on
another airline. The Company succeeded in obtaining interline agreements on
behalf of BIA with many of the international carriers that offer interline
passengers to the Baltic region. BIA was the first carrier from the former
Soviet Union to have formal interline agreements with the major international
airlines.
BANK SETTLEMENT PLAN. The Company assisted BIA in obtaining membership
in the Bank Settlement Plan of IATA, which allows member airlines to settle
accounts with one another through a system of automatic debits and credits. This
arrangement allows member airlines that do not presently serve Riga to write
tickets without a separately negotiated interline agreement.
AIRPORT CONTRACTS. Traffic rights to destinations in foreign countries
are subject to approval by, and successful negotiation of bilateral agreements
with, the destination country. Western airport authorities and suppliers must be
convinced of a carrier's financial solvency, the soundness of its operating
plan, and the competency of its personnel before it will allow new carriers to
fly to their market. The Company arranged airport and supplier contracts on
behalf of BIA in Germany and in the United Kingdom and finalized the contracts
necessary to carry out these Western operations.
AIRCRAFT REFURBISHING. BIA started operations with Tupolev jet
equipment dating from the former Soviet Union. The Company was able to arrange
the refurbishing and repainting of these aircraft at affordable prices to render
the aircraft exteriors and interiors acceptable to Western passengers.
COMPUTERIZED RESERVATIONS SYSTEMS. The Company negotiated contracts
with recognized computerized reservation systems (SAAS, SABRE, AMADEUS,
GOLDSPAN, DATAS and SYSTEM ONE). These agreements provided reservations systems
and hardware equipment for use in Riga and in Houston. Under these systems,
flights are displayed with all joint fares and reservation connections into and
out of Riga, thereby providing travel agents worldwide access to BIA's services.
LEASING OF WESTERN EQUIPMENT. The Company's challenge was to bring in
Western equipment at an affordable cost. Most leasing companies require
substantial deposits and guarantees which ultimately make Western aircraft
unaffordable to newly emerging carriers. The Company was able to negotiate on
favorable terms leases for Western aircraft on behalf of BIA. The Company also
organized a team of experts to carry out maintenance procedures and establish
supply and maintenance programs for the safe and efficient operation of Boeing
727 equipment. See "--Airline Operations--Maintenance and Training."
CATERING SERVICES. The Company established catering operations as well
as other related distribution operations in order to better serve BIA, as well
as other airlines. The catering services are essential in order to upgrade
service to meet international standards.
FREIGHT MARKETING. The Company is engaged in air cargo marketing
through BWAF to provide an additional means for carriers to earn revenue.
THE ATTRACTION OF START-UP CAPITAL. The major purpose of BIA's
business plan as prepared by the Company was to attract sufficient capital to
commence airline operations. The attraction of capital to a region of uncertain
political stability, uncertain economic reform and legislation, and a
questionable record of contract enforcement was difficult. Despite the climate
of uncertainty, the Company believes that it has met its financial obligations
under the terms of its joint venture agreements.
31
The Company intends to market its abilities primarily through
management's long standing network in the region. Management is regularly
afforded aviation-related business opportunities in this region and will utilize
its discretion in determining which ventures, if any, to pursue.
AIRLINE OPERATIONS
ROUTE SYSTEMS
BIA commenced scheduled passenger operations in June 1992, and
provided regularly scheduled service to and from Riga and Frankfurt, Berlin,
London, Tallinn, Amsterdam and Vilnius through September 1995. In August 1995,
the BIA route authorities, as well as those of Latvian Airlines, were
transferred to, and as of October 1, 1995 are operated by, Air Baltic. Air
Baltic currently provides passenger service on the following routes:
DESTINATION FREQUENCY
----------- ---------
London 7 days per week
Frankfurt 7 days per week
Stockholm*** 7 days per week
Copenhagen* 7 days per week
Helsinki 7 days per week
Tallinn** 5 days per week
Warsaw 3 days per week
Kiev 4 days per week
Vilnius 5 days per week
Minsk 5 days per week
------------
* Twice-daily service.
** Twice-daily service on Tuesday and Thursday.
*** Twice-daily service on Monday through Friday.
Additional routes, bringing the total routes to be serviced to
thirteen, are planned for 1996. However, there can be no assurances any
additional routes can be successfully negotiated resulting in a commencement of
operations. All routes may be subject to approval by, and successful negotiation
of bilateral agreements with, the destination countries. Air Baltic management
will require a feasibility study and site visits as well as an established
marketing system before any additional routes can be initiated. Once a bilateral
agreement is entered into and the LDCA has confirmed the award of the routes,
Air Baltic will negotiate with various airports for additional flight
frequencies, times and services. There can be no assurance that this intended
expansion will occur.
PASSENGER SERVICE AND AIRCRAFT
BIA initially operated Tupolev aircraft equipment until the
introduction of Western aircraft in August 1993. Management believes that some
Western travelers were reluctant to travel on Soviet equipment, notwithstanding
that BIA's equipment was fully refurbished to Western standards. This reluctance
may have restricted access to potential passengers. The introduction of Western
aircraft was intended to mitigate passenger resistance. Air Baltic operates a
SAAB 340 as well as a McDonnell Douglas DC9. Air Baltic will use only Western
aircraft in its fleet and is currently developing a strategic long-term plan for
fleet selection. Air Baltic has entered into an agreement with Avro
International Aerospace to lease three Avro RJ70 aircraft for a period of seven
years. See "--Wet Lease."
Air Baltic will pursue a strategy to maintain its fleet with low cost
Western aircraft for expansion to the East from its hub in Riga as well as
Western Europe. Cockpit, cabin crew, and maintenance personnel have been and are
being trained in the operation of the Boeing aircraft and will undergo training
for the aircraft selected for the long-term needs of Air Baltic. Because of its
low labor expense, the strategy will be to ensure a long-term low cost structure
in the routine servicing and maintenance of its Western aircraft fleet.
32
The SAAB 340 aircraft has a configuration of 34 single-class seats,
and the McDonnell Douglas DC-9 aircraft has a configuration of 20 first class
seats and 80 economy seats.
Part of the strategy in the development of BIA and of Air Baltic was
to offer passenger service equivalent to service offered by major United States
carriers. All flights provide a multi-course meal to business passengers as well
as a full selection of newspapers and periodicals. Duty-free services are
offered to passengers and management believes the level of service parallels
that of transatlantic in-flight passenger service.
BIA operated with full operational independence on the basis of its
own operating licenses and manuals, all of which met international aviation
standards and Air Baltic operations have a parallel standard. The LDCA has
determined to observe FAA rules in the operation of Western aircraft by Latvian
carriers. BIA's and Air Baltic's operating procedures are designed to conform to
FAA standards.
The Boeing aircraft previously used by BIA are not currently being
utilized. The Company is negotiating to return these aircraft to the owner.
MARKETING, ADVERTISING AND PROMOTION
BIA's services were marketed primarily through Skylink GmbH, the
airline's general sales agent in Germany, and Chapman Freeborn, the airline's
general sales agent in the United Kingdom. General sales agents are used to
attract Western business from Europe and the United States. In Latvia, BIA used
local travel agents in Riga and surrounding cities to market the airline. These
relationships will be maintained by Air Baltic.
Air Baltic intends to concentrate its marketing efforts to attract
groups from the appropriate ethnic markets in Europe and the United States that
have large Latvian populations. Management believes that lower operating costs
than many of its competitors will allow Air Baltic to offer comparatively
attractive fares to business and tourist passengers. Air Baltic intends to use
advertising dollars to increase its loads and a formal marketing program is
currently under development.
The development and implementation of Air Baltic's marketing program
will be managed and supervised by SAS in its capacity as manager of Air Baltic
and the Company is negotiating to manage Air Baltic's North American marketing
program. If the Company is successful in these negotiations, its marketing staff
will supervise and appoint general sales agents and sales agents, monitor fares
and computerized flight listings, and prepare promotional material.
MAINTENANCE AND TRAINING
BIA has provided routine and scheduled servicing and maintenance for
its aircraft using its own personnel who have been trained by BIA and have met
appropriate certification of the Ministry of Transportation of the Republic of
Latvia. BIA believes it has engaged sufficient personnel, as well as
professional consultants, with appropriate experience to insure proper servicing
and maintenance of its aircraft. From October through December 1995, BIA
personnel provided similar services to Air Baltic. Air Baltic personnel, some of
which were transferred from BIA, will also ensure that maintenance and training
programs are in place to meet required certification in the Republic of Latvia.
WET LEASE
The Company and Air Baltic entered into a Wet Lease Agreement in
October 1995 which provided for the sublease of the Boeing aircraft through
December 31, 1995. This agreement also provided that the Company and/or BIA
operate and staff Air Baltic's flight operations and maintain insurance, with
Air Baltic responsible for ground handling. Air Baltic paid the Company a fee of
$1,500,000 pursuant to the wet lease. The Company continues to be responsible
for the leases of the Boeing aircraft through July 1996, and the Company is
negotiating with the owner to return the aircraft prior to the end of the
leases.
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BIA JOINT VENTURE AGREEMENT
In June 1991, the Company entered into an agreement with the LCAB to
form BIA for the primary purpose of establishing international airline
operations in the Republic of Latvia, including passenger, freight, mail,
airplane maintenance, catering and baggage handling operations, which would
service North America, Western Europe, the Baltic States and the Newly
Independent States. Effective July 1993, the Company entered into a settlement
agreement with the Latvian Ministry of Transportation and Latvian Airlines (as
the legal successor to LCAB) whereby Latvian Airlines ceased to be the owner of
the Latvian share of BIA and the Latvian Aviation Department, an agency of the
Government of Latvia (the "Latvian Partner") was appointed as such owner. The
ownership shares were set at 40% for the Company and 60% for the Latvian share.
Under an agreement reached September 15, 1994, the Company's share was increased
to 49% and the Latvian share was reduced to 51% as a consequence of the Company
converting a $2 million advance into equity. The following is a summary of the
more significant provisions of the BIA joint venture agreement, as amended ("BIA
Joint Venture Agreement").
CASH AND PROPERTY INVESTMENT. BIA is owned 49% by the Company, and 51%
by the Latvian Partner. To date, the investment contribution made by the Company
has consisted of hard currency funds and other capital and services used in the
initial development of BIA, while the Latvian Partner's and its predecessor's
investment contribution has primarily consisted of the TU134 aircraft. The
Latvian Partner has indicated its intent to make an additional contribution of
real estate to BIA as they are deficient in contributing capital to BIA.
GENERAL DUTIES. The Company's responsibilities under the BIA Joint
Venture Agreement include, without limitation, the negotiation of any and all
agreements of BIA necessary to carry out its operations, marketing, the
refurbishing of older generation aircraft and providing of new aircraft, and
financial planning. Furthermore, in accordance with the BIA Joint Venture
Agreement, the Company generally provides advice and training for all flight
operations of BIA, including without limitation, maintenance of BIA's aircraft
and training of all of BIA's flight personnel.
MANAGEMENT AND CONTROL. The BIA Joint Venture Agreement requires the
creation of a 10-member board of directors, currently comprised of nine members,
and delegates all management control of BIA to the board which is elected
annually. Six members of the board are designated by the Latvian Partner, and
the remaining four members are designated by the Company. It is expected that
the current vacancy on the BIA board will be filled by the Latvian Partner. The
board has the authority to appoint executive, audit and financial management
committees; however, none of these committees has been appointed to date.
The attendance of six board members, including at least one director
designee of the Company and one designee of the Latvian Partner, constitutes a
quorum for all meetings of the board. All decisions made by the board require
the vote of at least 66% of the directors constituting a quorum and present in
person or by proxy at any meeting of the board. Furthermore, certain major
decisions including, without limitation, the merger or dissolution of BIA, the
incurring of indebtedness, the encumbrance of any of BIA's assets other than in
the ordinary course of business and the issuance of additional ownership shares
in BIA, require the vote of at least 80% of the directors of the entire board.
Meetings of the board may be held by teleconference or other similar means of
communication, and each director of BIA is entitled to vote in person or by
proxy at any meeting of the board. Accordingly, certain major decisions, such as
those aforementioned, may not be effected by BIA without the consent of the
Company.
OFFICERS. The BIA Joint Venture Agreement provides for the election of
officers of BIA, who are responsible for the daily management of BIA. Directors
appointed by both the Company and the Latvian Partner jointly elect the officers
of BIA. Officers and Directors of the Company who also serve as officers and
directors of BIA include Juris Padegs, Robert L. Knauss, Homi M. Davier, Paul
Gregory and James Goodchild.
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FINANCIAL ACTIVITY AND DISTRIBUTIONS. The net profits generated from
the operations of BIA shall, subject to certain contributions to an established
reserve fund, first be utilized to pay taxes and other expenses, and then
distributed, on a pro rata basis, to the Company and the Latvian Partner. So
long as funds are legally available, all net profits of BIA shall be distributed
to the Company and the Latvian Partner in accordance with their respective
ownership interests in BIA. Furthermore, the Company has the unilateral right
under the BIA Joint Venture Agreement to demand a pro rata distribution of 50%
of the net profit of BIA to the Company and the Latvian Partner. The Company has
not received any distributions of net profits from BIA.
TERMINATION AND LIQUIDATION. The term of the BIA Joint Venture
Agreement is perpetual; however, BIA may be dissolved and liquidated upon the
occurrence of any of the following events: (i) the adoption of a resolution by
the board of directors dissolving BIA; (ii) the insolvency of BIA; or (iii)
transformation of BIA into a different form of business activity. In the event
the BIA Joint Venture Agreement is terminated as a result of a default of the
terms and provisions of the BIA Joint Venture Agreement by the Company or the
Latvian Partner, the nondefaulting party has the right and is entitled to
continue the business of BIA by acquiring the defaulting party's interest in
BIA. The nondefaulting party may do so by paying the defaulting party 10% of the
fair market value (which shall be deemed to be two times the annual gross
revenues of BIA times the defaulting party's percentage of ownership in BIA) in
hard currency as a down payment, with the balance to be paid in monthly
installments of principal and interest for a period of 10 years at a rate of 10%
per annum. The nondefaulting party has 180 days after termination of the BIA
Joint Venture Agreement to exercise the right to carry on the business and
purchase the defaulting party's shares in BIA or liquidate BIA.
GOVERNING LAW AND ARBITRATION. Under the BIA Joint Venture Agreement,
the Company and its Latvian Partner agree to submit disputes that cannot be
resolved between the parties to binding arbitration at the Arbitration Institute
of the Stockholm Chamber of Commerce in Stockholm, Sweden, to be conducted
pursuant to the arbitration rules of the United Nations Commission on
International Trade Law. Such disputes will be governed by the Republic of
Latvia Law on Limited Liability Companies to the extent such law is applicable;
otherwise, Swedish law will be applied.
CURRENT STATUS. BIA's passenger revenue service operations and route
authorities were contributed to Air Baltic as of August 29, 1995, and its
passenger service revenue production was transferred to Air Baltic on October 1,
1995. BIA has therefore discontinued the passenger service portion of its
operations. BIA has maintained its rights and privileges to conduct charter and
cargo operations as a Latvian carrier and has maintained in good standing all of
its international organization memberships which would permit it to conduct
non-passenger related activities. The Company intends to develop the charter and
cargo operation of BIA. The Company has no specific business plan at this time
and has no estimate of capital needs, if any, to develop the charter and cargo
operations of BIA and can make no assurances that BIA will commence operations
as a charter and cargo carrier.
AIR BALTIC JOINT VENTURE AGREEMENT
The following is a summary of the more significant provisions of the
Air Baltic Joint Venture Agreement.
CASH AND PROPERTY INVESTMENT. Air Baltic is owned 8.02% by the
Company, 28.51% by SAS, 51.07% by the Republic of Latvia and 12.4% by two
Scandinavian financial institutions. The Company's and the Republic of Latvia's
shares in Air Baltic were obtained in exchange for a contribution of the
scheduled passenger service operation of BIA. In addition, the Republic of
Latvia contributed cash and real estate to the new airline. SAS and the two
Scandinavian financial institutions contributed cash for their shares. Under the
terms of the Air Baltic Joint Venture Agreement, the parties other than the
Company may be required to provide additional financing, if necessary, in the
form of subordinated debt.
MANAGEMENT AND CONTROL. The Air Baltic Joint Venture Agreement created
a seven-member board of directors. The Republic of Latvia has designated four
directors, SAS nominated two directors and the Scandinavian financial
institutions jointly have nominated the seventh director. The board is
responsible for supervising the actions of the executive management as well as
adopting business plans, budgets and approving material agreements, borrowings
and expenditures. The attendance of six directors constitutes
35
a quorum for all meetings of the board. Each director has one vote and all
matters to be decided by the board require a majority of six votes in order for
a decision to be approved.
The agreement also provides that certain matters, including
distribution of profits, are to be decided by the parties themselves in a
participants' meeting. Participants having more than 75% shall constitute a
quorum. All matters to be decided by the participants shall be decided by simple
majority except that certain matters, including amendments, share issuances and
reorganizations, require a quorum of 90% and a majority of 90% of the votes cast
either at a meeting or in writing.
EXECUTIVE MANAGEMENT. The executive management will manage the
development of the new airline except with respect to matters which are
specifically reserved to the board or participants. The executive management
shall report to the board via chief executive officer. For a period of 10 years
from the date of the Air Baltic Joint Venture Agreement, SAS shall have the
right to nominate the chief executive officer, chief financial officer, chief
flight operations officer, chief technical officer and chief ground operations
officer, subject to approval by the board. To the extent that any of the
executive management positions are not filled by Latvian citizens or permanent
residents, the chief executive officer will appoint Latvian citizens or
permanent residents as deputies in order to achieve a transfer to know-how with
respect to finance, technical, flight operations, ground operations and sales
and marketing. Executive management will be responsible for the day-to-day
management of the airline, efficient management of the airline including
preparation and achievement of business plans, preparation and delivery of
monthly financial statements and management reports, and obtaining services to
be provided to the airline by third parties on the best available terms.
FINANCIAL ACTIVITY AND DISTRIBUTIONS. So long as funds are legally
available, all net profits of Air Baltic shall be distributed to the
participants in accordance with their respective ownership interest in Air
Baltic.
TERMINATION AND LIQUIDATION. The Air Baltic Joint Venture Agreement
shall continue for the duration of the airline's existence, unless sooner
terminated. The agreement may be terminated if the airline has not commenced
scheduled flight operations within six months of the date of the agreement, a
resolution is passed for the winding-up of the airline, the airline becomes
insolvent, the airline makes a general assignment for the benefit of creditors,
or the airline has a receiver or other manager appointed over all or a
substantial part of its business or assets.
GOVERNING LAW AND ARBITRATION. The construction, validity and
performance of the Air Baltic Joint Venture Agreement shall be governed by
Swedish law, subject to the mandatory requirements of Latvian law. Any disputes
under the agreement shall be referred to and resolved by arbitration under the
rules of the Arbitration Institute of the Stockholm Chamber of Commerce in
Stockholm, Sweden.
CURRENT STATUS. Air Baltic began its passenger service operations on
October 1, 1995. From October 1, 1995 through December 31, 1995, Air Baltic's
fleet consisted of two Boeing 727 aircraft subleased from the Company, and one
leased SAAB 340. The lease on the SAAB 340 is expected to be renegotiated. Air
Baltic has also entered into an agreement with Avro International Aerospace to
lease three Avro RJ70 aircraft for seven years.
These aircraft are modern narrow bodied mid range aircraft.
BALTIC WORLD AIR FREIGHT
BWAF, a wholly-owned Latvian limited liability company, provides cargo
marketing services and is the cargo agent for BIA. BWAF is currently negotiating
with Air Baltic to become Air Baltic's cargo marketing services company and
cargo agent. Air Baltic has engaged BWAF to serve as Air Baltic's interim cargo
and cargo marketing agent until a decision is made on definitive terms for a
contract between Air Baltic and BWAF. BWAF was formed to develop air cargo
networks between the Baltic States and Newly Independent States and Europe. BWAF
provides international standard air cargo management and services to start-up
and existing carriers. The Company believes that movement of cargo within the
large geographical areas of the Baltic States and Newly Independent States is
more efficient through air transportation, due primarily to the lack of
well-developed trucking and rail networks. BWAF is also responsible for
negotiating agreements relative to the loading and unloading of freight,
documentation of shipments and development of policies for performance of the
actual carriage of freight.
36
BWAF is in the process of determining the merits of the development of
a cargo center at Riga International Airport to act as a central point for
shipping air cargo from Riga. With the expected development of Riga
International Airport as a hub, the growth of air cargo will require a terminal
for servicing the cargo needs of the market area. The Riga International Airport
has requested a grant from the United States Trade Development Agency to engage
the Company to conduct a feasibility study with respect to the development of a
cargo center.
In addition to serving as the cargo agent for BIA and Air Baltic, BWAF
is negotiating with other regional carriers from the Baltic States and former
Soviet Union. There can be no assurance that any definitive agreements will be
executed with respect to any carrier from the region.
OTHER AVIATION-RELATED VENTURES
BALTIC CATERING SERVICES
BCS is an airline catering and duty-free products company, as well as a
wholesale food distributor. In connection with the formation of BCS, the Company
entered into a limited liability company agreement with ARVO, Ltd., a Latvian
limited liability company, the term of which is perpetual, unless sooner
terminated by the terms and provisions of the limited liability agreement. Each
venturer is entitled to 50% of the distributions, profits and losses. ARVO, Ltd.
handles the day-to-day catering services and the construction and management of
kitchen and other catering facilities. The Company arranges all financial
matters, negotiations of all third-party contracts and day-to-day management of
distribution activities.
BCS is the catering agent for Air Baltic and for seventeen other
international airline carriers serving Riga International Airport. BCS maintains
a kitchen at Riga International Airport for wholesale food production. BCS
operates a cafeteria for airport employees and office workers located at the
airport, which was built in exchange for a five-year rent-free lease on property
on the grounds of the airport. BCS is a full-service airline catering company
located at Riga International Airport and provides catering, duty-free and other
in-flight support service products to Western airlines servicing Riga. The
availability of these services saves the additional expense for the Western
carriers in extra weight and increases the cargo capacity of the aircraft. BCS'
strategy is to offer international standard catering and other in-flight support
services which meet the needs of the Western carriers traveling to Riga.
BCS was also a wholesale distributor of food products. BCS hired a
management and sales staff and has secured duty-free warehouse space and offices
at Riga International Airport for management of its wholesale food distribution
operations. Effective December 1, 1995, BCS sold the rights to distribute Miller
Beer products in Riga, Latvia to ADC. There can be no assurances that definitive
agreements will be executed with respect to additional products.
LITHUANIAN AIRCRAFT MAINTENANCE CORPORATION
On September 28, 1995, the Company executed Articles of Incorporation
with Siauliai Aviacija, a joint stock company wholly owned by the Ministry of
Transportation of the Republic of Lithuania, and the Municipality of Siauliai
City to form Lithuanian Aircraft Maintenance Corporation ("LAMCO"), a Lithuanian
closed stock company, for the purpose of establishing an aircraft maintenance
facility in Lithuania. The lines of business of LAMCO have been amended to
include production of metal buildings, production of plastic articles, retail
trade in non-specialized shops and wood cutting in addition to establishing an
aircraft maintenance facility. The Company does not expect LAMCO to be fully
operational until late 1996 or early 1997, if at all.
In March 1996, the founders of LAMCO amended the Articles of
Incorporation changing the authorized capital from $5,000,000 to $1,538,482. The
authorized capital may be increased from additional contributions made by the
founders. The Company has the right to own up to 50% of LAMCO; however, the
Company's initial investment will total only 2.6% of LAMCO. Further purchases of
shares are anticipated during 1996 as the business plans for the operating
entities of LAMCO are concluded. Siauliai Aviacija currently owns 96.6% of LAMCO
and 0.8% is owned by the Municipality of Siauliai City. The Company will have
the right to recommend the general manager, chief financial officer and
department heads for approval by LAMCO's board for a period of 10 years. The
Company will also have the authority to negotiate a line of credit for LAMCO.
The Lithuanian partners have made their cash capital contributions. The
Company's initial capital contribution is $40,000 of which 25% was contributed
on March 26, 1996, with the remainder of the Company's initial capital
contributed in May 1996. In the event the Company is unable to meet its capital
contribution obligations, any interest it may have in LAMCO may be forfeited.
37
AMERICAN DISTRIBUTING COMPANY
The Company has been granted exclusive rights to distribute selected
Kraft products throughout the Baltic States. Additionally, the Company has been
granted rights to distribute Miller Beer products in St. Petersburg, Russia. The
Company intends to develop these opportunities through a wholly owned Latvian
limited liability company, under the name of American Distributing Company. ADC
will operate the Kraft operation independently, but will work with a local St.
Petersburg based company to commence activities related to distribution of
Miller products in St. Petersburg. Effective December 1, 1995, ADC acquired the
rights to distribute Miller products in Riga, Latvia from BCS. The Company
intends to finance the activities of ADC from internal sources of liquidity, or
seek external financing if necessary. As ADC is currently in the formation
stage, and not operational, there can be no assurances that operational
activities will commence with either the new Kraft or Miller opportunity.
AIRO CATERING SERVICES
In February 1996 the Company entered into a joint venture agreement
with Topflight AB, a Stockholm-based airline catering company, which resulted in
the establishment of a new catering company, ACS. The Company owns 51% of ACS
and Topflight owns 49%. On April 2, 1996, the catering operations of BCS were
acquired by Riga Catering Services ("RCS"), previously owned by Topflight AB, in
exchange for shares in RCS. RCS is currently owned 35% by ACS, 23.5% by the
Company and 41.5% by the principals of the Company's partner in BCS. ACS will
develop additional airline catering companies in selected markets of the Baltic
States and the Newly Independent States. The Company and Topflight are preparing
a business plan which will identify the areas which may demonstrate the best
opportunity for development of in-flight catering operations. As the
relationship is in the preliminary stage with current focus on feasibility of
establishing business operations, there can be no assurances that definitive
agreements will be entered into or that business operations will result from
these arrangements.
GOVERNMENT REGULATION
REPUBLIC OF LATVIA LAW ON FOREIGN INVESTMENT
In November 1991, the Republic of Latvia adopted the Law on Foreign
Investment ("Foreign Investment Law"), which was designed to encourage the
participation by foreigners in the establishment of Latvian joint ventures. The
Foreign Investment Law generally provides certain preferential tax advantages to
ventures formed under the Foreign Investment Law beginning in the year in which
profits are first generated from the operations of such ventures. In addition,
the Foreign Investment Law permits non-Latvian entities to own up to a 100%
interest in most Latvian business entities, including airlines.
Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are exempt from profit taxes for a period of two years, and thereafter for the
following two years, profit taxes for such ventures are reduced by 50%. Ventures
having foreign participation in excess of 50% (equal to at least $1,000,000),
are exempt from profit taxes for a period of three years, and thereafter for the
following five years, profit taxes for such ventures are reduced by 50%. In
addition, ventures which are active in certain industries deemed to be
"preferential" by the government of the Republic of Latvia and having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are entitled to a three-year tax holiday from the payment of profit taxes, and
thereafter for the following two years, profit taxes for these "preferential"
ventures are reduced by 50%.
The business of BIA, and also of Air Baltic, is deemed to be a
preferential industry, entitling it to a three-year profit tax holiday for the
first year in which it generates profits, and a 50% reduction in profit taxes
for the following two years. To date, BIA has not generated any profits in any
year.
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REPUBLIC OF LATVIA LAW ON LIMITED LIABILITY COMPANIES
The formation and operation of joint venture-limited liability
companies within the Republic of Latvia is regulated and governed by the
Republic of Latvia Law on Limited Liability Companies ("Company Law"). A joint
venture-limited liability company is recognized as a separate legal entity under
the Company Law for purposes of transacting business in the Republic of Latvia,
and accordingly, a joint venture-limited liability company can incur its own
obligations and liabilities with respect to its business operations.
Furthermore, the capital shareholders of a joint venture-limited liability
company are afforded limited liability with respect to any acts or obligations
of the joint venture-limited liability company. Accordingly, the Company will
not be liable, because of its status as owner of a joint venture-limited
liability company interest or as owner of any subsidiary registered as a Latvian
limited liability company, for any obligations incurred by Air Baltic, BIA, BCS,
BWAF or ADC resulting from their respective business operations.
REPUBLIC OF LATVIA LAW ON AVIATION
BIA and Air Baltic are subject to government regulation and control
under the laws of the Republic of Latvia and the laws of the various countries
which they serve. They are also governed by bilateral air services agreements
between the Republic of Latvia and the countries to which they provide airline
services. In April 1993, the Republic of Latvia adopted the Law On Aviation
("Aviation Law"), which regulates and governs all areas related to the aviation
industry in the Republic of Latvia, including the air transportation safety
standards, and is administered by the LDCA. The Aviation Law generally
corresponds to the internationally recognized standards, requirements and
regulations of the International Civil Aviation Organization ("ICAO"), and the
Republic of Latvia is a signatory to the ICAO, the Chicago Convention and the
Warsaw Convention. In accordance with the Aviation Law all aircraft operating in
the Republic of Latvia are required to carry and maintain certificates of air
worthiness issued by the LDCA, and are required to carry certificates of
competency issued by the LDCA covering each member of its operating crew.
Furthermore, with respect to flight operations, the Aviation Law requires that
journey log books, containing information regarding the aircraft, its crew and
each journey, be maintained for each aircraft engaged in air navigation in the
Republic of Latvia.
In order to conduct operations as an air carrier in the Republic of
Latvia, BIA and Air Baltic were required to, and did, obtain certain
certificates and licenses relating to the registration of aircraft,
airworthiness, each crew member and aircraft radio stations. Air Baltic and BIA
are subject to continuing regulation and inspection by the LDCA regarding flight
operations, maintenance programs and operations personnel, flight training and
retaining programs, security program, ground facilities, dispatch,
communications, equipment, carriage of hazardous materials and other matters
affecting air safety. With respect to airports and routes, the LDCA requires
each air carrier to obtain an operating certificate and operation specifications
authorizing the carrier to operate to particular airports on approved routes
using specific equipment, such certificates and specifications being subject to
amendment, suspension, revocation or termination by the LDCA. Air Baltic and BIA
currently hold a LDCA certificate and operations specifications pursuant to the
Aviation Law with respect to the airports used and routes flown by Air Baltic
and BIA.
In accordance with the Aviation Law, the LDCA has the authority to
suspend temporarily or revoke permanently the authority of Air Baltic and BIA or
its licensed personnel for failure to comply with regulations promulgated by the
LDCA and to assess civil penalties for such failures. The LDCA has the power to
bring proceedings to enforce the safety laws and regulations of Air Baltic and
BIA's authority to operate. The Company believes that Air Baltic and BIA are in
compliance with all requirements necessary to maintain in good standing its
operating authority granted by the LDCA. A modification, suspension or
revocation of any of Air Baltic and BIA's LDCA authorizations, certificates or
licenses could have a material adverse effect upon Air Baltic and BIA.
The LDCA also regulates landing and takeoff "slots" at Riga
International Airport. A "slot" is an authorization to take off or land at Riga
International Airport within a specified time window. Air Baltic and BIA do not
own any slots but instead apply to the LDCA for use of slots at Riga
International Airport as needed. While the LDCA has the authority to revoke Air
Baltic and BIA's landing rights, the Company
39
does not believe it will do so because the LDCA has had a policy of encouraging
air traffic at the airport, and also since the controlling interest of Air
Baltic and BIA is held by an entity controlled by the Latvian government.
Certain foreign airports served by Air Baltic and BIA are also subject to slot
allocations administered by the local airports or the governments of the
countries in which such airports are located. To date, BIA has generally been
successful in obtaining the slots it needed to conduct planned operations. Air
Baltic has had no problems with obtaining permission to conduct operations in
the Scandinavian airports, but has to date not been able to secure slots at
airports served by Latvian Airlines. While Air Baltic and the Company believe
Air Baltic will be able to soon service intended routes called for in the
business plan of Air Baltic, there can be no assurance that it will be able to
do so, due to among other things, government factors, government policies
regulating the distribution of slots in foreign countries, and the potential for
foreign airports to be unwilling to authorize slots as a result of prior
experience with Latvian Airlines.
International air services are generally governed by a network of
bilateral civil air transport agreements in which traffic rights are exchanged
between governments which then select and designate air carriers authorized to
exercise such rights. In the absence of a bilateral agreement, such
international air services are governed by principals of comity and reciprocity.
The provisions of such agreements pertaining to charter services vary
considerably depending on the particular country. Scheduled international
services also subject to the provisions of bilateral agreements, which may
specify the city-pair markets that may be served, restrict the number of
carriers that may be designated, provide for prior approval by one or both
governments of the prices the carrier proposes to charge, limit the amount of
capacity to be offered in the market, and in various other ways impose
limitations on the operations of air carriers, such as Air Baltic and BIA.
POLITICAL, ECONOMIC AND SOCIAL CLIMATE OF DESTINATION COUNTRIES
Air Baltic intends to expand its operations to geographic areas which
are subject to evolving political, economic and social climates, including other
Baltic States and other republics of the former Soviet Union. Failure to improve
political, economic or social stability in these regions could have an adverse
effect on the future operations and expansion efforts of Air Baltic.
COMPETITION
The Company's aviation business ventures face competition from other
companies and individuals who have also recognized the Baltic States and Newly
Independent States as a developing market. Air Baltic as a passenger service
carrier, faces competition from other airlines, many of which have longer
operating histories, greater name recognition, greater financial resources, more
extensive facilities and equipment, and better marketing resources. Other
aviation-related ventures that the Company currently operates, or in the future
may operate, presently compete and will compete with other entities, many of
which may have greater financial, marketing and technical resources.
Air Baltic assumed the scheduled passenger service operations of BIA
and Latvian Airlines and is designated as the international air carrier of
Latvia. As such, Air Baltic will experience no competition from other
Latvian-owned airlines. Management believes that competition may develop in the
future from private start-up regional carriers based in Latvia or in nearby
states which may want to provide service between Riga and other destinations.
These competitors, may, however, wish to compete directly with Air Baltic on the
same routes or compete for new routes which Air Baltic also wishes to serve.
Western airline traffic to Riga has increased since the restoration of
independence in the Baltic States. Riga International Airport is now served by
approximately eight European carriers on a scheduled basis. Air Baltic can
expect increased competition at its major Western European destinations, and
from carriers which offer interline service from North America to Riga via other
hubs. Air Baltic currently competes with Lufthansa German Airlines on its
Riga-Frankfurt route; with SAS and FinnAir on its London-Riga route; with RIAIR
on its London-Riga route; and with FinnAir on its Riga-Helsinki route. Air
Baltic experiences no competition on its Stockholm or Copenhagen routes.
40
The development strategy for Air Baltic includes expansion to
destinations in the other Baltic States and Newly Independent States, and other
major metropolitan centers. At present, such markets are either not served with
regularly-scheduled service or are underdeveloped and serviced only infrequently
by carriers such as Lufthansa German Airlines or the national carrier of the
given state. The Company has no specific knowledge of the plans of Lufthansa
German Airlines or any other major airline as it relates to expansion into
markets which Air Baltic may develop in the future.
EMPLOYEES
The Company currently employs 10 persons on a full time basis. The
Company has in the past, and will continue in the future, to employ independent
contractors, and to make extensive use of its outside directors and others as
consultants. Air Baltic currently employs approximately 140 persons on a full
time basis, including pilots, mechanics, cabin crews, airport services and
administrative personnel. BIA currently employs one person. BCS employs an
aggregate of approximately 66 persons, BWAF employs 3 persons and ADC employs 21
persons. None of the employees of the Company, BIA, Air Baltic, BCS, BWAF or ADC
are represented by a labor organization. The Company believes its relationships
with all of these employees are satisfactory.
FACILITIES
The Company leases approximately 3,500 square feet of office space in
Houston, Texas for a monthly rental of approximately $3,000. The Company
believes that its facilities are adequate for its current operations.
Air Baltic leases approximately 6,000 square feet of office space at
Riga Airport. The remaining commitment on this lease is approximately $135,000.
Air Baltic plans to open additional sales offices in the downtown business
center of Riga.
The facilities of the Company's other aviation-related business
ventures are satisfactory for current purposes.
INSURANCE
BIA and Air Baltic are exposed to potential losses that may be
incurred in the event of an aircraft accident. Any such accident could involve
not only repair or replacement of a damaged aircraft and its consequent
temporary or permanent loss from service, but also significant potential claims
of injured passengers and others. BIA currently maintains comprehensive airline
liability insurance in the amount of $150 million per occurrence for its Tupolev
aircraft. BIA does not maintain property damage insurance on its TU134 aircraft
because management believes such coverage to be uneconomical. BIA maintains
comprehensive airline liability insurance and property damage insurance on its
two Boeing 727 aircraft as required by the leases on such aircraft. In addition,
BIA's insurance expenses could significantly increase if BIA were to decide to
provide future charter and/or cargo service to destinations where military
action is taking place. Any such increases in expenses could have a material
adverse effect on BIA.
Air Baltic maintains liability and property damage insurance on its
SAAB 340 and Avro RJ70 aircraft through the insurance consortium which insures
SAS aircraft. Air Baltic will select the lowest cost high standard third party
provider of liability and property damage insurance on the future aircraft to be
selected for the long term needs for Air Baltic's development. Air Baltic
insurance expenses may significantly increase due to the addition of aircraft,
the acquisition of modern aircraft and due to a decision by Air Baltic to
provide service to destinations where military action is taking place. Any such
increases in expenses could have a material adverse effect on Air Baltic.
The Company believes Air Baltic and BIA operate professionally and
prudently; however, airline services involve significant risks of potential
liability. The Company believes that the Latvian Division of Aeroflot had an
excellent reputation for safety and maintenance. The Company believes that BIA
was the first privatized part of a former Aeroflot division to obtain Western
insurance through Lloyds of London. No material claim has been asserted against
BIA to date or Air Baltic, and Air Baltic and BIA are not aware of the basis for
any such claim. There can be no assurance that all possible types of liabilities
that may be incurred by Air Baltic and BIA are covered by its insurance or that
the dollar amount of such liabilities will not exceed BIA's policy limits.
41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table gives certain information with respect to the
executive officers and directors of the Company:
NAME AGE POSITION
---- --- --------
Robert L. Knauss(1) 65 Chairman of the Board and Chief
Executive Officer
James W. Goodchild 40 Chief Operating and Financial
Officer
Thomas E. Glenister 46 President, Aviation Group
Homi M. Davier(1) 47 Director
Paul R. Gregory(1) 54 Director
Juris Padegs(2)(3) 64 Director
Ted Reynolds(2)(3) 64 Director
Morris Sandler(2)(3) 48 Director
Jo Ann Johnson 38 Secretary
- ---------------------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
ROBERT L. KNAUSS has served as chairman of the board of the Company
since its inception in March 1991 and also as chief executive officer since
January 1994. Mr. Knauss also serves as a member of the board of BIA. Mr. Knauss
served as Dean of the University of Houston Law Center from 1981 through
December 1993. Mr. Knauss was involved in establishing the relationship between
the University of Houston Law Foundation and the former Soviet Union in 1991
whereby the University of Houston Law Foundation assisted the former Soviet
Union in creating the Petroleum Legislation Project, and was involved with the
government of Russia in the development of privatization legislation. Mr. Knauss
has served as a director of Equus Investments, Inc. since 1984, as one of two
United States directors for the Mexico Fund since 1985, and as a director of
Allwaste, Inc. since 1986. Securities of the Mexico Fund, Allwaste, Inc. and
Equus Investments, Inc. are registered under the Exchange Act. Mr. Knauss is a
graduate of Harvard University and the University of Michigan Law School. Mr.
Knauss has traveled extensively to the former Soviet Union.
JAMES W. GOODCHILD has served as chief operating officer since October
1994 and also as chief financial officer of the Company since September 1993.
Mr. Goodchild served as the Company's vice president of finance and development
from July 1992 to August 1993. From August 1989 through June 1992, Mr. Goodchild
attended the University of Houston where he acquired a B.A. degree in Russian
and Soviet Studies, and a B.A. degree in International Relations. Mr. Goodchild
is fluent in Russian. Mr. Goodchild was project administrator of the Russian
Petroleum Legislation Project from July 1992 to December 1992. From 1984 to
March 1989, Mr. Goodchild was employed with MCorp, formerly a Dallas-based bank
holding company, where he served as senior vice president and manager of credit
administration of MCorp's Collection Bank. Additionally, Mr. Goodchild acquired
a B.S. degree in finance from the University of Houston in 1978.
THOMAS E. GLENISTER has served as president of the aviation group for
the Company since October 1994 and is the Company's liaison to BIA and serves as
the Company's advisor to the president of BIA. From September 1988 through
September 1994, Mr. Glenister was employed by Northwest Airlines. While at
Northwest Airlines, Mr. Glenister was the director of several major business
development projects including the establishment of a heavy maintenance facility
at Shanghai, China and the construction of a heavy maintenance facility at
Duluth, Minnesota. In addition to project management responsibility, Mr.
Glenister had public relations and financial planning responsibility for these
projects. Mr. Glenister also had considerable experience at Northwest Airlines
in the areas of flight operations and marketing. Mr. Glenister developed the
first all computer based pilot training program and marketed it worldwide. Prior
to joining Northwest Airlines, Mr. Glenister served for 21 years in the U.S. Air
Force. Mr. Glenister received an MBA from New Hampshire College and a B.S.
degree in business management from the University of New Hampshire.
42
HOMI M. DAVIER has served as a director of the Company since its
inception in March 1991 and also served as president from March 1991 to August
1995. Mr. Davier has served as a director and as the Company's managing director
to BIA since June 1991. Mr. Davier served as senior traffic assistant of Air
India from April 1971 to May 1975, and assisted in the start-up of Gulf Air in
Oman and in the start-up of the Middle Eastern operations of Air Bangladesh and
Sabena Belgian Airlines. Mr. Davier has served as chairman of the board and
president of Capricorn Travel n' Tours, Inc. since April 1983. Mr. Davier is the
founder and president of Capricorn Computers, established in 1985, which
developed and markets the Capri 2020, a revenue accounting and management report
system for travel agencies. Mr. Davier has been chief executive officer of
Travel Stop, a Houston-based retail travel outlet, since 1990. Mr. Davier
graduated from Hislop College in Nagpur, India.
PAUL R. GREGORY has served as a director of the Company since its
inception in March 1991 and also served as treasurer, on a part-time basis, from
March 1991 to August 1995. Mr. Gregory also serves as a member of the board of
BIA. Mr. Gregory is the Cullen Professor of Economics and Finance at the
University of Houston where he has been a faculty member since 1972. Mr. Gregory
was involved in creating the Petroleum Legislation Project with Russia and he
served as project coordinator of the Russian Securities Project in conjunction
with the Russian State Committee for Property Management and the various Russian
stock exchanges. Mr. Gregory serves as advisor to a number of major United
States corporations on their Russian business activities, and has been active in
the former Soviet Union for 25 years. Mr. Gregory has served as chairman of the
board of Amsovco International Consultants, Inc. since 1988. Mr. Gregory has
also served as a consultant to the World Bank. Mr. Gregory graduated from
Harvard University with a Ph.D. in economics and is fluent in Russian and
German. Mr. Gregory is the author of a text on Soviet and Russian economies.
JURIS PADEGS has served as a director of the Company since December
1993. Mr. Padegs also serves as vice chairman of the board of BIA. Mr. Padegs
has served as a managing director of Scudder, Stevens & Clark, an international
investment firm, since 1985 and has been employed with Scudder, Stevens & Clark
since 1964. Mr. Padegs is a director of a number of international investment
companies, including Scudder New Europe Fund and Scudder New Asia Fund. Mr.
Padegs is the chairman and a director of the Korea Fund, the Brazil Fund, and
the First Iberian Fund. Mr. Padegs was born in Latvia and holds a Bachelor of
Arts and a law degree from Yale University. Mr. Padegs is fluent in Latvian and
German. In July 1994, he was appointed by President Clinton to the board of the
Baltic American Enterprise Fund, a $50 million fund to promote private
enterprise in the Baltic states.
TED REYNOLDS has been a director of the Company since December 1993.
He has been president of the Houston Grain Company since 1983 and vice president
of Mid-America Grain Commodities since 1976. He recently formed and is owner of
Red River Grain Company. He is actively involved in various international
business transactions. Mr. Reynolds is a graduate of Texas Christian University.
MORRIS A. SANDLER has been a director of the Company since August 1995.
Mr. Sandler has served as executive vice president - strategic relations and
director of Global TeleSystems Group, Inc., an independent telecommunications
company in Russia, since 1994. From 1990 to 1994, Mr. Sandler was an employee of
Alan B. Slifka and Company. From 1984 to 1990, he was a general partner of
Griffis Sandler & Co., an international private investment banking firm. Mr.
Sandler served as vice president and director of marketing of the merchant
banking firm of J. Aron & Company, Inc. from 1976 until its acquisition by
Goldman, Sachs & Co. ("Goldman Sachs") in 1981, at which time he became a vice
president of Goldman Sachs, which position he held until 1984. He has also
served as a director of Vesta Technology, Ltd. since 1986. Mr. Sandler received
a B.A. degree from Cornell University in 1969, and an M.B.A. from the University
of Chicago Graduate School of Business in 1976.
JO ANN JOHNSON has served as executive assistant for the Company since
January 1993 and as secretary since October 1993. Prior thereto, Ms. Johnson was
employed by the University of Houston Law Center since 1984 in the capacity of
assistant director of the Russian Petroleum Legislation Project and as executive
assistant to the Dean of the University of Houston Law Center.
43
Directors are elected annually and hold office until the next annual
meeting of the stockholders of the Company and until their successors are
elected and qualified. The Executive Committee of the Board reviews and monitors
the operating decisions and strategies of management. The Audit Committee
reviews and reports to the Board on the financial results of the Company's
operations and the results of the audit services provided by the Company's
independent accountants, including the fees and costs for such services. The
Compensation Committee reviews compensation paid to management and recommends to
the Board of Directors appropriate executive compensation. Officers are elected
annually and serve at the discretion of the Board of Directors. There is no
family relationship between or among any of the directors and executive officers
of the Company. Under the terms of the underwriting agreement in connection with
the Company's initial public offering, Messrs. Knauss, Gregory and Davier agreed
to support a designee of the representative of the underwriters of that offering
as an additional member of the Board of Directors of the Company for a period
ending April 1996; to date, no such designee has been appointed.
The Company's Restated Articles of Incorporation ("Articles") provide
for a staggered Board in the event the number of directors is increased to nine.
A staggered Board may deter coercive or unfair takeover tactics or offers and
encourage potential bidders in any takeover attempt to negotiate directly with
the Board of Directors. As a result, the staggered Board may discourage a change
of, or future attempt to acquire, control of the Company that a substantial
number and perhaps even a majority of the stockholders of the Company might
believe to be in the Company's best interests, or in which stockholders might
receive a substantial premium for their shares over then-current market prices.
Upon classification, the Board will be divided into three classes, as nearly
equal in number as possible, each of which will serve for a term of three years,
with one class to be elected each year.
OTHER KEY PERSONNEL
The Company employs a number of persons to develop, manage, and
operate its aviation-related interests. They are assigned to the Company's
different ventures to manage operations, develop business opportunities and to
train local specialists.
DANIEL P. SOLON (64) has served as vice president of marketing for BIA
in Europe since January 1993 and has offices in London. Since 1982, Mr. Solon
has been an independent corporate relations and marketing consultant
specializing in the shipping and aviation industries. Mr. Solon has over 30
years of experience in the international aviation business and has worked in
executive management positions with American Airlines and TWA and as a
consultant to People Express. Mr. Solon received an M.B.A. from Harvard
University and a B.A. degree in Russian studies from Fordham University.
DONALD D. JANACEK (26) is assigned to assist in the management of
Baltic Catering Services, to manage the day-to-day operations of BWAF, and to
develop new business prospects in the Baltic region. He has been employed as
manager of the Company's aviation group since April 1994. From July 1993 to
April 1994, Mr. Janacek was president of Mosher International, an international
investment firm. From August 1992 through July 1993, he was vice president of
international marketing for Dockside Incorporated, an international trading
company focusing on Eastern Europe and the former Soviet Union. Mr. Janacek
graduated from the University of Texas at Austin in 1991 with a B.A. degree in
economics.
DAVID A. GROSSMAN (32) has served as comptroller since November 1995.
From July 1985 to November 1995, Mr. Grossman was Audit Senior Manager for
Deloitte & Touche LLP. Mr. Grossman was certified as a CPA in 1986. Mr. Grossman
graduated from Indiana University in 1985 with a B.S. degree in Accounting.
44
EXECUTIVE COMPENSATION
The following table sets forth information with respect to the Chief
Executive Officer as well as the executive officers of the Company who received
total annual salary and bonus for the fiscal year ended December 31, 1995 in
excess of $100,000:
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
SECURITIES
ANNUAL COMPENSATION (1) RESTRICTED UNDERLYING
NAME AND PRINCIPAL FISCAL ALL OTHER STOCK OPTIONS AND
POSITION YEAR SALARY BONUS COMPENSATION AWARDS WARRANTS
- ------------------------------------------------------------------------------------------------------------------------------------
Robert Knauss, Chief .................... 1995 $120,000 $75,000 (2) $0 $ 0 125,000
Executive Officer ..................... 1994 33,967 0 0 0 35,000
1993 0 0 0 0 0
James Goodchild, Chief .................. 1995 $120,000 $50,000 (2) $0 $ 0 140,000
Operating and Financial ............... 1994 115,583 30,000 0 0 50,000
Officer ............................... 1993 45,250 0 0 0 40,000
Thomas Glenister, ....................... 1995 $121,500 $50,000 (2) 0 $ 0 80,000
President-Aviation .................... 1994 35,000 0 0 60,000(3) 20,000
Group ................................. 1993 -- -- - -- --
- -------------
(1) Neither of the named executive officers received perquisites or
other benefits valued in excess of 10%
of the total of reported annual salary and bonus.
(2) The bonus for 1995 will consist of cash payments of $37,500,
$25,000 and $25,000 and the issuance of 25,000, 16,667 and 16,667
shares of the Company's common stock to Messrs. Knauss,
Goodchild and Glenister, respectively.
(3) The restricted stock award for Mr. Glenister in 1994 consists of a
grant of 20,000 shares of the Company's common stock of which 10,000
shares vested in October 1995 and 10,000 shares will vest in October
1996.
(4) Of these options and warrants, 35,000, 50,000, and 20,000 stock
options were originally granted in October 1994 to Messrs. Knauss,
Goodchild and Glenister, respectively, at an exercise price of $2.875
per share. In August 1995, these options were repriced at $1.125 per
share.
EMPLOYMENT AGREEMENTS
In January 1994, the Company entered into one-year employment
agreements with Messrs. Knauss and Davier which provided for an annual base
salary of $120,000 each. As of December 31, 1994, Messrs. Knauss and Davier
received only an aggregate of $63,967 pursuant to these agreements due to the
Company's lack of liquidity. Mr. Davier and Mr. Knauss will receive an
additional $40,000 under their agreements in 1996, and no additional amounts for
1994 compensation will be paid. These agreements included provisions which
prohibit the employee from competing with or engaging in the same business as
the Company in any geographic area in which the Company is then doing business
for a period of one year following the expiration of the employment period. The
Company extended its agreement with Mr. Knauss for an additional year on the
same terms and expects to extend the agreement again during 1996.
DIRECTOR COMPENSATION
Outside directors are entitled to receive options to purchase 10,000
shares in their first year of service and 5,000 shares of Common Stock per year
thereafter as compensation and reimbursement of out-of-pocket expenses to attend
board meetings. Messrs. Padegs and Reynolds have each received options to
purchase 5,000 shares of Common Stock pursuant to this arrangement. In addition,
Mr. Padegs received an option to purchase 5,000 shares of Common Stock for
consulting services rendered. Such options are exercisable for $1.125 per share
and expire in October 1999. In December 1995, Messrs. Padegs, Reynolds and
Sandler each received options to purchase 15,000 shares of Common Stock at a
price of $1.375 per share pursuant to this arrangement. Also in December 1995,
Messrs. Davier and Gregory each received options to purchase 50,000 shares at a
price
45
of $1.375 per shares for services rendered. Such options expire in December
2000. In addition, consulting fees in the amount of $10,000 and $20,000,
respectively, were paid to Capricorn Travel, a company controlled by Mr. Davier,
during 1993 and 1994. See "--Stock Options" and "--Certain Transactions."
STOCK OPTIONS
In September 1992, the Company adopted its 1992 Equity Incentive Plan
("Plan"), which was amended effective March and December 1995. The Plan provides
for the issuance of incentive stock options and non-qualified options. An
aggregate of 1,500,000 shares of the Company's Common Stock may be issued
pursuant to options granted under the Plan to employees, non-employee directors
and consultants, subject to evergreen provisions included in the Plan. The Plan
is administered by the compensation committee of the Company's Board of
Directors. The compensation committee has the authority to determine, among
other things, the size, exercise price, and other terms and conditions of awards
made under the Plan. Subject to certain restrictions, the exercise price of
incentive stock options may be no less than 100% of fair market value of a share
of Common Stock on the date of grant. As of the date of this Prospectus, options
to purchase an aggregate of 602,800 shares were outstanding under the Plan. Such
options include: (i) options to purchase 247,000 shares of Common Stock at an
exercise price of $1.125 per share, which options are currently exercisable and
expire in October 1999; (ii) options to purchase 34,000 shares of Common Stock
at an exercise price of $0.50 per share, which options are currently exercisable
and expire in October 1999; (iii) options to purchase 98,800 shares of Common
Stock at an exercise price of $0.50 per share, which options vest ratably over a
three-year period commencing December 1994 and expire in December 1999; (iv)
options to purchase 213,000 shares of Common Stock at an exercise price of
$1.375 per share, which options are currently exercisable and expire in December
2000; and (v) options to purchase 10,000 shares of Common Stock at an exercise
price of $1.875 per share, which options are currently exercisable and expire in
April 2001. In August 1995, the Board of Directors repriced the options that
were previously exercisable for $2.875 per share to $1.125 per share which is a
price more consistent with current market prices. Such repricing was in
consideration of services rendered in lieu of granting additional options to the
holders. The resale of shares of Common Stock issued upon exercise of all of the
Company's outstanding options is being registered under the Act pursuant to this
Prospectus.
In April 1995, the Company issued 150,421 shares of Common Stock to a
consultant at a price of $1.05 per share upon exercise of an outstanding option.
In July 1995, the Company issued 149,579 shares at $.80 per share and 18,000
shares at $0.50 per share to consultants upon exercise of outstanding options.
In December 1995 and January 1996, the Company issued an aggregate of 381,680
shares of Common Stock to a consultant at a price of $.735 per share upon
exercise of an outstanding option.
46
The following table shows, as to the named executive officers,
information concerning individual grants of stock options and warrants during
1995.
OPTION/WARRANT GRANTS IN LAST FISCAL YEAR
Number Of % Of Total Options/
Securities Warrants
Underlying Granted To Exercise
Options/warrants Employees Price Expiration
Name Granted In 1995 Per Sharedate
- --------------------------------------------------------------------------------------------------------------
Robert L. Knauss 90,000 20.59 $1.375 December 2000
35,000 8.01 $1.125(1) October 1999
James W. Goodchild 90,000 20.59 $1.375 December 2000
50,000 11.44 $1.125(1) October 1999
Thomas Glenister 60,000 13.73 $1.375 December 2000
20,000 4.58 $1.125(1) October 1999
- -----------------------
(1) These options were originally granted in October 1994 at an exercise
price of $2.875 per share. In August 1995, these options were repriced
at $1.125 per share.
The following table shows, as to the named executive officers,
information concerning aggregate stock option and warrant exercises during 1995
and the stock option and warrant values as of December 31, 1995.
AGGREGATED OPTION AND WARRANT EXERCISES IN LAST FISCAL YEAR
AND YEAR END OPTION AND WARRANT VALUES
Number Of
Securities Value Of
Underlying Unexercised
Unexercised In-the-money
Options/warrants At Options/warrants At
December 31, 1995 December 31, 1995
Shares Acquired Exercisable/ Exercisable/
Name On Exercise Value Realized Unexercisable Unexercisable
- ----------------------------------------------------------------------------------------------------------------
Robert L. Knauss 0 $0 79,500/60,000 $44,000/$22,500
James W. Goodchild 0 0 113,667/73,333 $81,084/$39,166
Thomas Glenister 0 0 40,000/40,000 $20,000/$15,000
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.
CERTAIN TRANSACTIONS
In March 1991, Messrs. Knauss, Davier and Gregory were each issued
500,000 shares of Common Stock for $37,000 each. In March 1991, Mr. Padegs
subscribed for, and subsequently purchased, for an aggregate amount of $88,140,
a total of 150,000 shares of Common Stock. In April 1992, Mr. Reynolds purchased
40,000 shares for $100,000. In June 1993, Mr. Reynolds purchased an additional
10,000 shares of Common Stock for $25,000.
From March 1991 through December 1994, Mr. Knauss advanced to the
Company a total of $253,220 of which $128,220 was on an interest-free basis. Of
this amount, $40,000 was repaid in 1993, and $88,220 was repaid in May 1994 with
proceeds from the Company's initial public offering. In October and December
1994, Mr. Knauss advanced an aggregate of $125,000, bearing interest at a rate
of 10% per annum. In connection with these advances, the Company issued Mr.
Knauss
47
warrants to purchase an aggregate of 12,500 shares of Common Stock at a price of
$1.00 per share, which warrants became exercisable in August 1995 and expire in
October 1999. Effective June 30, 1995, $125,000 in aggregate principal amount of
notes payable to Mr. Knauss was converted to 12,500 shares of Series A Preferred
Stock, convertible into 62,500 shares of Common Stock. In August 1995, the Board
of Directors approved a bonus to Mr. Knauss for his efforts in connection with
the Air Baltic transaction. Such bonus will consist of 25,000 shares to be
issued and a $37,500 cash payment to be paid in 1996. In December 1995, Mr.
Knauss advanced an aggregate of $20,000 bearing interest at a rate of 10% per
annum, which was repaid in March 1996. In connection with this advance, the
Company issued Mr. Knauss warrants to purchase an aggregate of 2,000 shares of
Common Stock at a price of $1.00 per share, which warrants are currently
exercisable and expire in December 2000. In December 1995, the Company granted
Mr. Knauss warrants to purchase 90,000 shares of Common Stock at a price of
$1.375 per share for services rendered, which one-third of the warrants became
exercisable in December 1995, one-third in December 1996, and one-third in
December 1997. The issuance of shares underlying the portion of this warrant
which becomes exercisable in December 1997 is being registered hereby. In
addition, the resale of the shares of Common Stock underlying the Warrants,
Options and Series A Preferred Stock held by Mr. Knauss, as well as the shares
to be issued for services rendered, is being registered under the Act pursuant
to this Prospectus.
From January 1992 through March 1995, the Gregory Family Partnership,
an affiliate of Dr. Gregory, advanced to the Company a total of $447,161, of
which $212,161 was on an interest-free basis. Of this amount, $53,614 was repaid
in 1993, and $158,547 was repaid in May 1994 with proceeds from the Company's
initial public offering. In October and December 1994, this affiliate advanced
an aggregate of $135,000, bearing interest at a rate of 10% per annum, and
maturing on March 31, 1996. In connection with these advances, the Company
issued Dr. Gregory's affiliate warrants to purchase an aggregate of 13,500
shares of Common Stock at a price of $1.00 per share, which warrants became
exercisable in August 1995 and expire in October 1999. In March 1995, this
affiliate loaned an additional $100,000 to the Company, which loan bears
interest at a rate of 10% per annum. In connection with this loan, Dr. Gregory's
affiliate received a warrant to purchase 10,000 shares at an exercise price of
$1.00 per share, which warrant became exercisable in August 1995 and expires in
October 1999. Effective June 30, 1995, $235,000 in aggregate principal amount of
notes payable to Dr. Gregory or his affiliates was converted to 23,500 shares of
Series A Preferred Stock, which are convertible into 117,500 shares of Common
Stock. In December 1995, an affiliate of Dr. Gregory advanced an aggregate of
$20,000 bearing interest at a rate of 10% per annum, which was repaid in March
1996. In connection with this advance, the Company issued Dr. Gregory's
affiliate warrants to purchase an aggregate of 2,000 shares of Common Stock at a
price of $1.00 per share, which warrants are currently exercisable and expire in
December 2000. The resale of the shares of Common Stock underlying the Warrants,
Options and Series A Preferred Stock held by Dr. Gregory's affiliate is being
registered under the Act pursuant to this Prospectus.
From January 1992 through October 1994, Mr. Davier advanced to the
Company a total of $150,736, of which $100,736 was on an interest-free basis. Of
this amount, $14,980 was repaid in 1993 and $85,756 was repaid in May 1994 with
proceeds from the Company's initial public offering. The remaining balance of
$50,000 was advanced in October 1994, bears interest at a rate of 10% per annum.
In connection with the October 1994 advance, the Company issued Mr. Davier a
warrant to purchase 5,000 shares of Common Stock at a price of $1.00 per share,
which warrant became exercisable in August 1995 and expires in October 1999.
Effective June 30, 1995, the 50,000 note payable to Mr. Davier was converted to
5,000 shares of Series A Preferred Stock, which are convertible into 25,000
shares of Common Stock. The resale of the shares of Common Stock underlying the
Warrants, Options and Series A Preferred Stock held by Mr. Davier is being
registered under the Act pursuant to this Prospectus.
In June 1993, Baltic World Holdings, a company owned by Messrs. Davier,
Knauss and Gregory, on behalf of the Company, advanced $144,000 to BIA, bearing
interest at a rate of 12% per annum, payable in four quarterly payments of
principal and accrued interest. In September 1993,
48
such affiliate assigned all of its rights as creditor to the Company and to date
BIA has made no payments to the Company. In addition, this affiliate originally
owned 50% of BCS on behalf of the Company, and, in September 1993, assigned its
50% interest in BCS to the Company, effective March 1994.
Consulting fees in the amount of $10,000 and $20,000 were paid to
Capricorn Travel, a company controlled by Mr. Davier, during 1993 and 1994,
respectively.
During 1993, Messrs. Knauss, Davier and Gregory pledged 15% of the then
issued and outstanding shares of Company Common Stock to secure the repayment of
an aggregate principal amount of $623,340 of bridge loan financing. Such bridge
loans were repaid in May 1994 with proceeds from the Company's initial public
offering and the pledged shares were released.
In May 1994, Baltic World Holdings, a company owned by Messrs. Knauss,
Davier and Gregory leased two Boeing 727 aircraft from an unaffiliated third
party for an aggregate monthly lease payment of $61,378. These airplanes are
subleased by this affiliate to BIA for an aggregate monthly lease payment of
$80,000. The Company believes that this arrangement is fair for the following
reasons: (i) the Company guarantees the lease payments and manages the lease of
the aircraft; (ii) as a foreign entity, it is unlikely that BIA would have had
access to the aircraft without the assistance of the Company; and (iii) the
Company was able to negotiate a favorable lease rate. The affiliate has assigned
all of the revenues and expenses under the leases and subleases to the Company
and the Company guarantees the affiliate's obligations under the leases. The
leases and subleases terminate in July 1996.
In October 1994, Mr. Padegs advanced to the Company $25,000. This
indebtedness bears interest at a rate of 10% per annum. In connection with the
October 1994 advance, the Company issued Mr. Padegs a warrant to purchase 2,500
shares of Common Stock at a price of $1.00 per share, which warrant became
exercisable in August 1995 and expires in October 1999. In March 1995, Mr.
Padegs advanced $50,000 to the Company, which loan bears interest at a rate of
10% per annum. In connection with this loan, Mr. Padegs received a warrant to
purchase 5,000 shares at an exercise price of $1.00 per share, which warrant
became exercisable in August 1995 and expires in October 1999. Effective June
30, 1995, $75,000 in aggregate principal amount of notes payable to Mr. Padegs
was converted to 7,500 shares of Series A Preferred Stock, which are convertible
into 37,500 shares of Common Stock. In December 1995, Mr. Padegs advanced an
aggregate of $20,000, bearing interest at a rate of 10% per annum, which was
repaid in March 1996. In connection with this advance, the Company issued Mr.
Padegs warrants to purchase an aggregate of 2,000 shares of Common Stock at a
price of $1.00 per share, which warrants are currently exercisable in December
1995 and expire in December 2000. The resale of the shares of Common Stock
underlying the Warrants, Options and Series A Preferred Stock held by Mr. Padegs
is being registered under the Act pursuant to this Prospectus.
In December 1994, Mr. Goodchild advanced to the Company $50,000. This
indebtedness bears interest at a rate of 10% per annum. In connection with this
advance, Mr. Goodchild received a warrant to purchase 5,000 shares at an
exercise price of $1.00 per share, which warrant became exercisable in August
1995 and expires in October 1999. Effective June 30, 1995, the $50,000 note
payable to Mr. Goodchild was converted to 5,000 shares of Series A Preferred
Stock, which are convertible into 25,000 shares of Common Stock. In August 1995,
the Board of Directors approved a bonus to Mr. Goodchild for his efforts in
connection with the Air Baltic transaction. Such bonus will consist of 16,667
shares to be issued and a $25,000 cash payment to be paid in 1996. In December
1995, Mr. Goodchild advanced an aggregate of $20,000, bearing interest at a rate
of 10% per annum, which was repaid in March 1996. In connection with this
advance, the Company issued Mr. Goodchild warrants to purchase an aggregate of
2,000 shares of Common Stock at a price of $1.00 per share, which warrants are
currently exercisable and expire in December 2000. In December 1995, the Company
granted Mr. Goodchild warrants to purchase 90,000 shares of Common Stock at a
price of $1.375 per share, which one-third of the warrants became exercisable in
December 1995, one-third in December 1996, and one-third in December 1997. The
issuance of shares underlying the portion of this warrant which becomes
exercisable in December 1997 is being registered hereby. In addition, the resale
of the shares of Common Stock underlying the Warrants, Options and Series A
Preferred Stock held by Mr. Goodchild, as well as the shares to be issued for
services rendered, is being registered under the Act pursuant to this
Prospectus.
49
In December 1994, Mr. Knauss guaranteed a $50,000 bank loan to the
Company. In March 1995, the principal amount of this loan was increased to
$100,000, the interest rate was increased from 10.5% to 11.25% per annum, and
Mr. Davier was added as a guarantor. The balance of the loan is $75,000 at
December 31, 1995 which matured in January 1996. The Company has renegotiated an
extension to July 1996 with a $25,000 principal reduction which the Company has
made.
In June 1995, Mr. Sandler purchased 25,000 shares of Common Stock for
$25,000. In August 1995, the Company issued a warrant to purchase 55,000 shares
at an exercise price of $1.00 per share to Mr. Sandler for services rendered
prior to his election to the board. This warrant expires in August 2000 and the
resale of the underlying shares upon exercise is being registered hereby. In
addition, the resale of 25,000 restricted shares owned by Mr. Sandler is being
registered under the Act pursuant to this Prospectus.
Management believes that all prior related party transactions are on
terms no less favorable to the Company as could be obtained from unaffiliated
third parties. All ongoing and future transactions with such persons, including
any loans to such persons, will be approved by a majority of disinterested,
independent outside members of the Company's Board of Directors.
LIMITATION ON DIRECTORS' LIABILITY; INDEMNIFICATION
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. The Articles of the
Company limit the liability of directors of the Company (in their capacity as
directors but not in their capacity as officers) to the Company or its
stockholders to the fullest extent permitted by Texas law. Specifically,
directors of the Company will not be personally liable for monetary damages for
breach of a director's fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Article 2.41
under the Texas Business Corporation Act, or (iv) for any transaction from which
the director derived an improper personal benefit, whether or not the benefit
resulted from an action taken in the person's official capacity. Section 2.41 of
the Texas Business Corporation Act relates to directors' liability for unlawful
dividends and stock issuances.
The inclusion of this provision in the Articles may have the effect of
reducing the likelihood of derivative litigation against directors, and may
discourage or deter stockholders or management from bringing a lawsuit against
directors for breach of their duty of care, even though such an action, if
successful, might otherwise have benefited the Company and its stockholders.
However, such limitation on liabilities does not affect the standard of conduct
with which directors must comply, the availability of equitable relief or any
causes of action based on Federal law.
The Company's Articles provide for the indemnification of its executive
officers and directors, and the advancement to them of expenses in connection
with any proceedings and claims, to the fullest extent permitted by the Texas
Business Corporation Act. The Articles include related provisions meant to
facilitate the indemnitees' receipt of such benefits. These provisions cover,
among other things: (i) specification of the method of determining entitlement
to indemnification and the selection of independent counsel that will in some
cases make such determination; (ii) specification of certain time periods by
which certain payments or determinations must be made and actions must be taken;
and (iii) the establishment of certain presumptions in favor of an indemnitee.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the Company pursuant to
the foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
50
PRINCIPAL STOCKHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of Common Stock at May 17, 1996 by (i) each
person who owns beneficially more than five percent of the outstanding shares of
Common Stock, (ii) each director of the Company, (iii) each named executive
officer and (iv) all directors and officers as a group. See "Management--Certain
Transactions."
SHARES BENEFICIALLY OWNED
----------------------------
NAME OF BENEFICIAL OWNER(1) NUMBER PERCENT
- --------------------------------------------------------------------------------
Citibank Switzerland......................... 1,000,000 16.83
Paul R. Gregory.............................. 742,000 (2) 12.02
Robert L. Knauss............................. 672,000 (3) 11.00
Homi M. Davier............................... 615,000 (4) 10.16
Richard H. Gibson............................ 378,331 (5) 5.99
Juris Padegs................................. 235,333 (6) 3.91
James Goodchild.............................. 155,334 (7) 2.55
Morris Sandler............................... 95,000 (8) 1.58
Ted Reynolds................................. 70,000 (9) 1.17
Thomas Glenister............................. 66,667 (10) 1.11
Jo Ann Johnson............................... 29,000 (11) 0.49
All directors and officers
as a group (9 persons).................... 2,680,334 (12) 38.95
- -------------------------
(1) The business address of each individual is the same as the address of
the Company's principal executive offices except for Citibank
Switzerland whose business address is P.O. Box 244, Zurich,
Switzerland 8021; Mr. Gibson whose business address is 2321 A. West
Loop 281, Longview, Texas 75604; Mr. Padegs whose business address is
345 Park Avenue, New York, New York 10154; Mr. Reynolds whose business
address is 1300 Post Oak Boulevard, Suite 770, Houston, Texas 77056;
and Mr. Sandler whose business address is 477 Madison Avenue, 8th
Floor, New York, New York 10022.
(2) Includes 233,000 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable.
(3) Includes 142,000 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable and 25,000 shares to
be issued for services rendered.
(4) Includes 115,000 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable.
(5) Includes 378,331 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable.
(6) Includes 85,333 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable.
(7) Includes 138,667 shares subject to Options, Warrants and Series A
Preferred Stock which are currently exercisable and 16,667 shares to
be issued for services rendered.
(8) Includes 70,000 shares subject to Options and a Warrant which are
currently exercisable.
51
(9) Includes 20,000 shares subject to Options which are currently
exercisable.
(10) Includes 40,000 shares subject to Options and Warrants which are
currently exercisable and 26,667 shares to be issued for services
rendered.
(11) Includes 29,000 shares subject to Options which are currently
exercisable.
(12) Includes an aggregate of 873,000 shares subject to Options, Warrants
and Series A Preferred Stock which are currently exercisable and
68,334 shares to be issued for services rendered.
DESCRIPTION OF SECURITIES
Under the Company's Articles, the authorized capital stock of the
Company consists of 20,500,000 shares, of which 20,000,000 shares are Common
Stock and 500,000 shares are preferred stock, par value $10.00 per share
("Preferred Stock"). As of the date of this Prospectus, the Company had
outstanding 6,106,671 shares of Common Stock, 123,000 shares of Series A
Preferred Stock and 48 shares of Series B Preferred Stock. The Company has
reserved 255,001 shares for issuance for services rendered, 602,800 shares for
issuance upon exercise of outstanding stock options, 1,287,470 shares for
issuance upon exercise of outstanding warrants, 615,000 shares for issuance upon
conversion of outstanding shares of Series A Preferred Stock, 1,170,732 shares
for issuance upon conversion of outstanding shares of Series B Preferred Stock
and 300,000 shares for issuance upon conversion of the Convertible Note.
COMMON STOCK
The holders of Common Stock are entitled to one vote per share with
respect to all matters required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company's Articles, including provisions
governing any Preferred Stock. The Common Stock does not have any cumulative
voting, preemptive, subscription or conversion rights. Election of directors and
other general shareholder action requires the affirmative vote of a majority of
shares represented at a meeting in which a quorum is represented. The
outstanding shares of Common Stock are, and the shares of Common Stock offered
hereby will be, upon payment therefor, validly issued, fully paid and
non-assessable.
Subject to the rights of any outstanding shares of Preferred Stock,
the holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining available for distribution to them after payment or provision for all
liabilities and any preferential liquidation rights of any Preferred Stock then
outstanding. The resale of 2,301,487 shares of Common Stock issued and
outstanding and 255,001 shares to be issued for services rendered is being
registered hereby.
PREFERRED STOCK
The Board of Directors is authorized, without action by the holders of
the Common Stock, to provide for the issuance of the Preferred Stock in one or
more series, to establish the number of shares to be included in each series and
to fix the designations, powers, preferences and rights of the shares of each
such series and the qualifications, limitations or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
shall be superior to the Common Stock. The issuance of one or more series of the
Preferred Stock could adversely affect the voting power of the holders of the
Common Stock and could have the effect of discouraging or making more difficult
any attempt by a person or group to attain control of the Company.
In October 1993, the Board of Directors filed with the Texas Secretary
of State a statement of resolution establishing and designating a series of
shares setting forth the preferences, rights and limitations and authorizing the
issuance of up to 500,000 shares of series A cumulative preferred stock. Between
August 1993 and February 1994, an aggregate of 4,666 shares of this series of
Preferred Stock were issued for $46,660. The Company redeemed all 4,666 shares
of this series of Preferred Stock in May 1994, and this series was eliminated
effective June 30, 1995.
52
Effective June 30, 1995, the Company created its Convertible
Redeemable Series A Preferred Stock (defined herein as "Series A Preferred
Stock"), $10 par value, and issued 118,500 shares thereof upon conversion of
$1,185,000 in aggregate principal amount of long-term indebtedness. In September
1995, the Company issued an additional 4,500 shares of Series A Preferred Stock
upon conversion of $45,000 in aggregate principal amount of long-term
indebtedness. The Series A Preferred Stock: (i) is redeemable only at the option
of the Company and only during the 30-day period beginning on December 31 and
June 30 of each year that the Preferred Stock is outstanding; (ii) is
convertible at any time by the holders thereof at the initial conversion price
of $2.00 per share; (iii) carries a liquidation preference of $10 per share;
(iv) is non-voting; and (v) accrues cumulative cash dividends per share at an
annual rate equal to 10% of the stated value per share, payable in equal
quarterly installments. The resale of 615,000 shares of Common Stock issuable
upon conversion of the outstanding shares of Series A Preferred Stock is being
registered hereby.
Effective February 22, 1996, the Company created its Series B
Convertible Redeemable Preferred Stock ("Series B Preferred Stock"). The Company
is authorized to issue 70 shares of Series B Preferred Stock, $25,000 stated
value and $10 par value per share. The Company issued 50 shares thereof for
aggregate net proceeds of $1,093,750 in February and March 1996. The Series B
Preferred Stock: (i) is not entitled to receive dividends; (ii) is convertible
at any time by the holders thereof on or after the 55th day after the date that
the shares were issued at a conversion price equal to the lesser of $2 per share
or 82% of the 5-day average closing bid price of the Company's Common Stock;
(iii) is non-voting; (iv) carries a liquidation preference of $25,000 per share
plus interest equal to 10% of the stated value per annum since the issuance
date, and after payment in full of the Series A Preferred Stock; and (v) is
redeemable only at the option of the Company if the conversion price is $0.75 or
less per share.
The voting rights of the holders of Company Common Stock will be
diluted upon conversion of the Preferred Stock and the holders of the Preferred
Stock will have preferential dividend and liquidation rights over the holders of
Common Stock. Furthermore, when and if the Company becomes profitable, the
issuance of shares of Preferred Stock will have a dilutive effect on the per
share value of the Common Stock.
CONVERTIBLE NOTE
On April 5, 1996, the Company entered into a Convertible Note
Agreement in connection with a $250,000 loan to the Company ("Convertible
Note"). Principal and interest at an annual rate of 10% are due on October 5,
1996. The holder of the Convertible Note may at any time on or after July 5,
1996 convert the Convertible Note to shares of the Company's Common Stock at a
conversion price equal to the lesser of $1.50 or 70% of the closing bid price
per share of Common Stock on the trading date immediately preceding the date of
conversion. The resale of 300,000 shares of Common Stock underlying the
Convertible Note is being registered hereby.
PUBLIC WARRANTS
The Company issued 800,000 two-year Public Warrants in its initial
public offering in April 1994, of which 799,950 are currently outstanding. The
Public Warrants are exercisable to purchase an aggregate of 399,975 shares of
Common Stock at a price of $6.00 per share, and expire on April 26, 1998. The
warrant agreement governing the Public Warrants provides for the right of
redemption at $.05 per Public Warrant if the high bid price of the Common Stock
as reported on Nasdaq equals or exceeds $10.00 for 30 consecutive trading days.
The issuance of 399,975 shares of Common Stock upon exercise of the outstanding
Public Warrants is being registered hereby.
Each holder of a Public Warrant may exercise such Public Warrant by
surrendering the certificate evidencing such Public Warrant, with the form of
election to purchase on the reverse side of such certificate properly completed
and executed, together with payment of the exercise price to the Warrant Agent.
The exercise price will be payable in cash or by certified or official bank
check payable to the Company. Subject to certain limited exceptions, no
adjustments as to any dividends with respect to the shares of Common Stock of
the Company will be made upon any exercise of Public Warrants. If less than all
of the Public Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Public Warrants.
Certificates evidencing the Public Warrants may be exchanged for new
certificates of different denominations by presenting the Public Warrant
certificate at the office of the Warrant Agent.
53
WARRANTS
REPRESENTATIVE'S WARRANTS. In connection with the Company's initial
public offering in April 1994, the Company issued to the representative of the
group of underwriters of such offering a warrant authorizing its holder to
purchase 120,000 shares of Common Stock at exercise prices between $6.00 and
$9.80 per share, exercisable between April 1995 and April 1999. The holder of
this warrant holds certain registration rights; however, the issuance of the
shares underlying this warrant is not being registered hereby.
BRIDGE WARRANTS. In connection with certain financing obtained by the
Company from unrelated parties between August 1993 and April 1994, the Company
issued bridge warrants to purchase a total of 163,995 shares of Common Stock at
a price of $1.00 per share, subject to adjustment. These bridge warrants are
presently exercisable and terminate on or prior to the close of business on
August 31, 1998.
In connection with certain financing obtained by the Company from
related and unrelated parties from October 1994 through March 1995, the Company
issued bridge warrants to purchase an aggregate of 148,000 shares of Common
Stock at a price of $1.00 per share, subject to adjustment. Of these bridge
warrants, all of which are currently exercisable, 4,500 expire in March 2000,
and 143,500 expire in October 1999.
In connection with certain financing obtained by the Company from
related and unrelated parties in December 1995, the Company issued bridge
warrants to purchase an aggregate of 10,000 shares of Common Stock at a price of
$1.00 per share, subject to adjustment. These bridge warrants are presently
exercisable and expire in December 2000.
EMPLOYEES' AND CONSULTANTS' WARRANTS. In July 1995, the Company issued
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$1.00 per share, which warrants expire in May 2000. In August 1995, the Company
issued warrants to purchase an aggregate of 90,500 shares of Common Stock at an
exercise price of $1.00 per share, which warrants expire in August 2000. In
November 1995, the Company issued warrants to purchase an aggregate of 15,000
shares of Common Stock at an exercise price of $2.25 per share, which warrants
expire in November 2000. All of the foregoing warrants were issued to
consultants and employees for services rendered and are presently exercisable.
In December 1995, the Company issued warrants to purchase an aggregate of
240,000 shares of Common Stock to employees for services rendered. These
warrants are exercisable for $1.375 per share and expire in December 2000. Of
these warrants, 80,000 are currently exercisable, 80,000 become exercisable in
December 1996 and 80,000 become exercisable in December 1997. The 80,000
warrants which become exercisable in December 1997 are sometimes referred to
herein as "Compensation Warrants" and the issuance of the shares of Common Stock
upon exercise of such Compensation Warrants is being registered hereby.
The resale of the shares of Common Stock underlying the Bridge
Warrants and Employees' and Consultants' Warrants (other than the Compensation
Warrants) is being registered hereby pursuant to registration rights granted to
the holders thereof. The Company has agreed to pay all expenses in connection
with such registration, except for underwriting discounts and commissions and
legal fees for counsel to the holders.
TRANSFER AGENT
The Company's transfer agent for the Common Stock, and the Warrant
Agent for the Public Warrants, is KeyCorp Shareholder Services, Inc., 700
Louisiana, Suite 2620, Houston, Texas 77002-2729.
54
PLAN OF DISTRIBUTION AND SELLING STOCKHOLDERS
This Prospectus relates to the issuance of an aggregate of 479,975
upon exercise of Compensation Warrants and Public Warrants. This Prospectus also
relates to the resale of 4,714,908 shares by the Selling Stockholders. The
shares being registered for resale include (i) 2,176,487 shares issued and
outstanding; (ii) 255,001 shares to be issued for services rendered; (iii)
765,620 shares to be issued upon exercise of outstanding Resale Warrants; (iv)
602,800 shares to be issued upon exercise of outstanding Options; (v) 615,000
shares to be issued upon conversion of outstanding shares of Series A Preferred
Stock; and (vi) 300,000 shares to be issued upon conversion of the Convertible
Note.
The following tables set forth certain information with respect to the
issuance by the Company of shares of Common Stock upon exercise of Compensation
Warrants and Public Warrants; as well as the resale of Common Stock by the
Selling Stockholders, including the resale of shares of Common Stock issued and
outstanding, and to be issued for services rendered and shares underlying Resale
Warrants, Options, Series A Preferred Stock and the Convertible Note. The
Company will not receive any proceeds from the resale of Common Stock by the
Selling Stockholders. However, the Company will receive the exercise price per
share upon exercise of the Compensation Warrants and Public Warrants.
ISSUANCE OF COMMON STOCK BY THE COMPANY UPON
EXERCISE OF PUBLIC WARRANTS ("PW") AND COMPENSATION WARRANTS ("CW")
EXERCISE OR
CONVERSION NUMBER EXPIRATION
HOLDER PRICE OF SHARES DATE
- --------------------------------------------------------------------------------
Public Warrant Holders........ $6.00 399,975 PW 4/98
J. Goodchild (1).............. 1.375 30,000 CW 12/00
R. Knauss (1)................. 1.375 30,000 CW 12/00
T. Glenister (1).............. 1.375 20,000 CW 12/00
- --------------------
(1) These persons are officers and/or directors of the Company. See
"Management--Executive Officers and Directors" and "--Certain
Transactions."
55
RESALE BY SELLING STOCKHOLDERS OF SHARES CURRENTLY OUTSTANDING ("S");
SHARES TO BE ISSUED FOR SERVICES RENDERED ("I"); AND
SHARES UNDERLYING RESALE WARRANTS ("W"), OPTIONS ("O"),
SERIES A PREFERRED STOCK ("P")AND CONVERTIBLE NOTE ("N")
Shares Shares
Beneficially Beneficially
Owned Owned
Before Amount After
Stockholder Resale(2) Offered Resale Percentage
- --------------------------------------------------------------------------------
Citibank (Switzerland).......... 1,000,000 1,000,000 S 0 0.00
C. Abele........................ 175,000 175,000 S 0 0.00
T.G. Shown Associates, Inc...... 174,000 174,000 S 0 0.00
F. Moran........................ 114,285 114,285 S 0 0.00
D. Brown........................ 95,000 95,000 S 0 0.00
F. Rock......................... 90,000 90,000 S 0 0.00
A. Cassidy...................... 80,000 80,000 S 0 0.00
JS Partners..................... 50,000 50,000 S 0 0.00
M. Ostrow....................... 50,000 50,000 S 0 0.00
D. Lanes........................ 35,000 35,000 S 0 0.00
A. Abele........................ 25,000 25,000 S 0 0.00
R. DelVecchio................... 25,000 25,000 S 0 0.00
G. Hakim........................ 25,000 25,000 S 0 0.00
Intalite International.......... 25,000 25,000 S 0 0.00
A. Meruelo...................... 25,000 25,000 S 0 0.00
J. Moriarty..................... 25,000 25,000 S 0 0.00
M. Sandler(1)................... 95,000 25,000 S 0 0.00
55,000 W
15,000 O
S. Cole......................... 20,000 20,000 S 0 0.00
A. Mann......................... 30,000 20,000 S 10,000 0.17
S. Collector.................... 40,000 18,000 S 0 0.00
22,000 O
A. Santos-Buch.................. 10,000 10,000 S 0 0.00
E. Garrard...................... 5,000 5,000 S 0 0.00
J. Copeland..................... 24,000 24,000 S 0 0.00
D. Boorman...................... 20,000 20,000 S 0 0.00
Wall Street Financial........... 21,202 21,202 S 0 0.00
R. Gibson....................... 378,331 58,331 W 0 0.00
20,000 W
50,000 W
250,000 P
Gregory Family Partnership(1)... 742,000 7,500 W 509,000 8.62
6,000 W
10,000 W
2,000 W
40,000 O
50,000 O
117,500 P
56
Shares Shares
Beneficially Beneficially
Owned Owned
Before Amount After
Stockholder Resale(2) Offered Resale Percentage
- --------------------------------------------------------------------------------
J. Goodchild (1)................ 198,667 5,000 W 0 0.00
2,000 W
60,000 W
40,000 O
50,000 O
25,000 P
16,667 I
R. Knauss (1)................... 702,000 7,500 W 505,000 8.55
5,000 W
2,000 W
60,000 W
35,000 O
62,500 P
25,000 I
N. Alston....................... 100,000 100,000 W 0 0.00
J. Padegs (1)................... 242,000 2,500 W 150,000 2.54
5,000 W
2,000 W
20,000 O
10,000 O
15,000 O
37,500 P
E. B. Mosher.................... 139,000 10,000 W 68,000 1.15
11,000 O
50,000 P
H. Davier (1)................... 615,000 5,000 W 500,000 8.47
35,000 O
50,000 O
25,000 P
Sheffield Corporation........... 35,500 35,500 W 0 0.00
Young Family Trust.............. 30,000 5,000 W 0 0.00
25,000 P
E. O. Boshell, Jr............... 10,000 10,000 W 0 0.00
T. Glenister (1)................ 96,667 40,000 W 0 0.00
20,000 O
20,000 I
16,667 I
S. Oliver....................... 20,000 20,000 O 0 0.00
B. Young........................ 23,433 8,333 W 5,100 0.09
10,000 W
D. Solon........................ 25,000 10,000 O 0 0.00
5,000 O
10,000 O
D. Evans........................ 5,000 5,000 W 0 0.00
57
Shares Shares
Beneficially Beneficially
Owned Owned
Before Amount After
Stockholder Resale(2) Offered Resale Percentage
- --------------------------------------------------------------------------------
J. Johnson (1).................. 31,000 6,000 O 0 0.00
5,000 O
10,000 O
10,000 O
H. Bharucha..................... 10,000 10,000 O 0 0.00
Chapman Freeborn................ 10,000 10,000 W 0 0.00
G. Lejins....................... 10,000 10,000 O 0 0.00
Patrick B. Sands................ 10,000 10,000 W 0 0.00
M. Weisser...................... 27,000 4,500 W 0 0.00
22,500 P
C. R. Mueller................... 8,333 8,333 W 0 0.00
M. Walsh........................ 8,333 8,333 W 0 0.00
M. Behrana...................... 10,400 4,000 O 400 0.01
3,000 O
3,000 O
J. Valhanrat.................... 6,000 6,000 O 0 0.00
D. Arnett....................... 15,000 2,000 O 0 0.00
3,000 O
10,000 O
D. Janacek...................... 35,800 5,000 O 800 0.01
30,000 O
T. Reynolds (1)................. 70,000 5,000 O 50,000 0.85
15,000 O
Bailey Lafayette Harrison
Trust B......................... 4,583 2,083 W 0 0.00
2,500 W
Peyton Bunker Sands Trust B..... 4,583 2,083 W 0 0.00
2,500 W
Mosher International............ 20,000 4,000 W 16,000 0.27
N. Sethi........................ 2,500 2,500 W 0 0.00
V. K. Sethi..................... 2,500 2,500 W 0 0.00
Caroline Anne Harrison Trust B.. 2,292 1,042 W 0 0.00
1,250 W
Hassie Elizabeth Harrison
Trust B ....................... 2,292 1,042 W 0 0.00
1,250 W
Laurie Francis Harrison Trust B.. 2,292 1,042 W 0 0.00
1,250 W
Lyda Hunt Caroline Trust-
Patrick B. Sands............... 2,292 1,042 W 0 0.00
1,250 W
Haven Starbuck Sands Trust B..... 3,055 1,388 W 0 0.00
1,667 W
Stark Bunker Sands Trust B....... 3,055 1,389 W 0 0.00
1,666 W
Jacob Cayce Sands Trust B........ 3,055 1,389 W 0 0.00
1,666 W
Lydia Lygon Sands Trust B........ 3,055 1,388 W 0 0.00
1,667 W
58
Shares Shares
Beneficially Beneficially
Owned Owned
Before Amount After
Stockholder Resale(2) Offered Resale Percentage
- --------------------------------------------------------------------------------
John Clayton Sands Trust B....... 3,055 1,389 W 0 0.00
1,666 W
Julia Elizabeth Sands Trust B.... 3,056 1,389 W 0 0.00
1,667 W
B. Higley........................ 2,000 2,000 O 0 0.00
C. Dagilis....................... 800 800 O 0 0.00
D. Cameron....................... 2,000 2,000 W 0 0.00
J. Wilson........................ 5,000 5,000 O 0 0.00
H. Azadian....................... 5,000 5,000 W 0 0.00
V. Rodricks...................... 5,000 5,000 W 0 0.00
E. Young......................... 80,000 80,000 I 0 0.00
K. Lowe.......................... 55,000 55,000 I 0 0.00
D. Wheeler....................... 15,000 15,000 I 0 0.00
Lighthouse Resources, Inc........ 10,000 10,000 I 0 0.00
D. Grossman...................... 16,667 16,667 I 0 0.00
Eureka Communications, Inc. ..... 300,000 300,000 N 0 0.00
Regal International Capital, Inc. 43,750 43,750 W 0 0.00
Wheaten Partners................. 25,000 25,000 W 0 0.00
Perseus Holdings, Ltd............ 9,375 9,375 W 0 0.00
- ------------------------
(1) These persons are officers and/or directors of the Company. See
"Management--Executive Officers and Directors" and "-- Certain
Transactions."
(2) Shares Beneficially Owned Before Resale include shares of Common Stock
by the Company underlying outstanding and exercisable Resale Warrants
("W"), Options ("O"), Preferred Stock ("P") and Convertible Note ("N").
The 4,714,908 shares offered by the Selling Stockholders may be sold
by the Selling Stockholders from time to time as market conditions permit in the
market, or otherwise at prices and terms then prevailing or at prices related to
the current market price, or in negotiated transactions. The Selling
Shareholders may sell their shares in unsolicited ordinary brokerage
transactions or privately negotiated transactions between the Selling
Stockholders and purchasers without a broker. The 479,975 shares to be issued by
the Company upon exercise of the Compensation Warrants and Public Warrants are
being offered on a "best-efforts, no minimum" basis.
A current prospectus must be in effect at the time of the sale of the
Common Stock to which this Prospectus relates. Any Selling Stockholder or dealer
effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a Prospectus.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares
hereby will be passed upon for the Company by Brewer & Pritchard, P.C., Houston,
Texas.
59
EXPERTS
On July 14, 1995, the Company dismissed Price Waterhouse, LLP as the
Company's auditors and on July 28, 1995 engaged BDO Seidman, LLP as the
Company's new auditors. The audit opinion of Price Waterhouse, LLP for the year
ended December 31, 1994 included an explanatory paragraph relating to the
Company's ability to continue as a going concern. There were no disagreements
between the Company and Price Waterhouse, LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which if unresolved, would have caused Price Waterhouse LLP to make
reference to the disagreement in their report.
The financial statements and schedules as of December 31, 1995 and for
the year then ended included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the periods set forth in their reports (which
contain an explanatory paragraph regarding going concern uncertainties)
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
The financial statements of Baltic International USA, Inc. for the
year ended December 31, 1994 included in this Prospectus have been so included
in reliance on the report (which contains an explanatory paragraph relating to
the Company's ability to continue as a going concern as described in Note 2 to
the financial statements) of Price Waterhouse LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of Baltic International Airlines for the year ended
December 31, 1994 included in this Prospectus have been so included in reliance
on the report (which contains an explanatory paragraph relating to BIA's ability
to continue as a going concern as described in Note 2 to the financial
statements) of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
60
BALTIC INTERNATIONAL USA, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
----
BALTIC INTERNATIONAL USA, INC.
Independent auditors' report.............................................. F-2
Report of independent accountants......................................... F-3
Consolidated balance sheets at March 31, 1996 (unaudited)
and December 31, 1995.................................................. F-4
Consolidated statements of operations for the three months
ended March 31, 1996 and 1995 (unaudited) and the years
ended December 31, 1995 and 1994 ...................................... F-5
Consolidated statements of stockholders' equity (deficit)
for the three months ended March 31, 1996 (unaudited)
and the years ended December 31, 1995 and 1994......................... F-6
Consolidated statements of cash flows for the three months
ended March 31, 1996 and 1995 (unaudited) and the years
ended December 31, 1995 and 1994........................................ F-8
Notes to consolidated financial statements................................. F-10
BALTIC INTERNATIONAL AIRLINES
Independent auditors' report............................................... F-22
Report of independent accountants.......................................... F-23
Balance sheets at March 31, 1996 (unaudited) and December 31, 1995......... F-24
Statements of operations for the three months ended March 31, 1996
and 1995 (unaudited) and the years ended December 31, 1995 and 1994..... F-25
Statements of joint venture partners' equity (deficit) for the
three months ended March 31, 1996 (unaudited) and
the years ended December 31, 1995 and 1994............................. F-26
Statements of cash flows for the three months ended March 31, 1996 and
1995 (unaudited) and the years ended December 31, 1995 and 1994......... F-27
Notes to financial statements.............................................. F-28
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Baltic International USA, Inc.
We have audited the consolidated balance sheet of Baltic International USA, Inc.
as of December 31, 1995, and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Baltic International USA, Inc. is a joint venture partner in a group of
affiliated companies and, as disclosed in the financial statements, has
extensive transactions and relationships with members of the group. Because of
these relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Baltic International
USA, Inc. at December 31, 1995, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a significant interest in
Baltic International Airlines which has incurred losses from operations that
raise substantial doubt about the Company's ability to continue as a going
concern. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Houston, Texas
April 2, 1996
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Baltic International USA, Inc.
In our opinion, the accompanying consolidated statements of operations,
stockholders' equity (deficit) and cash flows present fairly, in all material
respects, the results of operations and cash flows of Baltic International USA,
Inc. for the year ended December 31, 1994 in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audit. We conducted our audit of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company's financial statements
include a significant investment in Baltic International Airlines which has
incurred losses from operations that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 2. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
Baltic International USA, Inc. is a joint venture partner in a group of
affiliated companies and, as disclosed in the financial statements, has
extensive transactions and relationships with members of the group. Because of
these relationships, it is possible that the terms of these transactions are not
the same as those that would result from transactions among wholly unrelated
parties (Notes 2 and 9).
PRICE WATERHOUSE LLP
Houston, Texas
March 30, 1995
F-3
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents ........................................ $ 411,355 $ 139,240
Accounts receivable:
Trade ............................................................ 89,196 87,178
Affiliates ....................................................... 970,780 100,000
Income taxes receivable ............................................. 16,860 16,860
Inventory ........................................................... 59,888 14,265
Prepaids and deposits ............................................... 84,099 6,418
----------- -----------
Total current assets ................................................ 1,632,178 363,961
PROPERTY AND EQUIPMENT, net ............................................ 16,894 20,035
INVESTMENT IN AND ADVANCES TO:
AIR BALTIC CORPORATION .............................................. 937,200 2,630,000
BIA ................................................................. 500,000 --
BCS ................................................................. 332,655 284,834
LAMCO ............................................................... 10,000 --
GOODWILL, NET .......................................................... 216,935 223,593
----------- -----------
Total assets ........................................................ $ 3,645,862 $ 3,522,423
=========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities ............................ $ 748,583 $ 807,470
Short-term debt, net ............................................. 250,000 324,063
Commitments for guarantees on BIA liabilities .................... 654,935 1,019,521
Other current liabilities ........................................ 351,786 342,143
----------- -----------
Total liabilities .................................................. 2,005,304 2,493,197
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock;
Series A, $2 convertible, $10 par value, 500,000 shares
authorized, 123,000 shares issued and outstanding .............. 1,230,000 1,230,000
Series B, convertible, $25,000 stated value and $10 par value,
70 shares authorized, 50 shares issued and outstanding ......... 1,250,000 --
Common stock, $.01 par value, 20,000,000 share authorized,
5,905,592 and 5,758,241 shares
issued and outstanding ......................................... 59,056 57,582
Additional paid-in capital ....................................... 8,691,561 8,703,883
Accumulated deficit .............................................. (9,590,059) (8,962,239)
----------- -----------
Total stockholders' equity (deficit) ............................. 1,640,558 1,029,226
----------- -----------
Total liabilities and stockholders'
equity (deficit) .................................................. $ 3,645,862 $ 3,522,423
=========== ===========
See accompanying notes to consolidated financial statements.
F-4
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- --------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
REVENUES:
Wet Lease Agreement with Air Baltic .. $ -- $ -- $ 1,500,000 $ --
Aircraft rental income from BIA ...... -- -- 480,000 --
Freight revenue ...................... 63,309 155,089 577,542 85,052
Fee revenue .......................... -- -- 1,500,000 --
Commissions from BIA ................. -- -- 78,845 --
Food distribution .................... -- -- 21,685 --
Net equity in earnings of BCS and BWAF 82,821 78,340 369,223 241,076
----------- ----------- ----------- -----------
Total operating revenues ............. 146,130 233,429 4,527,295 326,128
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of revenue:
Aircraft rental .................... -- -- 605,289 370,196
Freight ............................ 27,666 245,192 342,652 58,597
Food distribution .................. -- -- 21,373 --
Personnel and consulting ............. -- -- 1,108,946 461,490
Legal and professional ............... -- -- 324,916 196,181
Other general and administrative ..... 387,249 249,892 961,458 831,656
Net equity in losses of BIA .......... 612,385 703,245 3,440,445 4,580,752
----------- ----------- ----------- -----------
Total operating expenses ............. 1,027,300 1,198,329 6,805,079 6,498,872
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS ................... (881,170) (964,900) (2,277,784) (6,172,744)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ..................... (13,240) (67,038) (197,505) (121,234)
Interest income ...................... 15 -- 195,415 8,510
Other ................................ 297,200 30,504 152,250 --
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) ........... 283,975 (36,534) 150,160 (112,724)
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM ............... (597,195) (1,001,434) (2,127,624) (6,285,468)
INCOME TAX (EXPENSE) BENEFIT ........... -- -- -- 6,860
----------- ----------- ----------- -----------
LOSS BEFORE
EXTRAORDINARY ITEM ................... (597,195) (1,001,434) (2,127,624) (6,278,608)
EXTRAORDINARY LOSS - EARLY
EXTINGUISHMENT OF DEBT ............... -- -- -- (64,587)
----------- ----------- ----------- -----------
NET LOSS ............................... $ (597,195) $(1,001,434) $(2,127,624) $(6,343,195)
=========== =========== =========== ===========
LOSS PER COMMON SHARE
Loss before extraordinary item ....... $ (0.11) $ (0.34) $ (0.51) $ (2.37)
Net loss ............................. $ (0.11) $ (0.34) $ (0.51) $ (2.40)
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING .......................... 5,858,842 2,920,670 4,273,858 2,645,427
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
F-5
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
COMMON STOCK
SERIES A SERIES B ISSUED/
CONVERTIBLE CONVERTIBLE SUBSCRIBED STOCK
PREFERRED PREFERRED PREFERRED ------------------- SUBSCRIPTIONS
STOCK STOCK STOCK SHARES AMOUNT RECEIVABLE
-------- ---------- ---------- --------- ------- ---------
Balance, January 1, 1994 ...... $ 16,660 -- -- 2,119,400 $21,194 --
Warrants and stock issued in
conjunction with Bridge Notes 30,000 -- -- -- -- --
Net proceeds from initial
public offering ............. -- -- -- 800,000 8,000 --
Redemption of stock ........... (46,660) -- -- -- -- --
Net loss
Dividends paid on preferred
stock ....................... -- -- -- -- -- --
-------- ---------- ---------- --------- ------- ---------
Balance, December 31, 1994 .... -- -- -- 2,919,400 29,194 --
Common shares issued .......... -- -- -- 2,722,841 27,228 $(109,000)
Debt converted to common
stock ....................... -- -- -- 116,000 1,160 --
Debt converted to
preferred stock ............. -- $1,230,000 -- -- -- --
Collection of stock
subscription receivable ..... -- -- -- -- -- 109,000
Net loss
Dividends on Series A
Preferred Stock ............. -- -- -- -- -- --
-------- ---------- ---------- --------- ------- ---------
Balance, December 31, 1995 .... -- 1,230,000 -- 5,758,241 57,582 --
Preferred shares issued ....... -- -- $1,250,000 -- -- --
Common shares issued .......... -- -- -- 147,351 1,474 --
Net loss
Dividends on Series A
Preferred Stock ............. -- -- -- -- -- --
-------- ---------- ---------- --------- ------- ---------
Balance, March 31, 1996 ....... $ -- $1,230,000 $1,250,000 5,905,592 $59,056 $ --
======== ========== ========== ========= ======= =========
See accompanying notes to consolidated financial statements.
F-6
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(CONTINUED)
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
----------- ----------- -----------
Balance, January 1, 1994 ............ $ 1,292,138 $ (430,697) $ 899,295
Warrants and stock issued in
conjunction with Bridge Notes ..... 124,220 -- 154,220
Net proceeds from initial
public offering ................... 4,343,765 -- 4,351,765
Redemption of stock ................. -- -- (46,660)
Net loss ............................ -- (6,343,195) (6,343,195)
Dividends paid on preferred
stock ............................. -- (598) (598)
----------- ----------- -----------
Balance, December 31, 1994 .......... 5,760,123 (6,774,490) (985,173)
Shares issued ....................... 2,886,783 -- 2,805,011
Debt converted to common
stock ............................. 143,840 -- 145,000
Debt converted to
preferred stock ................... (86,863) -- 1,143,137
Collection of stock
subscription receivable ........... -- -- 109,000
Net loss ............................ -- (2,127,624) (2,127,624)
Dividends on
preferred stock ................... -- (60,125) (60,125)
---------- ----------- -----------
Balance, December 31, 1995 .......... 8,703,883 (8,962,239) 1,029,226
Preferred shares issued ............. (159,800) -- 1,090,200
Common shares issued ................ 147,479 -- 148,952
Net loss ............................ -- (597,195) (597,195)
Dividends on Series A Preferred Stock -- (30,625) (30,625)
----------- ----------- -----------
Balance, March 31, 1996 (unaudited) . $ 8,691,562 $(9,590,059) $ 1,640,558
=========== =========== ===========
See accompanying notes to consolidated financial statements.
F-7
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
-------------------------- ---------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss ..................................... $ (597,195) $(1,001,434) $(2,127,624) $(6,343,195)
Noncash adjustments:
Net equity in (earnings) and losses of:
BIA ...................................... 612,385 703,245 3,440,445 4,580,752
Other joint ventures ..................... (82,821) (78,340) (369,223) (241,076)
Depreciation and amortization .............. 10,300 4,693 19,678 6,353
Amortization of debt costs and discount .... 5,937 16,631 92,070 83,263
Deferred compensation expense .............. 7,257 -- 190,145 88,308
Gain on sale of assets ..................... (297,200) -- -- --
Write-off of deferred costs ................ -- -- -- 105,351
Extraordinary loss from early
extinguishment of debt ................... -- -- -- 64,587
Increase/decrease in current assets
and liabilities:
Accounts receivable .................... 81,232 (32,370) (108,540) (62,690)
Accounts payable and accrued liabilities (87,126) 150,275 337,253 331,193
Income taxes payable/receivable ........ -- -- -- (23,720)
Prepaid and other ...................... (77,681) -- 45,438 --
Inventory .............................. (45,623) -- (8,066) --
Commitments for guarantees ............. (364,586) -- 1,019,521 --
----------- ----------- ----------- -----------
Net cash provided by (used by)
operating activities .................. (835,121) (237,300) 2,531,097 (1,410,874)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Investment in and advances to joint ventures . (1,122,385) (749,246) (6,070,445) (3,254,675)
Distributions and repayments from
joint ventures ............................. 35,000 75,038 282,999 507,413
Acquisition of net assets of ADC, net
of $38,882 cash ............................ -- -- (29,954) --
Proceeds from sale of Air Baltic stock ....... 745,970 -- -- --
Repayment of subordinated debt from
Air Baltic ................................. 290,000 -- -- --
Acquisition of property and equipment ........ (501) (452) (11,348) (5,555)
----------- ----------- ----------- -----------
Net cash used by investing activities . (51,916) (674,660) (5,828,748) (2,752,817)
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
F-8
BALTIC INTERNATIONAL USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
----------------------- --------------------------
1996 1995 1995 1994
----------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from financing activities:
New borrowings ............................... $ -- $850,000 $ 1,066,000 $ 1,625,006
Increase in debt issuance costs .............. -- -- -- (58,669)
Repayment of debt and long-term obligations .. (80,000) -- (264,712) (1,756,092)
Deferred lease credit ........................ -- 15,656 (85,659) --
Issuance of stock, net of related costs ...... 1,239,152 100,000 2,652,005 4,481,759
Preferred dividends paid ..................... -- -- (29,500) (598)
Redemption of preferred stock ................ -- -- -- (46,660)
----------- -------- ----------- -----------
Net cash provided by financing
activities ............................ 1,159,152 965,656 3,338,134 4,244,746
----------- -------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents ............................. 272,115 53,696 40,483 81,055
Cash and cash equivalents, beginning of period . 139,240 98,757 98,757 17,702
----------- -------- ----------- -----------
Cash and cash equivalents, end of period ....... $ 411,355 $152,453 $ 139,240 $ 98,757
=========== ======== =========== ===========
Supplemental disclosure of noncash transactions:
Services and expenses contributed to BIA ..... $ -- $ -- $ 563,815 $ 2,969,561
Conversion of account payable to equity ...... -- -- -- --
Conversion of notes payable to equity ........ -- -- 1,288,137 --
Accrual of deferred stock offering costs ..... -- -- -- --
Dividends declared and paid in
subsequent period .......................... 30,625 -- 30,625 --
Supplemental disclosure of interest paid ....... $ 6,369 $ 27,432 $ 96,771 $ 42,552
Supplemental disclosure of income
taxes paid ................................... $ -- $ -- $ -- $ 16,860
See accompanying notes to consolidated financial statements.
F-9
BALTIC INTERNATIONAL USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Baltic International USA, Inc. (the "Company" or "BIUSA"), a Texas corporation,
was organized on March 1, 1991 to identify, form and participate in
aviation-related and other business ventures in the former Soviet Union. The
Company owns a 49% interest in and assists in the management of Baltic
International Airlines ("BIA"), a joint venture registered in the Republic of
Latvia. The routes and passenger service operations of BIA were transferred to a
new Latvian carrier, Air Baltic Corporation ("Air Baltic") effective October 1,
1995. The Company owns a 8.02% interest in Air Baltic after the sale of 12% of
Air Baltic stock in January 1996 discussed in Note 3. The Company is also
engaged in providing services to BIA and other airlines through its 50% interest
in Baltic Catering Services ("BCS"), a Riga, Latvia-based aviation catering and
distribution company. The Company also serves as a freight forwarder to BIA and
Air Baltic through Baltic World Air Freight ("BWAF"). American Distributing
Company ("ADC"), a wholly owned subsidiary, began operations on December 1, 1995
as a distribution company. BIUSA's main assets are its ownership interests in
BIA, advances to Air Baltic Corporation, and its sales contracts with BIA and
Air Baltic (see Note 3).
The accompanying unaudited financial statements have been prepared by the
Company and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the three months
ended March 31, 1996 and 1995, pursuant to the rules and regulations of the
Securities and Exchange Commission. All adjustments and provisions included in
these statements are of a normal recurring nature.
BASIS OF ACCOUNTING
Revenues are recognized when earned and expenses are recognized when the goods
and services are acquired or provided. Sales commissions are earned when
transportation on BIA is provided. In 1994 and 1995, the Company deferred
recognition of revenues earned from BIA due to the uncertain collectibility of
such revenues. The Company accounts for its investment in BIA and BCS using the
equity method. The Company's investment in BIA has been written down to zero.
The Company has recorded additional liabilities for commitments for guarantees
on BIA liabilities. The Company is not committed to provide further financial
support to BIA other than the guaranteed amounts. Therefore, the Company has
discontinued applying the equity method to account for its equity in the losses
of BIA.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries (BWAF and ADC). All significant intercompany
accounts and transactions have been eliminated.
PROPERTY, EQUIPMENT AND DEPRECIATION
Property and equipment are stated at cost. Depreciation is computed over the
estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations as incurred.
DEBT ISSUANCE COSTS
Debt issuance costs of $48,000 relating to the Company's bridge notes payable
were deferred at December 31, 1993. Such costs were amortized using the interest
method until the early retirement of such notes in May 1994. Other debt issuance
costs deferred at December 31, 1993 were charged to expense during 1994 because
the related financing was not obtained.
GOODWILL
Goodwill results from the acquisition of the remaining 50% interest in BWAF and
the acquisition of the Miller distribution rights in Riga, Latvia by ADC (see
Note 3). Goodwill is amortized over ten years.
F-10
INCOME TAXES
Deferred income taxes result from temporary differences between the financial
statements and tax basis of assets and liabilities (see Note 5).
The Company has not recognized the tax effect of the losses and undistributed
earnings of its foreign joint venture investments. The Company intends to
indefinitely reinvest undistributed earnings of its foreign joint ventures.
STATEMENT OF CASH FLOWS
For purposes of the statement of cash flows, the company considers all highly
liquid investments purchased with original maturities of three months or less to
be cash equivalents.
LOSS PER COMMON SHARE
Net loss per common share is computed using the weighted average number of
common shares outstanding. Common equivalent shares from stock options and
warrants are included in the computation if dilutive.
Stock warrants and options are considered to be dilutive for earnings per share
purposes if the average market price during the period ending on the balance
sheet date exceeds the exercise price and the Company had earnings for the
period.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. In November 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which addresses the financial accounting and reporting
standards for stock-based employee compensation plans and transactions in which
an entity issues its equity instruments to acquire goods or services from
nonemployees. These pronouncements are effective for fiscal years beginning
after December 15, 1995. The Company will be required to implement these
statements for the year ended December 31, 1996. Implementation of these
pronouncements should have no material effect on the Company's financial
statements.
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK
Substantially all of the Company's assets and revenue sources are heavily
concentrated in Latvia and Lithuania and in its affiliation with BIA. Failure of
BIA to perform up to the terms of its obligations due to economic or political
circumstances would result in a material credit risk to the Company.
At December 31, 1995, the Company's cash in financial institutions exceeded the
federally insured deposits limit by $1,286.
RECLASSIFICATIONS
Certain prior amounts have been reclassified to conform to 1995 consolidated
financial statement presentation.
F-11
NOTE 2 - FINANCIAL CONDITION AND LIQUIDITY
The Company has made significant investments in and advances to BIA which has
incurred losses of $12,408,524 from inception through December 31, 1995. The
Company has loaned an additional $636,156 to BIA through March 31, 1996. As
further explained in Note 3, the Company elected to forgive $4,042,255 of debt
previously written off to BIA as of September 30, 1995. The Company's future
plans for BIA are to continue operations as a charter and cargo service in the
Baltic region. However, BIA has not conducted any substantive business
operations since October 1995. Management believes that results of operations
have been and will continue to be affected by various factors typically
encountered by businesses in the start-up phase and in the airline industry. The
Company's success depends upon many factors that are beyond the Company's
immediate control, including market acceptance of its business ventures,
competition, economic and political factors, seasonality and the need for
additional capital.
The Company and BIA require substantial capital to pursue their operating
strategies. To date, the Company has relied upon net cash provided by financing
activities to fund its capital requirements. There can be no assurance that the
Company's business interests will generate sufficient cash in future periods to
satisfy its capital requirements.
In the event that inflation or other factors were to increase the cost of doing
business in Latvia, or if a change in the political or economic climate
occurred, many perceived business opportunities based on cost advantage may not
be available. Political stability in Latvia remains dependent, in part, on
political events in neighboring republics. Accordingly, unforeseeable and
uncontrollable costs and political factors could adversely affect BIA's
operations and its ability to implement its business strategy.
The above factors have adversely affected the Company's capital resources and
liquidity and raise substantial doubt about the Company's ability to continue as
a going concern. The accompanying financial statements do not include any
adjustments related to the recoverability and classification of recorded assets
or other adjustments should the Company be unable to continue as a going
concern.
On May 5, 1994, the Company received $5,040,000 in net proceeds from its initial
public offering of 800,000 units, each consisting of one share of common stock,
par value $0.01 per share, and a warrant to purchase an additional one-half
share of common stock at $6.00 per share, subject to adjustment, exercisable
under certain circumstances through April 1996. The Company used approximately
$1,773,000 of such proceeds to redeem indebtedness and preferred stock
outstanding and approximately $605,000 to pay additional related offering
expenses. The Company also advanced approximately $2,000,000 to BIA to fund its
growth and capital needs which has since been written off.
The Company has supplemented cash flow through the issuance of stock and
borrowings. From January through March 1995, the Company issued $800,000 in
bridge financing notes payable, pursuant to which warrants to purchase 80,000
shares of Common Stock of the Company at $1.00 per share were issued. In the
third quarter of 1995, the Company issued additional warrants to purchase an
aggregate of 160,000 shares to consultants for services rendered. These warrants
are exercisable for $1.00 per share and expire in August 2000. Effective June
30, 1995, an aggregate principal amount of $1,185,000 of bridge notes payable
was converted to 118,500 shares of Preferred Stock convertible into 592,500
shares of Common Stock, and $145,000 in short-term debt was converted into
116,000 shares of Common Stock. In September 1995, an additional $145,000 of
bridge notes was converted to 14,500 shares of Preferred Stock convertible into
72,500 shares of Common Stock. Also during 1995, the Company received proceeds
of $2,914,011 relating to the issuance of 2,722,841 shares of common stock
pursuant to private sales and the exercise of outstanding stock options. During
the first quarter of 1996, the Company received proceeds of approximately
$101,338 relating to the issuance of 147,351 shares of common stock pursuant to
private sales and the exercise of stock options. In February and March 1996, the
Company issued 50 shares of Series B Convertible Redeemable Preferred Stock for
net proceeds of $1,093,750. The Company believes it has sufficient ability to
obtain additional financing from key officers, directors and certain investors.
The Company's operations have been insufficient as a source of funds to meet the
Company's capital requirements and other liquidity needs. The Company believes
it can raise sufficient amounts of equity and obtain debt financing in order to
meet its required liquidity requirements for the remainder of the year ending
December 31, 1996. However, management has no specific plans or commitments with
respect thereto for the Company, and there can be no assurance the Company will
be successful in any effort. Historical earnings history of the Company have
been directly affected by the consistent advances to BIA. The other operating
interests of the Company do not require significant advances and are currently
profitable.
F-12
NOTE 3 - INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
BALTIC INTERNATIONAL AIRLINES
The Company entered into a joint venture agreement with the Latvian Civil
Aviation Department, an agency of the Government of Latvia (the "Latvian
Partner"), on June 6, 1991 to create BIA as a limited liability company in the
Republic of Latvia. The Company currently owns a 49% interest in BIA.
In September 1994, the Company contributed $2 million of its advances to BIA in
exchange for an increase in its percentage interest in BIA from 40% to 49%. The
Company incurred a loss on its investment in BIA of $1,250,000 as a result of
this transaction. The Latvian Partner has indicated its intention to contribute
real estate to BIA with a value of at least $500,000. In December 1994, the
Company contributed $969,561 of its advances to BIA representing uncollected
charges for interest and fees.
At September 30, 1995, BIUSA elected to forgive $4,042,255 of debt from BIA. The
Company transferred its remaining investment in and advances to BIA in the
amount of $1,302,600 to advances to Air Baltic upon completion of the Air Baltic
Joint Venture Agreement. On October 1, 1995, the scheduled passenger service
operation of BIA was transferred to Air Baltic. BIA currently has no substantive
operations.
From January 1, 1996 to March 31, 1996, the Company advanced an additional
$1,476,971 to BIA which includes $364,586 that had been accrued at December 31,
1995 as commitments for guarantees on BIA liabilities. Additionally, the Company
reserved $612,385 of the advances made during the quarter as uncollectible at
March 31, 1996. Management believes that it is in the best interest of both
BIUSA and BIA for BIA to remain an operating charter and cargo airline. As BIA
will likely continue to operate as a charter and cargo airline in the Baltic
region, the Company believes that maintaining BIA's airline certification and
maintaining the goodwill of BIA's debtors is beneficial to BIUSA. At March 31,
1996, the Company had net advances to BIA of $500,000. The Company believes that
this amount is collectible based on the Latvian partner's commitment to
contribute assets to BIA with a market value of $500,000 to $2,000,000.
Summarized financial data for BIA is as follows:
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
Current assets ........................... $ 231,981 $ 338,691
Noncurrent assets ........................ 368,256 388,012
----------- -----------
Total assets ............................. $ 600,237 $ 726,703
=========== ===========
Current liabilities ...................... $ 2,515,296 $ 4,085,872
Noncurrent liabilities ................... 4,385,009 2,783,006
Partners' deficit ........................ (6,300,068) (6,142,175)
----------- -----------
Total liabilities and partners'
deficit ................................ $ 600,237 $ 726,703
=========== ===========
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ---------------------------
1996 1995 1994
------------ ------------ ------------
Revenues ....................... $ -- $ 8,760,990 $ 7,510,362
Loss from operations ........... (49,972) (8,205,708) (4,895,797)
Net loss ....................... (157,893) (5,875,690) (5,112,664)
Total debt forgiven was $ 4,042,255 which was recorded as extraordinary income
by BIA. The Company did not recognize its equity share of this extraordinary
income.
F-13
Losses relating to BIA as reflected in the accompanying statement of operations
comprised:
THREE MONTHS
ENDED YEAR ENDED DECEMBER 31,
MARCH 31, -----------------------
1996 1995 1994
-------- ---------- ----------
Equity in losses of BIA ................ $ -- $3,440,445 $2,258,070
Provision for losses on investment in
and advances to BIA resulting from
losses attributable to the Latvian
Partner funded by the Company ........ -- -- 721,257
Allowance for collectibility of advances
to and accounts receivable from BIA .. 612,385 -- 1,601,425
-------- ---------- ----------
Total .................................. $612,385 $3,440,445 $4,580,752
======== ========== ==========
The Company's investment in BIA is summarized as follows:
MARCH 31, DECEMBER 31,
1996 1995
-------- -------
Proportionate investment in equity (deficit)
of BIA ............................................... $ -- $ --
Advances to and accounts receivable from BIA ........... 500,000 --
Allowance for collectibility of advances to
and accounts receivable from BIA ..................... -- --
-------- -------
Total investment in and advances to BIA .......... $500,000 $ --
======== =======
BALTIC WORLD AIR FREIGHT
On September 5, 1992, the Board of Directors of the Company approved the
formation of a joint venture to market and operate the air cargo services of BIA
and serve as the cargo sales agent for BIA. On September 11, 1992, BWAF was
formed as a California partnership, in which the Company owned a 50 percent
partnership interest. In October 1994, the Company purchased the remaining 50%
interest in BWAF for approximately $165,000. The acquisition was accounted for
using the purchase method of accounting. In connection with the acquisition, the
Company was obligated to either issue unregistered shares of common stock of the
Company with a value of $145,000, or pay such amount in cash. In 1995, the
Company issued 145,000 shares of common stock in satisfaction of the purchase.
The results of operations of BWAF have been combined with those of the Company
effective October 1, 1994.
BALTIC CATERING SERVICES
On July 1, 1993, the Board of Directors of the Company authorized the Company to
enter into the BCS joint venture, a Riga, Latvia, limited liability company, to
supply the catering needs of BIA and other airlines with operations in Riga. BCS
was formed initially on March 26, 1993 as a joint venture between ARVO, Ltd., a
Latvian limited liability company, and Baltic World Holdings, Ltd., a U.S.
Virgin Islands company owned by certain of the Company's stockholders. On
September 30, 1993, Baltic World Holdings, Ltd. assigned and transferred all of
its rights and privileges of its 50 percent ownership of BCS to the Company
retroactively to March 26, 1993.
In February 1996, the Company entered into a joint venture agreement with
TOPflight AB, a Swedish company to create a joint venture, Airo Catering
Services ("ACS"), that will set up airline catering facilities across Eastern
Europe. The Company owns 51% of ACS and TOPflight AB owns 49%. ACS is developing
a detailed business plan targeting six airports for in-flight catering
development. On April 2, 1996, the catering operations of BCS were acquired by
Riga Catering Services ("RCS"), previously owned by TOPflight AB, in exchange
for shares in RCS. RCS is currently owned 35% by ACS, 23.5% by the Company and
41.5% by the principals of the Company's partner in BCS. The business of BCS
after the transfer of the catering business to RCS is the operation of the
restaurant in the Riga Airport. The total assets remaining after the transfer of
the catering business is about $230,000. The Company will account for the
acquisition of its interest in RCS using the purchase method of accounting.
F-14
Summarized combined financial information for BWAF through September 30, 1994
and BCS through March 31, 1996 is as follows:
MARCH 31, DECEMBER 31,
1996 1995
-------- --------
Current assets ............................... $423,573 $291,967
Noncurrent assets ............................ 260,567 270,218
-------- --------
Total assets ................................. $684,140 $562,185
======== ========
Current liabilities .......................... $ -- $ 3,686
Equity ....................................... 684,140 558,499
-------- --------
Total liabilities and equity ................. $684,140 $562,185
======== ========
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31 --------------------------
1996 1995 1994
-------- ---------- ----------
Operating revenue ................ $506,030 $2,341,881 $1,520,004
Income from operations ........... 165,641 714,734 482,153
Net income ....................... 165,641 727,278 482,153
AIR BALTIC CORPORATION
On August 29, 1995, a Joint Venture Agreement was signed between the Company,
the Republic of Latvia ("Latvia"), Scandinavian Airlines Systems
Denmark-Norway-Sweden ("SAS"), Investeringsfonden for Ostlandene (the Investment
Fund for Central and Eastern Europe - "I0") and Swedfund International AB
("Swedfund") (collectively, the "Parties"), for the establishment of a Latvian
national airline, Air Baltic Corporation.
Upon completion of the Joint Venture Agreement, as amended on November 27, 1995,
Air Baltic will have a share capital of $11.7 million consisting of $3.4 million
cash and $8.3 million other assets including real estate, with the following
ownership percentages: Latvia - 51.07%, the Company - 20.02%, SAS - 16.51%, I0 -
6.2% and Swedfund - 6.2%. The Company obtained its 20.02% interest based on its
cumulative-to-date investments in and advances to BIA. The Joint Venture
Agreement provides that supplemental funding in the amount of $4.0 million for
working capital as necessary, will be provided by the Nordic Investment Bank, or
a similar financial institution.
Furthermore, the Parties agreed to provide subordinated debt loans as necessary
to Air Baltic, totaling approximately $10.1 million, of which the Company's
portion was $290,000. In January 1996, SAS assumed the Company's $290,000
portion of the subordinated debt. The obligation to provide such financing will
expire on December 31, 1997. The Company has agreed to pay all aviation-related
payables of BIA as of November 27, 1995.
Through December 31, 1995, all of the cash capital had been contributed to Air
Baltic and the title to the real estate being contributed to Air Baltic was in
the process of being transferred. On January 10, 1996, the Company entered into
an agreement to sell 12% of Air Baltic stock to SAS for $1,700,000 in cash and
the assumption by SAS of the remaining subordinated debt obligation of the
Company to Air Baltic of $2,175,000. At March 31, 1996, the Company had a
receivable of $954,030 from SAS for the balance due on the sale of the 12% Air
Baltic stock. The Company will retain a 8.02% interest in Air Baltic. A gain of
$297,200 was recognized on the sale of the Air Baltic stock.
The Company has accounted for its investment in Air Baltic using the cost basis
of accounting given that the 12% interest in Air Baltic that was sold to SAS in
January 1996 was considered temporarily owned as of December 31, 1995.
Additionally, the Company gave up its board seat in connection with the sale of
Air Baltic stock to SAS, and the Company cannot influence any of the corporate
decisions of Air Baltic and acts similar to a passive minority investor. The
Company's influence over and participation in the management of Air Baltic is
nominal.
AMERICAN DISTRIBUTING COMPANY
The Company has been granted exclusive rights to distribute selected Kraft
products throughout the Baltic States which will be managed through its wholly
owned subsidiary, ADC. Additionally, ADC will manage the Company's rights to
distribute Miller Beer products in St. Petersburg, Russia and Riga, Latvia. ADC
is a Latvian limited liability company which began operations on December 1,
1995. ADC will operate the Kraft operation independently, but will work with a
local St. Petersburg based company to commence activities related to
distribution of Miller products in St. Petersburg.
F-15
LATAVIO
On September 6, 1995, the Company invested $468,950 for a 25% share of a
non-profit state joint-stock company, the Latvian Airlines ("Latavio"). The
Company is to provide management expertise by submitting a business plan to
restructure Latavio, developing a turnaround strategy, and evaluating other
business possibilities in the Baltic area. Subsequent to the investment, the
Latvian Economic Court temporarily halted the privatization process and has
appointed a thirty party administrator to determine whether Latavio should be
restructured outside of the privatization process or, whether privatization
should continue. Management has not fully determined the level of the risk of
loss of the investment of Latavio; however, the Company has fully reserved the
investment as of September 30, 1995.
LITHUANIAN AIRCRAFT MAINTENANCE CORPORATION
On September 28, 1995, the Company entered into a joint venture with a joint
stock company, Siauliai Aviacija, presently 100% owned by the Ministry of
Transportation of the Republic of Lithuania and the Municipality of Siauliai
City for the establishment of an aircraft maintenance facility. The venture will
be a Lithuanian closed stock company which will operate under the name
Lithuanian Aircraft Maintenance Corporation ("LAMCO"). The Company has the right
to own up to 50% of LAMCO. The Company's initial investment will total only 2.8%
of LAMCO. Further purchases of shares are anticipated during 1996 as the
business plans for the operating entities of LAMCO are concluded. Siauliai
Aviacija owns 96.7% of LAMCO and .25% is owned by the Municipality of Siauliai
City. The Company will have the right to recommend the general manager, chief
financial officer and department heads for approval by LAMCO's board for a
period of 10 years. The Company will also have the authority to negotiate a line
of credit for LAMCO. The Company does not expect LAMCO to be fully operational
until late 1996 or early 1997, if at all.
LAMCO has an authorized charter capital of $1.845 million. The LAMCO Articles
will not be registered until the parties have contributed at least 25% of their
respective capital obligations. The Lithuanian partners have made their cash
capital contributions and the Company has contributed 25% of its capital
($40,000) on March 26, 1996, with the remainder of the Company's capital
contribution due by May 1, 1996.
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
LIFE MARCH 31, DECEMBER 31,
(IN YEARS) 1996 1995
----- -------- -------
Machinery and equipment ................ 3-5 $ 20,053 $20,053
Furniture and fixtures ................. 3-5 12,688 12,187
-------- -------
32,741 32,240
Less accumulated depreciation .......... (15,847) (12,205)
-------- -------
Total property and equipment, net ...... $ 16,894 $ 20,035
======== =======
F-16
NOTE 5 - SHORT-TERM AND LONG-TERM OBLIGATIONS
Short-term and long-term debt and notes payable to stockholders consist of the
following:
MARCH 31, DECEMBER 31,
1996 1995
--------- ---------
Note payable to bank, unsecured, interest rate of prime plus 2% (11% at December
31, 1995), due upon maturity, principal payable July 1996, guaranteed by an
officer of the Company ......................................................... $ 75,000 $ 75,000
Subordinated bridge loan financing, interest payable quarterly at 10% per annum,
secured by warrants to purchase 175,000
common shares of the Company, due March 31, 1996 ............................... 175,000 175,000
Subordinated bridge loan financing payable to officers and directors, interest
rate of 10% per annum, secured by warrants to purchase 8,000 common
shares of the Company, repaid in March 1996 .................................... -- 80,000
--------- ---------
250,000 330,000
Less:
Discount on bridge loan financing ............................................ -- (5,937)
Short-term obligations, net .................................................. (250,000) (324,063)
Long-term debt, net ............................................................ $ -- $ --
========= =========
F-17
NOTE 6 - INCOME TAXES
The components of deferred tax assets consisted of the following:
MARCH 31, DECEMBER 31,
1996 1995
----------- -----------
Deferred tax assets:
Net operating loss carryforward ................ $ 1,801,809 $ 1,824,170
Allowance for doubtful accounts ................ 159,443 159,443
Deferred compensation .......................... 69,883 67,416
Investment in BIA .............................. 1,279,966 1,071,755
----------- -----------
Total deferred tax assets ........................ 3,311,101 3,122,784
----------- -----------
Deferred tax liabilities:
Unremitted earnings of BCS ..................... 53,370 69,629
Other .......................................... 19,452 17,327
----------- -----------
Total deferred tax liabilities ................... 72,822 86,956
----------- -----------
Net deferred tax asset before valuation allowance 3,238,279 3,035,828
Valuation allowance .............................. (3,238,279) (3,035,828)
----------- -----------
Net deferred tax asset ........................... $ -- $ --
=========== ===========
Provisions for income taxes in the statements of operations were as follows:
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, --------------------------
1996 1995 1994
----------------- --------------- -------
Current expense (benefit) ..... $ -- $ -- $(6,860)
Deferred expense .............. -- -- --
----------------- --------------- -------
Total expense (benefit) ....... -- $ -- $(6,860)
================= =============== =======
Differences between the effective income tax rate and the statutory federal
income tax rate were primarily the result of expenses deductible for financial
reporting purposes that are not deductible for tax purposes.
As of March 31, 1996, the Company had net operating loss carryforwards of
approximately $5,300,000 available to offset future taxable income. These
carryforwards will expire at various dates beginning in 2009.
NOTE 7 - COMMON STOCK
The original Articles of Incorporation authorized the Company to issue up to
5,000,000 shares of its $0.01 par value common stock. On October 30, 1993, the
Board of Directors of the Company approved a Plan of Recapitalization, thereby
increasing the total number of $0.01 par value common shares authorized for
issuance to 20,000,000. Each holder of record of common stock became entitled to
receive certificates representing one additional share of common stock for each
share of common stock subscribed. The accompanying financial statements and
footnotes have been presented as if the recapitalization had been in effect for
all years.
In 1993, common stock shares of 102,400 were subscribed in exchange for cash and
services. In October 1993, the Company issued 2,044,600 shares of $.01 par value
common stock in satisfaction of all common stock subscriptions outstanding since
1991. In November 1993, an additional 74,800 shares were sold for $187,000 cash.
In May 1994, the Company completed its initial public offering of 800,000 units
consisting of one share of common stock and one warrant to purchase one-half
share of common stock. Also, in connection with the offering, the Company issued
warrants to the underwriters' representatives to purchase 120,000 shares of
common stock. The Company received net proceeds from its initial public offering
of $4,351,765.
The Company adopted an Equity Incentive Plan (the "Plan"). An aggregate of
800,000 shares of common stock may be issued under the Plan. In December 1995,
the board of directors adopted a resolution subject to shareholder approval to
increase the number of shares that may be issued under the Plan to 1,500,000
shares. The Plan provides for the grant of
F-18
options or rights, including incentive stock options and nonqualified stock
options to officers, directors, employees and consultants to the Company for the
purpose of providing incentive to those persons to work for the Company. In
October 1992, options to purchase 52,000 shares were granted to consultants of
the Company at an exercise price of $0.50 per share. Each option vests
immediately. As of September 30, 1995, 18,000 of these options have been
exercised. The difference between the fair market value of the common stock and
the exercise price was recorded as consulting expense on the date of grant. In
December 1993, the Board of Directors granted an additional 116,800 options to
employees of the Company at an exercise price of $0.50 per share. Such options
are exercisable annually through 1996.
In October 1993 through April 1994, in connection with a bridge financing
arrangement, the Company issued detachable stock purchase warrants to purchase
an aggregate of 163,995 shares of the Company's common stock at $1.00 per share,
subject to adjustment. Each warrant is exercisable at any time on or after
September 1, 1993 and prior to August 31, 1998. In October through December
1994, in connection with similar bridge financing arrangements the Company
issued detachable stock purchase warrants to purchase 57,000 shares of the
Company's common stock at $1.00 per share subject to adjustment. Each warrant is
exercisable at any time on or after August 31, 1995 and prior to October 31,
1999. In October 1994, the Company granted options to purchase 225,000 shares of
the Company's common stock at $2.875 per share to certain employees of the
Company. On June 13, 1995, the Board of Directors voted to reduce the exercise
price of those options to $1.125 per share to reflect the value of common stock
at that date. During the year ended December 31, 1995, common stock shares of
2,722,841 were issued resulting in proceeds of $2,914,011.
In December 1995, the Company issued options to purchase 213,000 shares of
common stock at $1.375 per share and detachable stock purchase warrants to
purchase 240,000 shares of common stock at $1.375 per share to certain employees
and directors of the Company and detachable stock purchase warrants to purchase
10,000 shares of common stock at $1.00 per share in connection with a bridge
financing agreement. Also in December 1995, the Company issued options to
purchase 381,680 shares of common stock at $0.735 per share to a consultant for
services rendered and these options were exercised in December 1995 and January
1996.
The compensation expense recorded by the Company for options issued at an
exercise price lower than the market price at the date of grant was $190,145 and
$97,668 for the years ended December 31, 1995 and 1994, respectively.
At March 31, 1996, common stock shares of 1,924,270 were reserved for issuance
upon exercise of options and warrants. A summary of changes in outstanding
options and warrants is as follows:
THREE MONTHS YEAR ENDED DECEMBER 31,
ENDED MARCH 31, ----------------------
1996 1995 1994
---------- ---------- --------
Shares under option, beginning of period 653,616 408,800 168,800
Changes during the period:
Granted ............................... 110,000 894,680 250,000
Canceled .............................. (5,667) (5,333) (10,000)
Exercised ............................. (121,149) (644,531) --
---------- ---------- --------
Shares under option, end of period ...... 636,800 653,616 408,800
========== ========== ========
Average option price .................... $ 1.12 $ 1.10 $ 0.88
========== ========== ========
Shares under warrant, beginning of period 1,267,970 751,995 103,996
Changes during the period:
Granted ............................... 19,500 516,000 647,999
Canceled .............................. -- -- --
Exercised ............................. -- (25) --
---------- ---------- --------
Shares under warrant, end of period ..... 1,287,470 1,267,970 751,995
========== ========== ========
Average warrant price ................... $ 3.34 $ 3.38 $ 4.86
========== ========== ========
F-19
NOTE 8 - PREFERRED STOCK
On October 30, 1993, the Board of Directors, in connection with the
recapitalization of the Company, authorized the issuance of up to 500,000 shares
of preferred stock. Pursuant to the bridge loan financing, the Company issued
4,666 shares of 4% Series A Cumulative Preferred Stock, $10 par value in 1993
and 1994.
The Series A Cumulative Preferred Stock was redeemed by the Company upon the
closing of the Company's initial public offering.
Effective June 30, 1995, the Company created its Convertible Redeemable Series A
Preferred Stock ("Series A Preferred Stock"), 500,000 shares authorized $10 par
value, and issued 123,000 shares thereof upon conversion of $1,230,000 in
aggregate principal amount of long-term indebtedness. The Series A Preferred
Stock: (i) is redeemable only at the option of the Company and only during the
thirty day period beginning on December 31 and June 30 of each year that the
Series A Preferred Stock is outstanding; (ii) is convertible at any time by the
holders thereof at the initial conversion price of $2 per share; (iii) carries a
liquidation preference of $10 per share; (iv) is non-voting; and (v) accrues
cumulative cash dividends per share at an annual rate equal to 10% of the stated
value per share, payable in equal quarterly installments. The voting rights of
the holders of the Company's common stock will be diluted upon conversion to the
Series A Preferred Stock and the holders of the Series A Preferred Stock will
have preferential dividend and liquidation rights over the holders of common
stock. Furthermore, when and if the Company becomes profitable, the issuance of
the shares of Series A Preferred Stock will have a dilutive effect on the per
share value of the common stock.
Effective February 22, 1996, the Company created its Series B Convertible
Preferred Stock ("Series B Preferred Stock"), 70 shares authorized $25,000
stated value per share and $10 par value, and issued 50 shares thereof for net
proceeds of $1,090,200 in February and March 1996. The Series B Preferred Stock:
(i) is not entitled to receive dividends; (ii) is convertible at any time by the
holders thereof on or after the 55th day after the date that the shares were
issued at the conversion price of the lesser of $2 per share or 82% of the 5-day
average closing bid price of the Company's common stock; (iii) is non-voting;
(iv) carried a liquidation preference of $25,000 per share and an amount equal
to 10% per annum since the issuance date after payment in full of the Series A
Preferred Stock; and (v) is redeemable only at the option of the Company if the
conversion price is $0.75 or less per share.
NOTE 9 - RELATED PARTY TRANSACTIONS
The following is a summary of material related party transactions which have
occurred during 1995 and 1994, other than those disclosed elsewhere in the notes
to the accompanying financial statements.
BALTIC INTERNATIONAL AIRLINES
The Company is entitled to earn management fees, aircraft rental income, and
commission income from BIA. Commissions are based upon a percentage of passenger
ticket and cargo revenue earned on sales originating outside of Riga. The
Company earned $78,845 and $655,000 in such commissions and fees for the years
ended December 31, 1995 and 1994, respectively. The Company subleases two Boeing
727 aircraft to BIA for an aggregate of $80,000 per month. For the year ended
December 31, 1995, the Company received $480,000 related to the subleases. For
the years ended December 31, 1995 and 1994, the Company charged BIA $611,792 and
$749,450, respectively, in costs incurred on behalf of BIA, including pilots'
salaries, officers' salaries and consulting costs. The Company forgave $759,150
of fees and commissions earned in 1994 by contributing it to the equity of BIA.
The Company has significant investments in and advances to its joint ventures,
including unsecured net advances of $2,008,272 at December 31, 1994. During
1994, the Company forgave interest income of $210,411 by contributing it to the
equity of BIA. The net advances include the excess of amounts invested in BIA
over the amount contributed to the equity in BIA (see Note 3).
F-20
AIR BALTIC CORPORATION
The Company managed the interim flight operations of Air Baltic and subleased
two western aircraft previously operated by BIA under a wet lease agreement for
$1.5 million through December 31, 1995. In addition, Air Baltic paid a $1.5
million fee to the Company for services rendered in connection with the training
of Latvian cockpit, cabin and ground personnel.
OTHER
During 1992 and 1993, officers, directors, employees and certain consultants
contributed certain overhead, services, capital and equipment to the Company in
exchange for shares and/or stock options. Certain officers provided similar
benefits in excess of the amount contributed to the Company, and in exchange
received Promissory Notes from the Company aggregating $332,523. Such notes were
repaid in May 1994.
BWAF is dependent upon Air Baltic for cargo transportation.
During 1995 and 1994, consulting fees in the amount of $0 and $20,000 were paid
to Capricorn Travel, which is controlled by a director of the Company.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company, along with the Ministry of Transportation of the Republic of
Latvia, has agreed that it may provide additional future financial support to
BIA in the form of loans or capital contributions. The Company is obligated on
leases for two Boeing 727 aircraft. The Company obtained deferred lease credits
in the form of cash and rent deferrals in 1994 from the lessor, principally to
defray the cost of heavy maintenance on the aircraft incurred by BIA. Aggregate
rental payments and supplemental payments are $61,378 per month. The leases
expire in June 1996.
The Company leases certain equipment and office space under operating leases
that expire over the next three years. Rental expense under operating leases was
$572,826 and $394,978 for 1995 and 1994, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
1996 $ 36,148
1997 37,657
1998 30,629
---------------
Total $ 104,434
===============
In December 1995, the Company guaranteed certain liabilities of BIA and the
Company accrued $1,019,521 as a commitment to pay these liabilities as the
Company has signed an agreement to pay these liabilities on behalf of BIA. The
expense for these liabilities is included in the Company's net equity in losses
of BIA on the 1995 consolidated statement of operations.
NOTE 11 - EXTRAORDINARY LOSS
On May 6, 1994, the Company repaid all of its bridge financing notes payable
using proceeds from its initial public offering. As a result of early
extinguishment of $893,340 of such notes, the Company recognized an
extraordinary loss of $78,586 in 1994.
F-21
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Joint Venture Partners of
Baltic International Airlines
We have audited the balance sheet of Baltic International Airlines as of
December 31, 1995, and the related statements of operations, joint venture
partners' equity (deficit) and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
Baltic International Airlines is a joint venture and, as disclosed in the
financial statements, has extensive transactions and relationships with Baltic
International USA, Inc. and its joint venture partner. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated
parties.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Baltic International Airlines
at December 31, 1995, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred significant losses and has a
joint venture partners' deficit that raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
BDO Seidman, LLP
Houston, Texas
April 2, 1996
F-22
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Joint Venture Partners of
Baltic International Airlines
In our opinion, the accompanying statements of operations, joint venture
partners' equity (deficit) and cash flows present fairly, in all material
respects, the results of operations and cash flows of Baltic International
Airlines, Riga, Latvia, for the year ended December 31, 1994 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has incurred losses from
operations that raise substantial doubt about the Company's ability to continue
as a going concern. Management's plans in regard to these matters are described
in Note 2. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Baltic International Airlines is a joint venture and, as disclosed in the
financial statements, has extensive transactions and relationships with Baltic
International USA, Inc. and its joint venture partner. Because of these
relationships, it is possible that the terms of these transactions are not the
same as those that would result from transactions among wholly unrelated parties
(Notes 2 and 4).
PRICE WATERHOUSE LLP
Houston, Texas
March 30, 1995
F-23
BALTIC INTERNATIONAL AIRLINES
BALANCE SHEETS
MARCH 31, DECEMBER 31,
1996 1995
------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash ............................ $ 48,465 $ 155,175
Accounts receivable ............. 183,516 183,516
------------ ------------
Total current assets ............ 231,981 338,691
PROPERTY AND EQUIPMENT, net ....... 268,256 288,012
EQUIPMENT DEPOSITS AND PREPAID RENT 100,000 100,000
------------ ------------
Total assets .................... $ 600,237 $ 726,703
============ ============
LIABILITIES AND JOINT VENTURE PARTNERS'
DEFICIT
CURRENT LIABILITIES
Accounts payable and accrued liabilities ...... $ 2,515,296 $ 4,050,872
Note payable to bank .......................... -- 35,000
------------ ------------
Total current liabilities ................... 2,515,296 4,085,872
LONG-TERM LIABILITIES
Advances from BIUSA ........................... 4,385,009 2,783,006
------------ ------------
Total liabilities ........................... 6,900,305 6,868,878
------------ ------------
COMMITMENTS AND CONTINGENCIES
JOINT VENTURE PARTNERS' DEFICIT
Capital ....................................... 6,266,349 6,266,349
Accumulated deficit ........................... (12,566,417) (12,408,524)
------------ ------------
Total joint venture partners' deficit ....... (6,300,068) (6,142,175)
------------ ------------
Total liabilities and joint venture partners'
deficit ................................... $ 600,237 $ 726,703
============ ============
See accompanying notes to financial statements.
F-24
BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------------------- --------------------------------
1996 1995 1995 1994
-------- ----------- ------------ ------------
(UNAUDITED) (UNAUDITED)
REVENUES:
Passenger ............................................. $-- $ 2,175,432 $ 8,552,438 $ 7,262,335
Charter and other ..................................... -- 81,756 208,552 248,027
-------- ----------- ------------ ------------
Total revenues ...................................... -- 2,257,188 8,760,990 7,510,362
-------- ----------- ------------ ------------
OPERATING EXPENSES:
Traffic and handling costs ............................ -- 1,492,800 7,081,284 5,003,261
Fuel .................................................. -- 692,714 2,060,950 1,701,436
Commissions ........................................... -- -- 397,035 345,553
Aircraft rental ....................................... -- 240,000 856,482 648,823
Other costs of services ............................... 20,058 698,678 3,759,095 1,613,633
General and administrative expenses ................... 10,158 344,500 1,694,578 1,146,834
Depreciation and amortization:
Property and equipment .............................. 19,756 75,519 439,323 185,644
Developmental and preoperating costs ................ -- 82,750 217,755 330,999
Development and preoperating costs .................... -- -- -- 553,299
Loss on sale of assets ................................ -- -- 11,755 876,677
-------- ----------- ------------ ------------
Total operating expenses ............................ 49,972 3,626,961 16,518,257 12,406,159
-------- ----------- ------------ ------------
LOSS FROM OPERATIONS .................................... (49,972) (1,369,773) (7,757,267) (4,895,797)
NONOPERATING INCOME AND (EXPENSES):
Interest income ....................................... 19 171 886 4,077
Exchange loss ......................................... (22,940) (7,156) (15,714) (10,533)
Interest expense ...................................... -- (71,320) (433,613) (210,411)
-------- ----------- ------------ ------------
TOTAL LOSS FROM OPERATIONS
(NOTE 1) ............................................. (72,893) (1,448,078) (8,205,708) (5,112,664)
LOSS ON DISPOSAL OF SCHEDULED
PASSENGER CARRIER SERVICE,
including provisions
of $550,000 in 1995 and $85,000 in 1996 for
operating losses during phase-out period .............. (85,000) -- (1,712,237) --
-------- ----------- ------------ ------------
NET LOSS BEFORE EXTRAORDINARY
INCOME ................................................ (157,893) (1,448,078) (9,917,945) (5,112,664)
EXTRAORDINARY INCOME-
FORGIVENESS OF DEBT ................................... -- -- 4,042,255 --
-------- ----------- ------------ ------------
NET LOSS $ .............................................. (157,893) $(1,448,078) $ (5,875,690) $ (5,112,664)
======== =========== ============ ============
See accompanying notes to financial statements.
F-25
BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF JOINT VENTURE PARTNERS' EQUITY (DEFICIT)
ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------------ -----------
Balance at January 1, 1994....................$ 2,732,973 $ (1,420,170) $ 1,312,803
Capital contributions ......................... 2,969,561 2,969,561
Net loss ...................................... (5,112,664) (5,112,664)
---------- ------------ -----------
Balance at December 31, 1994 .................. 5,702,534 (6,532,834) (830,300)
Capital contributions ......................... 563,815 563,815
Net loss ...................................... (5,875,690) (5,875,690)
---------- ------------ -----------
Balance at December 31, 1995 .................. 6,266,349 (12,408,524) (6,142,175)
Net loss ...................................... (157,893) (157,893)
---------- ------------ -----------
Balance at March 31, 1996 (unaudited).........$ 6,266,349 $(12,566,417) $(6,300,068)
========== ============ ===========
See accompanying notes to financial statements.
F-26
BALTIC INTERNATIONAL AIRLINES
STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR
ENDED MARCH 31, ENDED DECEMBER 31,
-------------------------- --------------------------
1996 1995 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss ..................................... $ (157,893) $(1,448,078) $(5,875,690) $(5,112,664)
Noncash adjustments:
Depreciation and amortization .............. 19,756 158,269 657,078 516,643
Loss on sale of assets ..................... -- -- 11,755 876,677
Forgiveness of debt ........................ -- -- (4,042,255) --
Loss on disposal of segment ................ -- -- 1,712,237 --
Change in accounts receivable .............. -- (78,838) 293,107 (476,623)
Change in inventory ........................ -- (11,757) 32,976 (32,976)
Change in prepaid expenses ................. -- 64,860 66,898 46,434
Change in unearned revenue ................. -- (79,824) (282,459) 184,839
Change in accounts payable ................. (1,410,544) 657,062 2,148,009 1,054,677
----------- ----------- ----------- -----------
Net cash used by operating
activities ............................. (1,548,681) (738,306) (5,278,344) (2,942,993)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and equipment ........ -- (224,200) (279,242) (625,243)
Equipment deposits and prepaid rent .......... -- 19,733 185,057 (327,974)
----------- ----------- ----------- -----------
Net cash used by investing activities .... -- (204,467) (94,185) (953,217)
----------- ----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable ................... -- -- 35,000 --
Repayment of note payable .................... (35,000) -- -- --
Operating expenses paid by BIUSA ............. -- -- -- 1,719,724
Advances from BIUSA .......................... 1,476,971 1,046,860 5,380,804 2,478,136
Repayments of advances from BIUSA ............ -- -- -- (350,790)
----------- ----------- ----------- -----------
Net cash provided by financing activities 1,441,971 1,046,860 5,415,804 3,847,070
----------- ----------- ----------- -----------
Net increase (decrease) in cash ................ (106,710) 104,087 43,275 (49,140)
Cash, beginning of period ...................... 155,175 111,900 111,900 161,040
----------- ----------- ----------- -----------
Cash, end of period ............................ $ 48,465 $ 215,987 $ 155,175 $ 111,900
=========== =========== =========== ===========
Supplemental disclosure of noncash transactions:
Liabilities to joint venture partners ........ $ -- $ -- $ -- $ --
-- (350,000)
Conversion of advances to equity ............. -- -- 563,815 2,969,561
See accompanying notes to financial statements.
F-27
BALTIC INTERNATIONAL AIRLINES
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS
Baltic International Airlines (the "Company") is a scheduled passenger carrier
with operations principally from Riga, Latvia, to England, Germany and other
European destinations. The routes and passenger service operations of the
Company were transferred to a new Latvian carrier effective October 1, 1995.
The Company is the result of a joint venture agreement between the Latvian
Aviation Department, an agency of the Government of Latvia (the "Latvian
Partner"), and Baltic International USA, Inc. ("BIUSA"). The Company was founded
on June 6, 1991 as a limited liability company in the Republic of Latvia.
The accompanying unaudited financial statements have been prepared by the
Company and include all adjustments which are, in the opinion of management,
necessary for a fair presentation of financial results for the three months
ended March 31, 1996 and 1995, pursuant to the rules and regulations of the
Securities and Exchange Commission. All adjustments and provisions included in
these statements are of a normal recurring nature.
On June 22, 1992, the Company began regularly scheduled service to various
German markets operating three refurbished Russian aircraft provided by the
Latvian partner. The Latvian partner facilitated the Company's usage of and
access to the aircraft, aviation-related equipment and facilities, and provided
full maintenance and service thereto. The Latvian partner's 66 2/3%
contribution, in the form of the right to use aircraft and other assets, was
made and valued at $1,200,000 pursuant to the amended joint venture agreement.
On July 2, 1993, the Company's joint venture agreement was amended via a
Settlement Agreement, wherein BIUSA's percentage was increased to 40% from 33
1/3% at that time. The Company transferred one refurbished aircraft back to
Latvian Airlines at no charge. Upon the relinquishment of the aircraft, the
Company recognized a loss of $80,868 due to the refurbishment costs incurred.
Effective July 31, 1993, Latvian Airlines transferred ownership and control of
the two remaining aircraft to the Company and relinquished responsibility for
further service or maintenance.
During 1994, BIUSA converted $2,969,561 in advances to equity of BIA and
increased its percentage ownership to 49% from 40%.
For a period of time in 1993 and 1994, the Company operated one DC9-30 aircraft.
Commencing in May 1994, the Company leases two Boeing 727-100 aircraft from an
affiliate. The Boeing aircraft were not operating until October 1994 and
February 1995 due to scheduled maintenance and repairs.
On August 29, 1995, the joint venture partners entered into another joint
venture agreement in which they contributed the scheduled passenger carrier
service of the Company to the new joint venture. This portion of the business
was transferred on October 1, 1995. The net operations of the Company related to
this discontinued operations and the continuing operations, with expenses pro
rated in proportion to revenues, are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
1995 1994
-------------- ---------------
Continuing operations $ (195,334) $ (168,844)
Discontinued scheduled passenger
carrier service (8,010,374) (4,943,820)
--------------- ---------------
Total loss from operations $ (8,205,708) $ (5,112,664)
=============== ===============
The Company recorded a loss on the disposal of this operation of $1,712,237
(composed of a $550,000 provision for operating losses during the phase-out
period and a $1,162,237 loss on disposal) included in the statement of
operations for the year ended December 31, 1995. During 1996, the Company
changed its estimate for the provision for operating losses during the phase-out
period based on further negotiations with the owner of the leased aircraft. The
Company recorded an additional $85,000 loss on disposal for the three months
ended March 31, 1996.
F-28
BASIS OF ACCOUNTING
Revenues are recognized when the transportation is provided rather than when the
ticket is sold. Passenger traffic commissions are recognized when the
transportation is provided and the related revenues are recognized. Revenues not
yet recognized as income are reflected in the financial statements as unearned
revenue. Expenses are recognized when the goods and services are acquired or
provided.
These financial statements have been prepared using accounting principles
generally accepted in the United States of America.
INVENTORY
Inventory of spare parts and supplies is stated at cost using the first-in,
first-out method.
PROPERTY AND EQUIPMENT
The costs of property and equipment, including renewals and improvements which
extend the life of existing property and equipment, are capitalized and
depreciated using the straight-line method over the estimated useful lives of
the various classes of assets. The salvage value of aircraft and improvements
has been assumed to be zero. The Company uses the deferral method of accounting
for overhaul costs on its owned aircraft, whereby overhaul costs will be
capitalized when incurred and amortized over the period until the next expected
overhaul. The Company uses the accrual method of accounting for overhaul costs
on its leased aircraft.
DEVELOPMENTAL AND PREOPERATING COSTS
Developmental and preoperating costs include the costs associated with
inaugurating service over the Company's routes, developing such routes, pilot
training and the costs of acquiring aircraft and access to airports,
reservations systems and other operating assets. Such costs were amortized over
a three-year period. Developmental and preoperating costs incurred after
December 31, 1993 are expensed as incurred.
INCOME TAXES
In November 1991, the Republic of Latvia enacted the Law on Foreign Investments,
which provides certain exemptions from income taxes on foreign-owned joint
ventures beginning with the first year in which the first profit is made. There
are no income tax benefits associated with losses incurred.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company is the Latvian Lat. A portion of the
Company's operations are conducted in convertible foreign currencies and are
translated into U.S. dollars at average current rates during each period
reported. Foreign currency transaction gains and losses are included in net
income. Net exchange gains or losses resulting from the translation of assets
and liabilities are accumulated as a separate component of joint venture
partners' equity. There were no such gains or losses as of December 31, 1995 or
December 31, 1994.
NEW ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF,
which establishes accounting standards for the impairment of long-lived assets,
certain identifiable intangibles, and goodwill related to those assets to be
held and used and for long-lived assets and certain identifiable intangibles to
be disposed of. In November 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR
STOCK-BASED COMPENSATION, which addresses the financial accounting and reporting
standards for stock-based employee compensation plans and transactions in which
an entity issues its equity instruments to acquire goods or services from
nonemployees. These pronouncements are effective for fiscal years beginning
after December 15, 1995. The Company will be required to implement these
statements for the year ended December 31, 1996. Implementation of these
pronouncements should have no material effect on the Company's financial
statements.
F-29
MANAGEMENT'S ESTIMATES AND ASSUMPTIONS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
NOTE 2 - FINANCIAL CONDITION AND LIQUIDITY
On October 1, 1995, the scheduled passenger service operation of the Company was
transferred to another company by the Latvian Partner and BIUSA. The Company has
incurred losses of $12,408,524 from inception through December 31, 1995. The
Company's future viability is dependent on its ability to achieve profitable
operations and obtain additional financing. Management believes that its results
of operations have been and will continue to be affected by various factors
typically encountered by businesses in the start-up phase and in the airline
industry. The Company's eventual success depends upon many factors that are
beyond the Company's immediate control, including market acceptance,
competition, economic and political factors, seasonality and the need for
additional capital.
The Company requires substantial capital to pursue its operating strategy. To
date, the Company has relied upon net cash provided by financing activities to
fund its capital requirements. There can be no assurance that the Company's
business interests will generate sufficient cash in future periods to satisfy
its capital requirements. The Latvian Partner has indicated its intention to
contribute real estate to the Company with a value of at least $500,000.
In the event that inflation or other factors were to increase the cost of doing
business in Latvia, or if a change in the political or economic climate
occurred, many perceived business opportunities based on cost advantage may not
be available. Political stability in Latvia remains dependent, in part, on
political events in neighboring republics. Accordingly, unforeseeable and
uncontrollable costs and political factors could adversely affect the Company's
operations and its ability to implement its business strategy.
The Company has continued to be supported primarily through advances from BIUSA.
These factors have adversely affected the Company's liquidity and raise
substantial doubts about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments related to
the recoverability and classification of recorded assets or other adjustments
should the Company be unable to continue as a going concern.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
LIFE MARCH 31, DECEMBER 31,
(IN YEARS) 1996 1995
---------- -------------- -------------
Aircraft and improvements 20 $ 382,701 $ 382,701
Furniture and fixtures 3-7 122,661 122,661
Leasehold improvements 2-20 837,304 837,304
Ground transportation equipment 7 8,125 8,125
-------------- -------------
1,350,791 1,350,791
Less - accumulated depreciation (1,082,535) (1,062,779)
--------------- --------------
Total property and equipment, net $ 268,256 $ 288,012
============== =============
In December 1994, BIA sold one of its TU134 aircraft for $350,000. Proceeds were
used to repay the $350,000 liability to BIA's former joint venture partner. BIA
recorded a loss on sale of the aircraft of approximately $877,000.
In February 1996, the Company and BIUSA entered into an agreement to return the
two leased aircraft to the owner. As a result, the Company accelerated the
depreciation on leasehold improvements which have a net book value of $0 at
December 31, 1995.
F-30
NOTE 4 - RELATED PARTY TRANSACTIONS
The following is a summary of material related party transactions other than
those disclosed elsewhere in the notes.
During 1994, the Company borrowed $4,197,860 from BIUSA, bearing interest at
12%. BIUSA converted $2,969,561 of such advances to equity during 1994. The
Company accrued interest on advances from BIUSA of $210,411 during 1994. During
the year ended December 31, 1995, the Company borrowed an additional $3,520,708
from BIUSA. At September 30, 1995 BIUSA elected to forgive $4,042,255 of debt
due from the Company and this forgiveness has been recorded as an extraordinary
item on the statement of operations. During the three months ended March 31,
1996, the Company borrowed an additional $1,476,971 from BIUSA.
The Company accrues commission payable to BIUSA for its services as
international promotional sales agent, based upon a percentage of ticket revenue
for tickets sold by BIUSA. For the years ended December 31, 1995 and 1994, the
Company recorded $78,845 and $166,157, respectively, for such commissions.
Commencing January 1, 1994, the Company accrued administrative charges payable
to BIUSA based upon actual costs incurred and billed by BIUSA. Such charges
include primarily pilot salaries and an allocation of officers' salaries.
Administrative charges from BIUSA during 1995 and 1994 totaled $611,792 and
$749,450, respectively. Effective in May 1994, the Company subleases from BIUSA
two Boeing 727-100 aircraft for an aggregate monthly rental of $80,000. The
Company recorded $856,482 and $648,823 in aircraft rental expense on the Boeing
727 aircraft in 1995 and 1994, respectively. At December 31, 1995, the Company
had a $2,783,006 payable to BIUSA. BIUSA has committed that it will not demand
repayment of the advances for at least one year.
A portion of the revenues earned by other corporate joint ventures of BIUSA are
derived from catering sales to the Company and cargo sales using transportation
provided by the Company. These amounts are not material to the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
The Company leases two 727-100 aircraft for $80,000 per month pursuant to
subleases to BIUSA, which expire in 1996.
The Company does not maintain property insurance on its owned aircraft nor does
it maintain property or liability insurance on its ground equipment, because it
would be uneconomical.
The Company has received a notice of deficiency and penalties from governmental
authorities in Riga, Latvia, claiming approximately $300,000 in unpaid VAT taxes
and penalties. The Company believes the claims are without merit and is
vigorously contesting such claims. The Company is undergoing VAT tax, income tax
and payroll tax audits by Latvian agencies for 1991 through 1994 and there can
be no assurances that additional taxes may not be levied. The Company contends
that it has properly remitted all taxes collected or otherwise owed. No
provision for such claims has been made in the accompanying financial
statements.
NOTE 6 - NOTE PAYABLE
During 1995, the Company borrowed $187,450 pursuant to a line of credit obtained
from a bank in Riga, Latvia. The borrowings are secured by a TU134 aircraft
owned by the Company This line of credit was paid off in January 1996.
F-31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Restated Articles of Incorporation of the Company ("Restated
Articles") provide for indemnification of Directors and Officers in accordance
with the Texas Business Corporation Act. Article Nine of the Restated Articles
provides as follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Article 2.41 under the Texas Business Corporation
Act, or (iv) for any transaction from which the director derived an improper
personal benefit, whether or not the benefit resulted from an action taken in
the person's official capacity.
Article Eight of the Restated Articles provides as follows:
A. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed
action, suit or proceedings, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit, or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best interest
of the Corporation, and, with respect to any criminal action or proceedings, had
reasonable cause to believe that his conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper.
C. To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceedings referred to in A and B, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
II-1
D. Any indemnification under paragraphs A and B of this Article Eight
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs A and B. Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable, a
quorum of disinterested directors so directs, by independent legal counsel in a
written opinion, or (3) by a majority of the stockholders.
E. Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article
Eight.
F. The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
G. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article Eight.
H. For purposes of this Article Eight, references to the "Corporation"
shall include, in addition to the resulting Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Article Eight with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
I. For purposes of this Article Eight, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article Eight.
J. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Eight shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
II-2
The foregoing discussion of the Company's Restated Articles and of the
Texas Business Corporation Act is not intended to be exhaustive and is qualified
in its entirety by such Restated Articles and statutes, respectively.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant. No expenses will be paid by the
security holders.
SEC Registration Fee.................................... $2,000
Nasdaq Application and Listing Fee...................... 4,000
Printing and Engraving Expenses......................... 5,000
Legal Fees and Expenses................................. 15,000
Accounting Fees and Expenses............................ 55,000
Blue Sky Fees and Expenses.............................. 15,000
Transfer Agent Fees..................................... 500
Miscellaneous........................................... 3,500
-------
TOTAL.............................................. $100,000
========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information regarding securities that the
Company has sold in the past three years to directors ("D"), officers ("O"),
employees ("E"), consultants ("C"), institutional investors ("I"), affiliates
("A") and non-affiliates ("N").
In March 1991, the Company issued an aggregate of 1,850,000 shares of
Common Stock to Homi M. Davier (D), Paul R. Gregory (A), Robert L. Knauss (D),
Joan B. Edwards(N), Harold Pareti(N) and Juris Padegs (D) for an aggregate
consideration of $120,250, representing cash and services.
In March 1991, the Company issued 1,000 shares of Common Stock to Paul
M. Gregory (D) at $3.00 per share for cash in the amount of $3,000.
From March through June 1992, the Company issued 91,200 shares of
Common Stock at $2.50 per share to Mehelli Behrana (E), Adil and Veera Bharucha
(N), Nilima F. Rajkotwala (N), Hormuzd Bhaya (N), Farrokh P. Mistree (N), Ted
Reynolds (D), Roy J. Ruffin (N), John M. O'Quinn (N), and Joel W. Sailors (N),
for an aggregate amount of $228,000.
In October 1992, the Company issued non-qualified options to purchase
an aggregate of 52,000 shares of Common Stock to Sarosh Collector (C), Girts
Lejins (C) and Robert Higley (C) under the Company's 1992 Equity Incentive Plan,
at an exercise price of $.50 per share, for services rendered.
In January 1993, the Company issued 60,000 shares of Common Stock to
Aerospace Interiors (N) for services rendered in connection with the
refurbishment of an aircraft.
In June 1993, the Company issued 10,000 shares of Common Stock to Ted
Reynolds (D) for $25,000.
In September 1993, the Company issued 32,400 shares of Common Stock to
Quintana Petroleum Corporation (N) for the provision of office facilities and
services rendered.
In October 1993, the Company issued 1,666 shares of Series A Preferred
Stock, par value $10.00 per share for $16,660, and issued warrants to purchase a
total of 16,666 shares of Common Stock at
II-3
an exercise price of $1.00 per share, to a non-affiliated group of investors in
connection with loans made to the Company in an aggregate amount of $83,340.
In October 1993, the Company issued to Richard Gibson (N), Greg Mueller
(N), Benjamin V. Young (N) and Michael Walsh (N) warrants to purchase an
aggregate of 83,330 shares of Common Stock at an exercise price of $1.00 per
share, in connection with loans made to the Company in an aggregate amount of
$500,000.
In November 1993, the Company issued an aggregate of 74,800 shares of
its Common Stock to Mosher International, Inc. (N), E. Blake Mosher (N), Donald
D. Janacek (N), Karin Von der Osten (N), Roy J. Ruffin (N), Joel Sailors (N) and
Ronnie Patel (N) for an aggregate amount of $187,000.
In November 1993, the Company issued a warrant to purchase 4,000 shares
of Common Stock to Mosher International, Inc. (N) at an exercise price of $1.00
per share, in connection with loans made to the Company in the amount of
$40,000.
In December 1993, the Company issued non-qualified options to 11
employees, officers, directors and consultants to purchase an aggregate of
116,800 shares of Common Stock under the Company's 1992 Equity Incentive Plan at
an exercise price of $.50 per share, for services rendered.
In January 1994, the Company issued to Benjamin V. Young (N) and
Richard A. Gibson (N) warrants to purchase an aggregate of 30,000 shares of
Common Stock at an exercise price of $1.00 per share, in connection with loans
made to the Company in an aggregate amount of $150,000.
In February 1994, the Company issued 3,000 shares of Series A Preferred
Stock, par value $10.00 per share, for $30,000, and issued warrants to purchase
29,999 shares of Common Stock at an exercise price of $1.00 per share to a
non-affiliated group of investors, in connection with loans made to the Company
in an aggregate amount of $120,000.
In October and November 1994, the Company issued warrants to purchase
an aggregate of 42,500 shares of Common Stock to Messrs. Knauss (D), Davier (D),
Gregory (D), Padegs (D), Boshell (N) and Mosher (N) at an exercise price of
$1.00 per share, in connection with loans made to the Company in the aggregate
principal amount of $425,000.
In October 1994, the Company issued options to purchase an aggregate of
250,000 shares to Juris Padegs (D), Ted Reynolds (D), Robert Knauss (D), Homi
Davier (D), Paul Gregory (D), James Goodchild (D), Diana Arnett (E), Mehelli
Behrana (E), Don Evans (E), Jo Ann Johnson (O), Daniel Solon (E), Blake Mosher
(N), Sally Oliver (C), Don Janacek (E) and Tom Glenister (O) at an exercise
price of $1.125 per share for services rendered.
In December 1994, the Company issued warrants to purchase an aggregate
of 25,500 shares of Common Stock to Robert Knauss (D), Paul R. Gregory Family
Partnership, Ltd. (D), James Goodchild (O), Matthew Weisser (N), Nalin Sethi (N)
and V.K. Sethi (N) at an exercise price of $1.00 per share, in connection with
loans made to the Company in the aggregate principal amount of $255,000.
In January 1995, the Company issued warrants to purchase an aggregate
of 50,000 shares of Common Stock to Richard and Elaine Gibson (N) at an exercise
price of $1.00 per share, in connection with a loan made to the Company in the
principal amount of $500,000.
In January 1995, the Company issued warrants to purchase 5,000 shares
to the Young Family Trust (N) at an exercise price of $1.00 per share in
connection with a $50,000 loan to the Company.
II-4
In March 1995, the Company issued warrants to purchase an aggregate of
25,000 shares to Chapman Freeborn (N), Paul R. Gregory Family Partnership, Ltd.
(D), and Juris Padegs (D), in connection with loans made to the Company in the
aggregate principal amount of $250,000.
Between March 1995 and May 1996, the Company issued an aggregate of
2,063,285 shares of its Common Stock to various unaffiliated private placement
investors for an aggregate amount of $2,225,188.
In July 1995, the Company issued a warrant to purchase 100,000 shares
to Norman Alston (C) for consulting services rendered.
In August 1995, the Company issued, effective June 30, 1995, an
aggregate of 118,500 shares of Convertible Redeemable Series A Preferred Stock
("Series A Preferred Stock") to Messrs. Gibson (N), Davier (O), Knauss (O),
Gregory (D), Padegs (D), Mosher (N) and Goodchild (O) and to the Young Family
Trust (N) upon conversion of $1,1850,000 in aggregate principal amount of
indebtedness.
In August 1995, the Company issued, effective June 30, 1995, 116,000
shares of Common Stock to T.G. Shown Associates, Inc., the Company's former
partner in BWAF, (A) upon conversion of $145,000 in principal amount of
short-term debt. In December 1995, April 1996 and May 1996, an additional
29,000, 10,000 and 19,000 shares, respectively, of Common Stock were issued to
T.G. Shown Associates, Inc. as part of this conversion of short-term debt.
In September 1995, the Company issued an aggregate of 4,500 shares of
Series A Preferred Stock to Mr. Weisser (N) upon conversion of $145,000 in
aggregate principal amount of indebtedness.
In September 1995, the Company issued warrants to purchase an aggregate
of 85,500 shares to Messrs. Sandler (D) and Harrington (C) for consulting
services rendered.
In November 1995, the Company issued warrants to purchase an aggregate
of 15,000 shares of Common Stock to Hratch Azadian (E), Don Evans (E) and
Vincent Rodricks (E) at an exercise price of $2.25 per share in connection with
services rendered prior to and in connection with their termination with the
Company.
In December 1995, the Company issued warrants to purchase an aggregate
of 10,000 shares of Common Stock to Dougal Cameron (N), Robert Knauss (D), the
Gregory Family Partnership (D), James Goodchild (O) and Juris Padegs (D) at an
exercise price of $1.00 per share in connection with loans made to the Company
in the aggregate principal amount of $100,000.
In December 1995, the Company issued options to purchase an aggregate
of 213,000 shares of Common Stock to the Gregory Family Partnership (D), Homi
Davier (D), Juris Padegs (D), Ted Reynolds (D), Morris Sandler (D), Dan Solon
(E), Jo Ann Johnson (O), Mehelli Behrana (E), Diana Arnett (E), Don Janacek (E)
and Jean Wilson (E) at an exercise price of $1.375 per share for services
rendered.
In January 1996, the Company issued 21,202 shares of Common Stock to
Wall Street Financial Corporation (C) for consulting services rendered.
In February and March 1996, the Company issued an aggregate of 50
shares of Series B Convertible Preferred Stock to a group of unaffiliated
private placement investors for an aggregate amount of $1,250,000. This offering
was conducted pursuant to Regulation S. In connection with this offering, the
Company paid commissions of $156,250 and issued warrants to purchase an
aggregate of 78,125 shares to Regal International Capital, Inc. (N), Wheaton
Partners (N) and Perseus Holdings, Ltd. (N), the placement agents, at an
exercise price of $2.40 per share, which warrants expire in March 2001.
II-5
In April 1996, the Company issued a Convertible Note to Eureka
Communications, Inc. (N) in connection with a loan to the Company in the
original principal amount of $250,000.
Unless otherwise indicated above, the issuance of securities was exempt
from registration under the Securities Act under Section 4(2) as a transaction
by an issuer not involving any public offering. In each instance, the purchaser
had a pre-existing relationship with the Company, the offers and sales were made
without public solicitation, the certificates bear restrictive legends, and
appropriate stop-transfer orders have been given to the transfer agent. No
underwriter was involved in the transactions and no commissions were paid.
ITEM 27. EXHIBITS
The following exhibits are filed as part of this Registration
Statement:
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
2.1(2)- Plan and Agreement of Recapitalization
3.1(a)(2)- Restated Articles of Incorporation
3.1(b)(2)- Amended Articles of Incorporation
3.1(c)(2)- Articles of Correction
3.2(2)- Bylaws
3.3(2)- Statement of Resolution Establishing and Designating a Series
of Shares of the Company, Series A Cumulative Preferred Stock,
$10.00 par value
3.4(5)- Certificate of Elimination of Shares Designated as Series A
Cumulative Preferred Stock
3.5(5)- Certificate of the Designation, Preference, Rights and
Limitations of Convertible Redeemable Series A Preferred
Stock
4.1(2)- Common Stock Specimen
5.1(1)- Opinion Regarding Legality
10.1(2)- Form of August 1993 through January 1994 Loan Documents
10.2(2)- Form of August 1993 through January 1994 Common Stock Warrants
10.3(4)- 1992 Equity Incentive Plan, as amended
10.4(2)- Employment Agreement between the Company and Robert L. Knauss
10.5(2)- Employment Agreement between the Company and Homi M. Davier
10.6(2)- Employment Agreement between the Company and Michael Pemberton
10.7(2)- Baltic International Airlines Joint Venture Limited
Liability Company Agreement between the Latvian Civil
Aviation Board and the Company
10.8(2)- Protocol No. 1 dated July 1991
10.9(2)- Protocol No. 4 dated May 9, 1992
10.10(2)- Protocol No. 5 dated July 21, 1992
10.11(2)- Protocol No. 6 dated February 5, 1993
10.12(2)- Settlement Agreement between the Company and Latvian Airlines
and Ministry of Transportation of the Republic of Latvia
10.13(2)- Partnership Agreement of Baltic World Air Freight between the
Company and T.G. Shown & Associates, Inc.
10.14(2)- Baltic Catering Limited Liability Company Agreement between the
Company and ARVO, Ltd.
10.15(2)- Assignment to the Company from Baltic World Holdings, Ltd.
10.16(2)- Baltic Travel Services Joint Venture Agreement between the
Company and Chapman Freeborn GmbH
10.17(2)- Agreement of Representation between the Latvian Civil Aviation
Department and the Company
10.18(2)- DC9 Lease Agreement
II-6
10.19(2)- Letter of Intent between the Company and Northwest Airlines
10.20(2)- Facilities Lease Agreement
10.21(2)- Management Services Agreement between the Company and Baltic
International Airlines
10.22(2)- Memorandum of Understanding between the Company and the
Department of Air Transport of the Republic of Georgia
10.23(2)- Maintenance Training Services Agreement
10.24(2)- Bank Settlement Plan Agreement
10.25(2)- Letter of Intent regarding lease of Boeing aircraft
10.26(2)- Extension Agreement regarding lease of Boeing aircraft
10.27(3)- Lease Agreement for Boeing aircraft
10.28(3)- Amendment to Lease of Boeing aircraft
10.29(3)- Baltic Aerospace Interiors Letter of Intent
10.30(3)- BIUSA/SAS Letter of Intent
10.31(3)- Lithuania/Northwest Airlines/BIUSA Letter of Intent
10.32(3)- Assignment Agreement between Baltic World Holdings, Ltd. and
the Company
10.33(3)- Acquisition Agreement with T.G. Shown & Associates, Inc.
10.34(3)- Memorandum of Understanding between the Company, BIA and SAS
10.35(3)- Loan Agreement with Charter Bank
10.36(7)- Air Baltic Joint Venture Agreement
10.37(10)- Wet Lease Agreement with Air Baltic
10.38(10)- Articles of Incorporation of LAMCO
10.39(10)- Memorandum of Understanding with TopFlight
10.40(10)- Amendment to Air Baltic Joint Venture Agreement
10.41(8)- Share Purchase Agreement with SAS
10.42(9)- Airo Catering Services Joint Venture Agreement
10.43(9)- Riga Catering Services Shareholders' Agreement
10.44(11)- Amendment to Articles of Incorporation of LAMCO
10.45(11) Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred Stock,
as amended
11.1(1)- Computation of Per Share Earnings
16.1(6)- Letter on Change in Certifying Accountant
23.1(1)- Consent of Counsel (included in Exhibit 5.1)
23.2(1)- Consent of BDO Seidman, LLP
23.3(1)- Consent of Price Waterhouse LLP
- ---------------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 33-90030), and incorporated herein by reference
thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1995, and incorporated
herein by reference thereto.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated July 14, 1995, and incorporated herein by reference thereto.
(7) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 29, 1995, and incorporated herein by reference
thereto.
II-7
(8) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 10, 1996, and incorporated herein by reference
thereto.
(9) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), and incorporated herein by reference
thereto.
(11) Previously filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form SB-2 (No. 333-860), and incorporated
herein by reference thereto.
ITEM 28. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales
are being made, a post-effective amendment to this
registration statement:
i. To include any prospectus required by
Section 10(a)(3) of the Securities Act
of 1933;
ii. To reflect in the prospectus any facts or
events arising after the effective date of
the registration statement (or the most
recent post-effective amendment thereof)
which, individually or in the aggregate,
represent a fundamental change in the
information set forth in the registration
statement; and
iii. To include any additional or changed
material information with respect to the
plan of distribution.
(2) That, for the purpose of determining any liability
under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a
new registration statement relating to the
securities offered therein, and the offering of
such securities at that time shall be deemed to be
the initial BONA FIDE offering thereof.
(3) To remove from registration by means of a
post-effective amendment any of the securities
being registered which remain unsold at the
termination of the offering.
(4) That, for the purpose of determining liability
under the Securities Act of 1933, the information
omitted from the form of prospectus filed as part
of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1)
or (4), or 497(h) under the Securities Act of 1933
shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Houston, State of Texas, on the 4th day of June,
1996.
BALTIC INTERNATIONAL USA, INC.
By /s/ ROBERT L. KNAUSS
ROBERT L. KNAUSS,
Chairman of the Board and
Chief Executive Officer
----------------------------
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
SIGNATURE TITLE DATE
- --------- ----- ----
/s/ ROBERT L. KNAUSS Chairman of the Board and Chief June 4, 1996
ROBERT L. KNAUSS Executive Officer (Principal
Executive Officer)
/s/ JAMES W. GOODCHILD Chief Operating and Financial Officer June 4, 1996
JAMES W. GOODCHILD (Principal Financial and Accounting
Officer)
/s/ HOMI M. DAVIER Director June 4 1996
HOMI M. DAVIER
/s/ PAUL R. GREGORY Director June 4, 1996
PAUL R. GREGORY
/s/JURIS PADEGS Director June 4, 1996
JURIS PADEGS
/s/ TED REYNOLDS Director June 4, 1996
TED REYNOLDS
/s/ MORRIS SANDLER Director June 4, 1996
MORRIS SANDLER
II-9
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION SEQUENTIALLY NUMBERED PAGES
- ----------- ----------- ---------------------------
2.1(2)- Plan and Agreement of Recapitalization
3.1(a)(2)- Restated Articles of Incorporation..............................................
3.1(b)(2)- Amended Articles of Incorporation...............................................
3.1(c)(2)- Articles of Correction..........................................................
3.2(2)- Bylaws..........................................................................
3.3(2)- Statement of Resolution Establishing and Designating a Series
of Shares of the Company, Series A Cumulative Preferred Stock,
$10.00 par value................................................................
3.4(5)- Certificate of Elimination of Shares Designated as Series A
Cumulative Preferred Stock......................................................
3.5(5)- Certificate of the Designation, Preference, Rights and Limitations
of Convertible Redeemable Series A Preferred Stock..............................
4.1(2)- Common Stock Specimen...........................................................
5.1(1)- Opinion Regarding Legality......................................................
10.1(2)- Form of August 1993 through January 1994 Loan Documents.........................
10.2(2)- Form of August 1993 through January 1994 Common Stock Warrants..................
10.3(4)- 1992 Equity Incentive Plan, as amended..........................................
10.4(2)- Employment Agreement between the Company and Robert L. Knauss...................
10.5(2)- Employment Agreement between the Company and Homi M. Davier.....................
10.6(2)- Employment Agreement between the Company and Michael Pemberton..................
10.7(2)- Baltic International Airlines Joint Venture Limited Liability
Company Agreement between the Latvian Civil Aviation Board
and the Company.................................................................
10.8(2)- Protocol No. 1 dated July 1991..................................................
10.9(2)- Protocol No. 4 dated May 9, 1992................................................
10.10(2)- Protocol No. 5 dated July 21, 1992..............................................
10.11(2)- Protocol No. 6 dated February 5, 1993...........................................
10.12(2)- Settlement Agreement between the Company and Latvian Airlines
and Ministry of Transportation of the Republic of Latvia........................
10.13(2)- Partnership Agreement of Baltic World Air Freight between
the Company and T.G. Shown & Associates, Inc....................................
10.14(2)- Baltic Catering Limited Liability Company Agreement between
the Company and ARVO, Ltd.......................................................
10.15(2)- Assignment to the Company from Baltic World Holdings, Ltd.......................
10.16(2)- Baltic Travel Services Joint Venture Agreement between
the Company and Chapman Freeborn GmbH...........................................
10.17(2)- Agreement of Representation between the Latvian Civil
Aviation Department and the Company.............................................
10.18(2)- DC9 Lease Agreement.............................................................
10.19(2)- Letter of Intent between the Company and Northwest Airlines.....................
10.20(2)- Facilities Lease Agreement......................................................
10.21(2)- Management Services Agreement between the Company and
Baltic International Airlines...................................................
10.22(2)- Memorandum of Understanding between the Company and the
Department of Air Transport of the Republic of Georgia..........................
10.23(2)- Maintenance Training Services Agreement.........................................
10.24(2)- Bank Settlement Plan Agreement..................................................
10.25(2)- Letter of Intent regarding lease of Boeing aircraft.............................
10.26(2)- Extension Agreement regarding lease of Boeing aircraft..........................
10.27(3)- Lease Agreement for Boeing aircraft.............................................
10.28(3)- Amendment to Lease of Boeing aircraft...........................................
10.29(3)- Baltic Aerospace Interiors Letter of Intent.....................................
10.30(3)- BIUSA/SAS Letter of Intent......................................................
10.31(3)- Lithuania/Northwest Airlines/BIUSA Letter of Intent.............................
10.32(3)- Assignment Agreement between Baltic World Holdings, Ltd.
and the Company.................................................................
10.33(3)- Acquisition Agreement with T.G. Shown & Associates, Inc.........................
10.34(3)- Memorandum of Understanding between the Company, BIA and SAS....................
10.35(3)- Loan Agreement with Charter Bank................................................
10.36(7)- Air Baltic Joint Venture Agreement..............................................
10.37(10)- Wet Lease Agreement with Air Baltic.............................................
10.38(10)- Articles of Incorporation of LAMCO..............................................
10.39(10)- Memorandum of Understanding with TopFlight......................................
10.40(10)- Amendment to Air Baltic Joint Venture Agreement.................................
10.41(8)- Share Purchase Agreement with SAS...............................................
10.42(9)- Airo Catering Services Joint Venture Agreement..................................
10.43(9)- Riga Catering Services Shareholders' Agreement..................................
10.44(11)- Amendment to Articles of Incorporation of LAMCO.................................
10.45(11) Statement of the Designation, Preferences, Rights and Limitations of Series B
Convertible Redeemable Preferred Stock, as amended..............................
11.1(1)- Computation of Per Share Earnings...............................................
16.1(6)- Letter on Change in Certifying Accountant.......................................
23.1(1)- Consent of Counsel (included in Exhibit 5.1)....................................
23.2(1)- Consent of BDO Seidman, LLP ....................................................
23.3(1)- Consent of Price Waterhouse LLP.................................................
- -----------------
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporate herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 33-90030), and incorporated herein by reference
thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1995, and incorporated
herein by reference thereto.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated July 14 1995, and incorporated herein by reference thereto.
(7) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 29, 1995, and incorporated herein by reference
thereto.
(8) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 10, 1996, and incorporated herein by reference
thereto.
(9) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), and incorporated herein by reference
thereto.
(11) Previously filed as an exhibit to the Company's Amendment No. 1 to
Registration Statement on Form SB-2 (No.333-860), and incorporated
herein by reference thereto.