NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF OPERATIONS, GOING CONCERN CONSIDERATIONS
(A) Organization
The Company was incorporated under the laws of the state of New York on
August 24, 1989.
(B) Nature of Operations
The Company was formed to provide commercial, passenger, cargo and mail
air transportation between New York and Russia.
Since inception, the Company's primary activities have been the raising of
capital, obtaining financing and obtaining Route Authority and approval
from the U.S. Department of Transportation. The Company has not yet
commenced revenue producing activities. Accordingly, the Company is
deemed to be a Development Stage Company.
The Company currently maintains office space at J.F. Kennedy Airport, New
York.
(C) Going Concern Considerations
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplates continuation
of the Company as a going concern. However, the Company has sustained sub-
stantial loses during the development stage since its inception and has an
accumulated deficit at June 30, 1997 and December 31, 1996 of $6,288,016
and $6,244,370, respectively.
The Company's ability to continue as a going concern is dependent on its
ability to raise sufficient capital and/or obtain sufficient financing, to
be used for the commencement of operations.
If the Company is unable to raise sufficient capital and/or obtain
sufficient financing such as described in Note 6 (E), Proposed Public
Offering, it is doubtful that it will be able to commence scheduled air
line service and thus, generate operating revenues, which in management's
judgement, shall be adequate to fund all current expenses and retire
current outstanding debt.
As of June 30, 1997 the Company has not yet commenced its scheduled air
line service.
2. ACCOUNTING POLICIES
(A) Cash and Equivalents
The Company considers cash and cash equivalents to be all short-term
investments which have an initial maturity of three months or less.
(B) Prepaid Expense
On June 23, 1997 the Company entered into an agreement with Kent Trading,
Inc., a media placement company whereby, the Company exchanged 65,000 common
F-9
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Continued)
(B) Prepaid Expense (Continued)
stock shares for future media placements in various international and
national media publications, with a current value of $396,090 as based on
the related publications 1997 advertising rates. Kent Trading, Inc. may
terminate the Agreement if the closing of the proposed Public Offering has
not occurred prior to December 31, 1997.
At June 30, 1997, the Company has recorded a prepaid asset in the amount
of $396,090, the current value of the future media placements. At such time
as the Company utilizes the media placements, the Company will charge of
the related costs to expense.
(C) Property & Equipment
The cost of property and equipment is depreciated over the estimated use-
ful lives of the related assets. Leasehold improvements are depreciated
over the lesser of the term of the related lease or the estimated lives of
the assets. Depreciation is computed on the straight line method for
financial reporting purposes and modified accelerated recovery method for
tax purposes.
(D) Start-up Activities
On July 5, 1990, the Company filed and application for a Certificate of
Authority to engage in foreign scheduled air transportation between New York
and St. Petersburg, Russia.
On March 28, 1991, the U.S. Department of Transportation granted to the
Company an exclusive Route Authority to fly between New York and Russia.
The Order found the company to be fit, willing and able to conduct scheduled
passenger service. However, the Order stipulated that if scheduled passen-
ger service did not commence within one year from the date of the Fitness
determination, March 28, 1991, the Route Authority would be revoked.
On September 20, 1991, the U.S. Department of Transportation granted the
Company an extension of time to commence operations, through April 1, 1992.
On April 14, 1992, the U.S. Department of Transportation granted a further
extension of time to commence operations, through August 31, 1992.
On April 8, 1993, the Company again requested an extension of time to
commence operations however, the U.S. Department of Transportation denied
the request.
On August 14, 1995, the Company re-filed its application with the U.S.
Department of Transportation for the Certificate of Route Authority.
On January 22, 1996, the U.S. Department of Transportation issued an Order
of Show Cause, whereby, they tentatively concluded that the Company is fit,
willing and able to provide scheduled air transportation between New York
and Russia and, should be issued a Certificate of Public Convenience and
Necessity authorizing such operations.
F-10
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
2. ACCOUNTING POLICIES (Continued)
(D) Start-up Activities (Continued)
On February 26, 1996, the U.S. Department of Transportation issued a Final
Order thereby, authorizing the Company to engage in foreign scheduled air
transportation between New York and St. Petersburg, Russia.
On February 6, 1997, the U.S. Department of Transportation granted the
Company an extension of time to commence operations, through August 7, 1997.
On July 24, 1997, the Company applied for an additional six (6) month
extension of time to commence operations, through February 7, 1998.
Obtaining Federal Aviation Administration air carrier certification and
meeting Department of Transportation financial requirements are prerequi-
sites to the Company's commencement of revenue service.
Costs associated with the development and approval of the authorized route,
such as legal and consulting fees, have been written off in the period in
which the expense was incurred.
(E) Income Taxes
Deferred income taxes arise from temporary differences between the recording
of assets and/or liabilities reported for financial accounting and tax
purposes in different periods. Deferred taxes are classified as current
or non-current, depending on the classification of the assets and liabil-
ities to which they relate. Deferred taxes arising from temporary differ-
ences that are not related to an asset or liability are classified as
current or non-current depending on the periods in which the temporary
differences are expected to reverse. To the extent the total of deferred
tax assets are not realized, a reserve is established.
(F) Accounting Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual amounts could differ from those
estimates.
(G) Fair Value of Financial Instruments
The Company considers the carrying value of its financial instruments (cash
and liabilities) to approximate their fair value.
3. RELATED PARTY TRANSACTIONS
The Company's legal counsel, Steffanie Lewis, of the International Business
Law Firm, P.C. owns 380,000 shares of common stock at June 30, 1997 and
80,000 shares of common stock at December 31, 1996 or approximately 7.78%
and 1.84%, respectively, of the Company's issued and outstanding common stock.
The 300,000
F-11
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
3. RELATED PARTY TRANSACTIONS (Continued)
shares were issued in June 1997 in exchange for legal work performed in
connection with various certifications, authorities and financial matters.
The 80,000 shares were issued in exchange for the first six months preparation
of the 1990 application to the Department of Transportation for Air Line
Fitness Certification.
For the period beginning January 1990 through December 31, 1996, the total
legal costs incurred in the amount of $1,757,262 were for legal work performed
by Steffanie Lewis for the Company in connection with various certifications,
authorities and financial matters.
Legal costs incurred and charged to professional fees for the (Unaudited)
six months ended June 30, 1997, 1996 and years ended December 31, 1996, and
1995 total $0, $0, $2,100, $234,543, respectively.
At June 30, 1997 and December 31, 1996 the account payable to this shareholder
totals $0 and $1,628,432, respectively.
On June 30, 1997, Steffanie Lewis was issued 300,000 common shares at par, in
exchange for the total due to her, in the amount of $1,628,432.
Legal costs associated with the proposed Public Offering, as described in Note
6 (D) totaling $150,000 are only payable in the event of a successful offering
and shall be charged against the Offering proceeds.
Additionally, other current accounts payable to shareholders at June 30, 1997
(Unaudited) and December 31, 1996, total $65,317 and $176,012, respectively.
On June 23, 1997, Airline Economics International, Inc., a shareholder, was
issued 20,000 common shares at par, in exchange for the total due them, in the
amount of $110,695.
Other liabilities to shareholders at June 30, 1997 (Unaudited) and December 31,
1996, total $0 and $22,142, respectively.
On June 23, 1997, Igor Dmitrowsky, President of the Company and a shareholder,
relinquished the amount due to him totaling $22,142. Accordingly, the Company
has recorded Contributed Capital in the amount of $22,142.
4. NOTES PAYABLE - STOCKHOLDERS
In 1992 the Company issued Promissory Notes to certain shareholders in exchange
for 1,048,000. The Notes were due on demand and all interest was payable upon
principal repayment, at an annual rate of six and one half percent (6 1/5%),
from the date of issuance to the date of repayment.
On June 24, 1997 certain shareholders were issued 150,000 common shares at par,
in exchange for the total due them, in the amount of $1,369,168, inclusive of
principal of $1,048,000 and accrued interest of $321,168.
Interest expense related to the above incurred for the (Unaudited) six months
ended June 30, 1997 and year ended December 31, 1996, totaled $0 and $68,120,
respectively.
F-12
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
4. NOTES PAYABLE - STOCKHOLDERS (Continued)
At June 30, 1997 (Unaudited) and December 31, 1996, interest expense related
to the above incurred since inception totals $321,168, $321,168, respectively.
In 1996 the Company borrowed net $125,776 from certain shareholders. The net
borrowings are non-interest bearing and are due on demand.
In 1995 the Company issued a short-term Promissory Note to a certain
shareholder in exchange for $50,000. The Company issued to this shareholder,
25,000 shares of common stock as a non-refundable prepayment of interest from
the date of the loan through repayment of the loan.
For the year ended December 31, 1995, the Company charged $63,500 to interest
expense for the shares issued in connection with the non-refundable interest
prepayment, based on an average price per share of $2.54.
5. INCOME TAXES
At December 31, 1996, the Company has a net operating loss carryforward of
$4,929,707, which is available to offset future taxable income. The carry-
forwards expire between the year 2005 and 2012. The Company is still liable
for certain minimum state taxes.
As of December 31, 1996, a net deferred tax benefit has not been reflected to
temporary differences between the amount of assets and liabilities recorded for
financial reporting and income tax purposes due to the establishment of a 100%
valuation allowance relating to the uncertainty of recoverability.
6. STOCKHOLDERS' DEFICIT
(A) Stock Options
In 1992, the Company granted options to purchase 104,600 shares of common
stock, at $33.33 per share, to certain private investors. These options
expire upon the passing of thirty full calendar months after the Company
has made a public sale of securities in compliance with the Securities
Act of 1933, as amended, or the passing of twenty years from the date of
said agreements, whichever is earlier. As of June 30, 1997, no options
have been exercised.
In July 1997, the Company granted options to purchase 800,000 shares of
common stock, at $6.125 per share, to certain of its management. These
options are exercisable for a four-year period commencing one year from
the closing of the Company's public offering.
As of June 30, 1997, no options have been exercised.
(B) Retirement of Stock
On November 4, 1992, the Company issued 25,000 shares of stock for $500,000
to a private investor. On November 24, 1992, these shares were repurchased
for the same amount from the investor and subsequently retired.
(C) Reverse Stock Split
On August 24, 1995, the Board of Directors authorized and the majority of
the current shareholders ratified a ten for one reverse stock split of the
Company's $.0001 par value common stock. All references in the accompanying
financial statements to the number of common shares issued have been
restated to reflect the reverse stock split.
F-13
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. STOCKHOLDERS' DEFICIT (Continued)
(D) Proposed Public Offering
In 1996 the Company had engaged an underwriter to underwrite the Company's
Initial Public Offering on a best-efforts basis. The Offering did not raise
the required minimum of $6,000,000 and was withdrawn. Subsequently, the
Company received an offer from Global Equities Group, Inc. to underwrite
the Company's proposed Public Offering on a firm-commitment basis.
On June 3, 1997, the Company entered into an agreement with Global Equities
Group,Inc. to act as the Managing Underwriter in connection with a proposed
firm-commitment Public Offering of securities and plans to file an
amended registration statement with the Securities Exchange Commission,
as is described in Note 7 (A) (2).
The Company intends to offer for sale 1,000,000 shares of common stock of
$.0001 par value, at a price of $6.125 per share and 3,000,000 Redeemable
Common Stock Purchase Warrants at $.125 per Warrant.
Each Warrant entitles the holder to purchase one Share for $6.50 during the
four-year period commencing one year from the date of the proposed Public
Offering. The Company may redeem outstanding Warrants, once they become
exercisable at a price of $.125 per Warrant on not less then 30 days
written notice, provided the closing bid quotations of the Shares have
exceeded $10 for 20 consecutive trading days ending on the third day prior
to the date on which notice is given.
The Agreement with the Underwriter sets forth the following terms and
conditions in relation to the Company's currently issued and outstanding
common stock;
(1) The Company maintains that on the effective date of the proposed Public
Offering, the common stock issued and outstanding shall not exceed
4,885,000 common shares.
(2) The Company will not issue or register with the Securities and exchange
Commission any additional common stock, options, warrants or conver-
tible securities for a period of twenty-four (24) consecutive months
after the closing date of the proposed Public Offering without the
consent of the Managing Underwriter.
(3) Holders of at minimum, ninety-five percent (95%) of the issued and out-
standing common stock, warrants and any securities convertible in to
common stock prior to the proposed Public Offering, will have a signed
two (2) year Lock-up Agreement on their respective holdings.
(E) Stock Buy-Back Requirements
As of December 31, 1996 the Company was required to buy-back 50,000 shares
$8 per share, from certain current investors, if in the event said
investor wanted to sell his/her common stock within the two(2) year Lock-up
period as referred in Note 6 (D) (3), and was denied such a waiver by the
Managing Underwriter.
F-14
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
6. STOCKHOLDERS' DEFICIT (Continued)
(E) Stock Buy-Back Requirements (Continued)
On June 23, 1997 all current investors with redemption options referred to
above surrendered their redemption options. Accordingly, the Company
recorded Additional Paid-in Capital in the amount of $400,000.
(F) Contributed Capital
The Company has recorded service contributions from certain key officers
who have worked for and on behalf of the Company. The service contribution
amounts have been calculated based on a normal rate of compensation, on
either a full or part time basis, as based on the number of hours worked
by each individual.
The Company maintains no obligation, present or future, to pay or repay for
any and all service contributions received. Accordingly, the Company has
not recorded a liability for, accrued for, and/or accounted for any
monetary reserves in connections with the service contributions.
On June 23, 1997, certain of the Company's management relinquished the
amount due them for back-pay totaling $270,928. Accordingly, the Company
has recorded Contributed Capital in the amount of $270,928.
7. COMMITMENTS AND CONTINGENCIES
(A) Commitments
(1) Lease Obligations
In October, 1995 the Company entered into a lease with Iceland Air,
J.F. Kennedy Airport, New York, to occupy space. The lease term is
on a month to month basis.
Currently, the Company is leasing space from Iceland Air for $1,200 per
month at J.F. Kennedy Airport, New York. Rent expense charged to
operations for the (Unaudited) six months ended June 30, 1997 and 1996
and years ended December 30, 1996 and 1995 totaled $7,200, $7,200,
$13,200 and $3,600, respectively.
In January 1993, the Company leased office space form its President at
his residence. The lease term is on a month to month basis through
December 31, 1997. Rent expense charged to operations for the
(Unaudited) six months ended June 30, 1997 and 1996 and years ended
December 30, 1996 and 1995 totaled $2,287, $2,400, $5,392 and $3,968,
respectively.
(2) Underwriter - Proposed Public Offering
On June 3, 1997, the Company entered into an agreement with Global
Equities Group, Inc. to act as the Managing Underwriter in connection
with a proposed Public Offering of securities.
F-15
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (Continued)
(A) Commitments (Continued)
(2) Underwriter - Proposed Public Offering (Continued)
The Agreement sets forth the following terms and conditions;
(a) The Managing Underwriter shall receive a dealers concession of ten
percent (10%) of the proposed Public Offering price.
(b) The Managing Underwriter shall receive at closing of the proposed
Public Offering a nonaccountable expense allowance of three percent
(3%) of the total offering.
(c) The Managing Underwriter shall receive upon signing the Agreement
an advance on the non-accountable expenses in the amount of $20,000,
which is part of item 2 (B). If the offering is canceled for any
reason, the advance will be applied to cover the Managing Under-
writer's accountable out-of-pocket expenses only.
(d) The Company shall sell to the Managing Underwriter an option to
purchase 100,000 common shares at a price of $8.575 per share and
300,000 Warrants at a price of $.175 per Warrant, at closing of the
proposed Public Offering. The Warrants are exercisable over a
period of four years (4) commencing one year (1) from the date of
the closing of the proposed Public Offering.
(3) Line of Credit
On December 12, 1995, the Company was granted a credit line of
$6,500,000 through January 1998, with a foreign bank. Monies are
available as follows;
(a) When the Company registers a subsidiary in the Republic of
Latvia, pursuant to local applicable regulations and, opens
an account with the bank.
(b) This credit facility cannot be utilized for primary funding of
capital investments.
(c) Terms of the borrowing's will be determined at the borrowing
date. Upon receipt of a written notice furnished by the Company.
Such notice must be received fourteen days (14) in advance of the
requested borrowing date.
(B) Contingencies
(1) Scandinavian Airline Systems
The Company will be liable to Scandinavian Airline Systems (SAS), for
expenses incurred by SAS on behalf of the Company should the Company
eventually purchase an aircraft from SAS.
F-16
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (Continued)
(B) Contingencies (Continued)
(1) Scandinavian Airline Systems (Continued)
In 1992, the Company forwarded a deposit to SAS for the purchase of a
Boeing 767 aircraft. SAS incurred costs totaling $114,000 beyond the
initial deposits for the preparation of the aircraft for the delivery
and subsequent de-modification back to SAS upon the Company's failure
to obtain financing. SAS has agreed to collect these amounts at the
time of any aircraft sale to the Company should such a sale occur.
Should no sale occur, the Company will not be liable to SAS for the
$114,000.
(2) Transaction Management, Inc.
On October 11, 1991, the Company was required by an arbitrator to pay
Transaction Management, Inc. (TMI) an unspecified "finders fee". The
Company refused to pay TMI and on December 1994 filed a motion to
Reconsider, citing 17 substantial errors In Fact, in the prior court's
Order.
On November 2, 1995, the court ordered that the Company's motion for
Reconsideration be denied.
In October 1996 the Federal Court of Appeals of the District of Columbia
reversed the lower courts Order and the case was dismissed.
|
(3) Subscribers' Flight Coupon - Proposed Public Offering
At the closing, the Company will issue Flight Coupons to the subscribers
in its proposed Public Offering. For each 1,500 shares of common stock
purchased, the subscriber receives on Flight Coupon. One Flight Coupon
plus $650 will purchase two (2) Voyager Class round-trip tickets. Two
(2) Flight Coupons plus $650 will purchase two (2) Business Class round-
trip tickets. Three (3) flight Coupons plus $650 will purchase two (2)
First Class round-trip tickets. The Flight coupon in not a security.
An estimate of the value of such a commitment by the Company cannot be
determined at this time. However, upon completion of the proposed
Public Offering, the Company will record deferred revenues and offset
its costs of rasing capital for all Subscribers' Flight Coupons issued.
(4) Compensation
The Board of Directors approves salaries for the Company's executive
officers as well as the Company's overall salary structure. For year
one following the closing of the proposed Public Offering, the rate of
compensation for the Company's executive officers is: (i) President
$186,000, (ii) Vice-President Marketing $82,000, and (iii) Vice-
President Europe $68,000. Pursuant to written agreement, during the
90-day period commencing once the offering proceeds are released to the
Company from the escrow account, the President and the Vice-Presidents
F-17
BALTIA AIR LINES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES (Continued)
(B) Contingencies (Continued)
(4) Compensation (Continued)
will receive compensation reduced to an amount equal to 50% of budgeted
salaries. Upon commencement of flight services 100% of respective budgeted
salaries will be paid. To this date, the Company has paid
officers no salaries, nor otherwise have compensated officers. Board
Directors are not presently compensated and shall receive no compen-
sation prior to commencement of revenue service.
The following table identifies executive compensation to be paid. No
executive salaries have been paid to date and reduced salaries will not
commence until proceeds are available from the proposed Public Offering
closes.
Name Position Salary
Igor Dmitrowsky President $186,000
Brian Glynn Vice-President Marketing 82,000
Andris Rukmanis Vice-President Europe 68,000
|
Inasmuch as the Company does not provide written individual contracts
with its personnel, for clarification purposes, the executives' agree-
ment for the temporarily reduced salaries was documented.
F-18
</AUDIT-REPORT>
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