U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for the Fiscal Year Ended: December 31, 1996
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED] for the transition period from _________ to _________.
Commission File Number: 0-26588
BALTIC INTERNATIONAL USA, INC.
(Name of small business issuer in its charter)
Texas 76-0336843
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1990 Post Oak Boulevard, Suite 1630
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 961-9299
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405
of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [x]
Issuer's revenues for the year ended December 31, 1996 were $1,313,257.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 27, 1997, based upon the last sales price as reported by
Nasdaq, was $2,636,433.
As of March 27, 1997, there were 7,593,586 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 6
Item 6. Management's Discussion and Analysis or Plan of Operation 7
Item 7. Financial Statements 11
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 11
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act 11
Item 10. Executive Compensation 14
Item 11. Security Ownership of Certain Beneficial Owners and Management 15
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 17
SIGNATURES
PART I
Item 1. DESCRIPTION OF BUSINESS
Baltic International USA, Inc. (the "Company" or "BIUSA") is a Texas
corporation organized in 1991 which provides and has provided capital,
management, and technical services to start-up and established private
companies located primarily in the Baltic Republics of Latvia and Lithuania.
In most instances, BIUSA is directly involved in management, and in all
instances, assists in allocation of capital either directly from BIUSA or
through the investment of third parties. BIUSA has not taken significant
profits or management fees from these investments. Rather, the Company
hopes that the value of these investments grows to a point where the
Company's subsidiaries and joint operations become independent through a
separate third party financing or sale to a third party, at which time, the
Company will realize a return on its investment.
The Company's current investments include:
Baltic International USA, Inc.
Airlines Catering Distribution Cargo & Maintenance
airBaltic AIRO Catering American Baltic World Air
Corporation 8% Services 51% Distributing Freight 100%
Baltic Catering Company 100% Baltic Int'l
Services 50% LAMCO 2.6% Airlines 49%
Riga Catering
Services 23.5%
Note: Percentages reflect the Company's ownership interest.
The Company will continue to use its substantial high level contacts to
increase its focus and to form and operate ventures in the Baltic States,
Eastern Europe and the Commonwealth of Independent States ("CIS"). 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. An
opportunity exists for the Company to utilize its expertise to establish
business opportunities to take advantage of existing market conditions.
airBaltic Corporation
In 1992, the Company developed Baltic International Airlines ("BIA") -
the first independent airline in the former Soviet Union. In October 1995,
BIUSA sold the scheduled passenger service operations of its 49% interest in
BIA, to the newly created national airline of Latvia, airBaltic Corporation
SIA("airBaltic"). airBaltic is owned 51.07% by the Republic of Latvia,
28.51% by Scandinavian Airlines System ("SAS"), 8.02% by the Company, 6.2% by
SwedFund International AB and 6.2% by Investeringsfonden. SAS is the operator
of this airline.
From its hub at Riga Airport, airBaltic currently provides regularly
scheduled service to and from Copenhagen, Frankfurt, Geneva, Helsinki, Kiev,
London, Minsk, Riga, Stockholm, Tallinn, Vilnius and Warsaw. Additional
routes, including Moscow and St. Petersburg, are planned for 1997.
airBaltic operates three AVRO RJ70 and one SAAB 340 aircraft. The AVRO
RJ70 has a configuration of 70 seats and the SAAB 340 aircraft has a
configuration of 34 single-class seats.
airBaltic is pursuing a strategy of operating a fleet of low-cost
Western aircraft for expansion of routes to the East from its hub in Riga as
well as expansion into Western Europe. Cockpit, cabin crew and maintenance
personnel have been and are being trained in Western operations. airBaltic
is able to offer passenger service equivalent to service offered by major
Western carriers. All flights provide a multi-course meal to business
passengers as well as a full selection of newspapers and periodicals.
airBaltic has full operational independence on the basis of its own
operating licenses and manuals, all of which meet international aviation
standards and conform to SAS and U.S. Federal Aviation Administration ("FAA")
standards. airBaltic provides routine and scheduled servicing and maintenance
for its aircraft using its own personnel who have been trained by SAS and have
met appropriate certification of the Ministry of Transportation of the Republic
of Latvia.
Management considers the Company's investment in airBaltic to be a
strategic as well as a high-quality financial investment. As an owner in one
of the Baltic States' largest and most modern national airline, the Company is
able to leverage its credibility in the pursuit of other business opportunities
in the region. In addition, the Company serves as the general sales agent in
North America for airBaltic.
AIRO Catering Services
Management has realized that there are a number of business opportunities
presented by in-flight catering due to the lack of international standard
kitchens in airports in Eastern Europe and the Newly Independent States.
Currently, many Western airlines flying into airports in Eastern Europe and the
former Soviet Union back-cater their food, carrying food for both legs of the
trip on board from the originating point which increases food costs and reduces
revenue-producing cargo space. The Company sees an opportunity to operate
kitchens in Eastern European airports that provide meals to both Western and
Eastern European carriers.
In February 1996, the Company formed AIRO Catering Services ("AIRO") with
TOPflight AB ("TOPflight"). TOPflight operates kitchens in Malmo, Gothenburg
and Stockholm, Sweden. In this joint operation, the Company contributed its
management and operational expertise, part of its interest in Riga Catering
Services ("RCS"), market knowledge, knowledge of the regional customer base and
labor force for a 51% interest, while TOPflight contributed its technical
experience in building in-flight kitchens and its partial interest in RCS for a
49% interest. AIRO currently operates RCS in Riga, which was started by BIUSA,
and caters all carriers which serve Riga International Airport including SAS,
Lufthansa and airBaltic.
In March 1997, AIRO finalized a contract to open an in-flight catering
kitchen in Kiev, Ukraine. The contract gives a 20-year lease to AIRO with at
least 5 years exclusivity. This kitchen should be open in fall 1997. AIRO is
in discussion with relevant airport authorities to open additional kitchens in
Minsk, Belarus; Gdansk, Poland; Krakow, Poland and Tallinn, Estonia by the end
of 1997.
AIRO is being developed as an independent, stand-alone company.
Riga Catering Services
On April 2, 1996, the catering operations of Baltic Catering Services
("BCS") were acquired by RCS, previously owned by TOPflight, in exchange for
shares in RCS. RCS is currently owned 35% by AIRO, 23.5% by the Company and
41.5% by the principals of the Company's partner in BCS.
Baltic Catering Services
The business of BCS after the transfer of the catering business to RCS
is primarily the operation of the restaurant in the Riga Airport. BCS is
currently owned 50% by the Company and 50% by ARVO, Ltd., a Latvian limited
liability company.
American Distributing Company
American Distributing Company ("ADC") is currently a wholly owned
subsidiary of BIUSA. It distributes Millerr, Bartles & Jaymesr, Gulf Pacific
Rice and various staple food products in the Baltic States. ADC commenced
operations in December 1995 as a successor to the Company's distribution
activities which began in 1993. The Company has a distribution system, offices
and a 9-person staff in Riga, Latvia. ADC is currently negotiating for the
distribution rights of other food products, has opened a new office in Vilnius,
Lithuania and has plans to open an office in Tallinn, Estonia.
Baltic World Air Freight
Through its wholly owned subsidiary Baltic World Air Freight ("BWAF"),
BIUSA is positioned to take advantage of the growth of air and intermodal
transportation in the Baltic States. The Company is seeking to expand its
cargo marketing and sales operations and has renegotiated its cargo marketing
and sales agency agreement with airBaltic to allow BWAF to accept agency
agreements with other airlines at Riga Airport and to open offices at other
airports in Lithuania and Ukraine. Currently, BWAF has cargo marketing
agreements with Hamburg Airlines, airBaltic and Austrian Airlines.
Baltic International Airlines
The Company currently owns a 49% interest in BIA. BIA currently has no
substantive operations. The Company believes that maintaining BIA's airline
certification and maintaining the goodwill of BIA's debtors and creditors is
beneficial to BIUSA.
LAMCO
The Company has a 2.6% interest in Lithuanian Aircraft Maintenance
Corporation ("LAMCO"), which was formed as a venture with the Lithuanian
government. The long-term plan of the Company is to develop an aircraft
maintenance base in Siauliai, Lithuania. BIUSA has the opportunity to increase
its share interest to 50%. LAMCO will continue to be in a development phase in
1997, and no significant revenues are expected.
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
operations. 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 airBaltic, is deemed to be a
preferential industry, entitling it to a three-year profit tax holiday
beginning the first year in which it generates profits and a 50% reduction
in profit taxes for the following two years. To date, airBaltic and BIA
have not generated any profits in any year.
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 its subsidiaries and joint operations resulting from
their respective business operations.
Political, Economic and Social Climate of Destination Countries
The Company's subsidiaries and joint operations intend to expand
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 future operations and expansion efforts.
Competition
The Company's business ventures face competition from other companies
and individuals who have also recognized the Baltic States and Newly
Independent States as a developing market. airBaltic, 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 businesses that the Company currently operates, or may
operate in the future, presently compete and will compete with other
entities, many of which may have greater financial, marketing and technical
resources.
Employees
The Company currently employs 6 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. airBaltic currently employs approximately 200
persons on a full time basis, including pilots, mechanics, cabin crews,
airport services and administrative personnel. BIA currently employs one
person, AIRO employs one person, RCS employs an aggregate of approximately
60 persons, BCS employs 26 persons, BWAF employs 3 persons and ADC employs 9
persons. None of the employees of the Company and its subsidiaries and
joint operations are represented by a labor organization. The Company
believes its relationships with all of these employees are satisfactory.
Item 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,500 square feet of office space in
Houston, Texas for a monthly rental of approximately $3,000. airBaltic,
BWAF, ADC, BCS and RCS each lease office space at Riga International
Airport. AIRO leases space in Stockholm, Sweden. The Company believes that
its facilities are adequate for its current operations. The facilities of
the Company's other business ventures are satisfactory for current purposes.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq SmallCap Market
under the symbol "BISA." Public trading of units (consisting of one share
of Common Stock and one warrant) ("Units") on Nasdaq commenced on April 28,
1994. The Units became separable and public trading of the Common Stock on
Nasdaq commenced on June 27, 1994. The following table sets forth the high
and low sales prices of the Common Stock for the periods indicated:
1996 1995
High Low High Low
First Quarter 2.875 1.000 2.375 1.250
Second Quarter 2.750 0.813 2.000 0.688
Third Quarter 1.156 0.563 3.625 1.313
Fourth Quarter 1.188 0.344 3.500 0.938
On March 27, 1997, the last sales price for the Common Stock was
$0.5625, and the Company believes there were approximately 1,100 beneficial
holders of its Common Stock.
The Company has not paid, and 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.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion should be read in conjunction with the
financial statements and notes thereto included elsewhere herein.
General
In 1996, the Company continued its strategy of making investments in
businesses in the Baltic States and further developing its existing
activities in such region.
In January 1996, the Company sold its 12% holding of airBaltic stock
to SAS for $1.7 million in cash and the assumption by SAS of the remaining
subordinated debt obligation of the Company to airBaltic. The Company
retains an 8.02% interest in airBaltic.
In February 1996, the Company and Topflight AG contributed their
interests in Riga Catering Services to form AIRO Catering Services in
exchange for a 51% interest and 49% interest respectively in AIRO. AIRO was
formed to build and acquire catering kitchens in Eastern Europe and the
former Soviet Union.
In April 1996, RCS acquired the catering operations of Baltic Catering
Services, which is 50% owned by the Company, in exchange for shares in RCS.
The Company's revenues have historically been derived from its equity
in the net income of its joint operations; 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. As a result of the transfer of the
scheduled passenger service operations of BIA to airBaltic in 1995, the
Company has not earned any revenue for management fees and commissions from
BIA in 1996. A significant portion of the operational activities of the
Company are reflected in the fees from, and the net equity in earnings and
losses of, joint operation investments, as the Company uses the equity method
to record its interest in its joint operations owned 50% or less or greater
than 50% owned companies in which the Company does not have control. The
Company's losses relating to joint operation activities were $114,821 for
1996 and $3,071,222 for 1995.
The Company's internally generated cash flows from operations have
historically been and continue to be insufficient to meet its capital
requirements and other liquidity needs. The Company continues to rely on
external financing to supplement funds generated from its operations. 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, 1997. See discussion of the
Company's financing plans in "-Liquidity and Capital Resources." However,
there can be no assurance the Company will be successful in its efforts to
raise additional financing. If not successful, the Company may be forced
to curtail operations or sell assets. The Company's earnings history as
well as liquidity have been adversely affected by the advances to BIA to
fund BIA's operations. The Company does not anticipate any further advances
to BIA which would adversely impact earnings. However, there can be no
assurances that the Company, as a whole, will not continue to experience
liquidity difficulties or losses. The Company's current and prior independent
accountants have qualified their opinions with respect to the Company's
financial statements for the years ended December 31, 1996 and 1995,
respectively, to reflect that incurred losses from operations and the
Company's financial condition raise substantial doubt about the ability of
the Company to continue as a going concern.
Current Latvian law does not restrict the repatriation of cash to
foreign participants in joint operations 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 joint
operations 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 Latvian Lat and the United States
dollar.
Results of Operations
Years Ended December 31, 1996 and 1995. Revenues for 1996 decreased
by $3,214,038, or 71%, to $1,313,257 compared to $4,527,295 for 1995. This
decrease is principally due to the Company's receipt in 1995 of a
non-recurring fee of $1,500,000 collected from airBaltic 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 airBaltic
in 1995. Also, because of the sale of the scheduled passenger service
operations of BIA in October 1995, payments made to the Company from BIA for
aircraft rental income, commissions received on the sale of airline tickets,
and freight revenue were not received by the Company in 1996. These decreases
were partially offset by an increase in the Company's earnings from its
investment in joint operations and food distribution revenues.
Operating expenses decreased 59% to $2,812,962 for 1996 compared to
$6,805,079 for 1995. This decrease was due to a decrease in costs related
to aircraft rental, freight, personnel and consulting, legal and
professional, general and administrative expenses and net equity in losses
of BIA partially offset by an increase in food distribution costs. The
decrease in general and administrative expenses was due primarily to the
reserve of the Latvian Airlines investment of $468,950 in 1995. The
decrease in rental expense resulted from the return of two Boeing 727
aircraft to the owner in 1996 which were leased during 1995.
Interest expense decreased by $65,471 or 33% to $132,034 for 1996 from
$197,505 in 1995 due to the conversion of $1,288,137 of notes payable to
equity during the second and third quarters of 1995.
Interest income decreased to $3,800 for 1996 from $195,415 for 1995.
This decrease is due primarily to interest paid by BIA on outstanding debt
to the Company in 1995 with no such interest in 1996.
On January 10, 1996, the Company sold 12% of its airBaltic stock to
SAS for $1.7 million in cash and the assumption by SAS of the Company's
future debt funding obligation to airBaltic of $2,175,000. SAS assumed and
funded the Company's share of the subordinated debt after agreement of the
terms of the share purchase were reached in January 1996. The Company
retains an 8.02% interest in airBaltic. A gain of $297,000 was recognized
on this sale.
The Company had a net loss of $1,172,536 for 1996 compared to a net
loss of $2,127,624 for 1995. The decrease in net loss is due primarily to
the decrease in the Company's net equity in losses of BIA.
The Company's consolidated financial statements included elsewhere
herein present the Company's share of the joint operations other than
airBaltic using the equity method of accounting in accordance with
generally accepted accounting principles. The Company's interests in
airBaltic, BIA and LAMCO are accounted for using the cost method. The
following table presents a pro forma condensed combined statement of
operations of the Company assuming its proportionate share of the joint
operations accounted for using the equity method is combined with the
Company. Management believes this presentation is informative of the
Company's results of operations given that a significant portion of the
Company's business is conducted through the joint operations.
<TABLE>
<CAPTION>
Pro forma Condensed Combined Statement of Operations
For the Year Ended December 31, 1996
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
<S> <C> <C> <C> <C>
Operating revenues $ 1,331,257 $ 1,240,176 $ (420,467) $ 2,132,966
Operating expenses 2,812,962 758,173 - 3,571,135
Income (loss) from operations (1,499,705) 482,003 (420,467) (1,438,169)
Other income (expense) 266,856 14,471 - 281,327
Income (loss) before
income taxes (1,232,849) 420,467 (420,467) (1,156,842)
Provision for income taxes (15,694) (76,007) - (91,701)
Net income (loss) $(1,248,543) $ 420,467 $ (420,467) $(1,248,543)
</TABLE>
Liquidity and Capital Resources
At December 31, 1996 the Company had a working capital deficit of
$2,300,157 compared to a working capital deficit of $2,129,236 at
December 31, 1995. The increase in working capital deficit is due primarily
to increased borrowings to finance the Company's capital contribution to
airBaltic during 1996. The Company had stockholders' equity of $1,636,899
at December 31, 1996.
Net cash used by operating activities was $2,082,722 for 1996,
compared to net cash provided by operating activities of $2,531,097 for
1995. The decrease in cash provided by operating activities in 1996 was
primarily due to the non-recurring fee of $1,500,000 received from airBaltic
in payment of training of Latvian pilots, flight attendants and mechanics in
1995 and the non-recurring $1,500,000 wet lease payment from airBaltic in
1995. Net cash used by investing activities was $834,100 for 1996, compared
to $5,825,258 for 1995. The decrease in cash used by investing activities
was attributable to the decrease in advances made to BIA and the proceeds of
$1,700,000 from the sale of 12% of airBaltic to SAS. Net cash provided by
financing activities was $3,161,827 for the 1996, compared to $3,338,134 for
1995.
The Company's consolidated balance sheet included elsewhere herein
presents the Company's share of the joint operations using the equity
method of accounting in accordance with generally accepted accounting
principles. The Company's interests in airBaltic, BIA and LAMCO are
accounted for using the cost method. The following table presents a pro
forma condensed combined balance sheet of the Company assuming its
proportionate share of the joint operations accounted for using the equity
method is combined with the Company. Management believes this presentation
is informative of the Company's financial condition since the majority of
the Company's underlying investment in its joint operations consists of net
current assets.
Pro forma Condensed Combined Balance Sheet
As of December 31, 1996
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
Current assets $ 642,158 $ 280,542 $ - $ 922,700
Investments in and
advances to joint
operations 3,446,775 - (301,950) 3,144,825
Property and other
assets, net 490,281 239,118 - 729,399
Total assets $4,579,214 $ 519,660 $(301,950) $4,796,924
Current liabilities $2,942,315 $ 234,704 $ (16,994) $3,160,025
Other liabilities - 80,856 (80,856) -
Stockholders' and
partners' equity 1,636,899 204,100 (204,100) 1,636,899
Total liabilities and
equity $4,579,214 $ 519,660 $(301,950) $4,796,924
The Company has financed its growth primarily from the issuance of
stock and borrowings. During 1996 and 1995, the Company borrowed an
aggregate principal amount of $2,510,000 and $2,136,000, respectively,
including deferred lease credits, bridge financing and bank debt. The
majority of the borrowings for 1996 consists of a loan in the amount of
$2,000,000 that the Company entered into in November 1996. This loan is
due in November 1997 and is secured by an option agreement that the Company
entered into with SAS during 1996 in which the Company has the right to put
the shares that it owns of airBaltic to SAS for $1,759,050 during the period
from June 1, 1997 to August 31, 1998. Under this option agreement, SAS has
the right to call the Company's airBaltic shares for a price ranging from
$3,103,750 to $4,862,800 during the same period. Management believes that
it will be successful in its efforts to refinance the $2,000,000 loan.
Should the Company be unable to refinance this note, it will exercise its
right to put its shares to SAS and use the proceeds to partially repay this
loan. During 1996 and 1995, the Company issued 169,149 and 2,693,841 shares
of Common Stock, respectively, for proceeds of an aggregate of $93,537 and
$2,660,943, respectively, pursuant to private sales and the exercise of
outstanding stock options. Additionally in 1996, the Company issued 410,929
shares of common stock for payment of accounts payable of $401,001. In
February and March 1996, the Company issued 50 shares of Series B
Convertible Redeemable Preferred Stock for net proceeds of $1,090,200.
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. In 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.
The Company will likely be required to seek external financing to meet
its goals with respect to AIRO. The Company has engaged Rauscher Pierce &
Clark as its investment banker in an effort to raise an additional equity
financing of up to $2.5 million on a best efforts basis at market rates
with a warrant priced at a premium to the current market price. Management
believes that, if the financing is completed, the Company will be able to
achieve a satisfactory level of liquidity to meets its business plan and
capital needs for the next twelve months. The Company anticipates that its
capital requirements with respect to AIRO over the next 12 months will be
approximately $1.5 million. However, the amount of capital to be
contributed to AIRO 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 to AIRO. The
Company's activities related to ADC and BWAF are financed through the internal
resources of ADC and BWAF and external financing. The Company expects to
seek additional external financing of $350,000 to fund an expansion of these
activities in 1997.
As of December 31, 1996, the Company's sources of external and
internal financing were limited. It is not expected that the internal
sources 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
operations 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.
The Company advanced $2,980,009 and $5,380,804 to BIA during the years
ended December 31, 1996 and 1995, respectively. At September 30, 1995, the
Company elected to forgive $4,042,255 of debt due from BIA as it was deemed
to be uncollectible.
As of December 31, 1996, BIA owed the Company, pursuant to advances
for payment of liabilities incurred by BIA from operating the scheduled
passenger carrier service, approximately $6.4 million. The Company does
not anticipate any further advances to BIA which would adversely impact
earnings. The Company may convert advances to increase its percentage
ownership of BIA, if appropriate. In March 1997, the Latvian Partner agreed
to contribute real estate and a promissory note with a combined value of
at least $1,000,000 to BIA. The Company agreed to capitalize $3 million of
BIA's debt to the Company, and BIA will deliver the promissory note from the
Latvian Partner to the Company. 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 1997. The Company has
agreed with the Latvian Partner that it will forgive the promissory note of
the Latvian Partner in exchange for the transfer of the Latvian Partner's
ownership in BIA. BIA will then become a wholly owned subsidiary of the
Company.
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 the Company's subsidiaries and joint operations
would attempt to pass increased expenses to customers. If the Company's
subsidiaries and joint operations are unable to pass through increased
costs, their operating results could be adversely affected which would
adversely affect the Company's operating results.
Item 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On July 14, 1995, the Company dismissed Price Waterhouse LLP as the
Company's independent accountants and, on July 28, 1995, approved the
engagement of BDO Seidman, LLP as the Company's independent accountant.
This change was recommended by the Board of Directors and approved by the
Company's shareholders at its annual meeting on August 29, 1995. There was
no disagreement with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure.
On August 30, 1996, BDO Seidman, LLP ("Former Accountant") informed
the Company that it was resigning from its position as the Company's
accounting firm, and on November 8, 1996, the Company approved the
engagement of Arthur Andersen LLP ("Current Accountant") as the Company's
independent accountant.
The Former Accountant's report on the Company's financial statements
for 1995 and the Current Accountant's report on the Company's financial
statements for 1996 contained a qualified opinion to reflect that incurred
losses from operations and the Company's financial position raise
substantial doubt about the ability of the Company to continue as a going
concern. There have been no disagreements with either the Former Accountant
or the Current Accountant on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
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 66 Chairman of the Board and Chief
Executive Officer
James W. Goodchild 41 Chief Operating and Financial Officer
and Director
David A. Grossman 33 Corporate Secretary
Homi M. Davier 48 Director
Paul R. Gregory 55 Director
Juris Padegs (1)(2) 65 Director
Ted Reynolds (1)(2) 66 Director
Morris Sandler (1)(2) 50 Director
____________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Robert L. Knauss has served as chairman of the board of the Company
since its inception in March 1991. Mr. Knauss has served as chief
executive officer since January 1994. 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 the 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 as chief financial officer of the Company since September
1993. Mr. Goodchild has been a director of the Company since June 1996.
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.
David A. Grossman has served as comptroller since November 1995 and
as corporate secretary since December 1996. From 1985 to 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.
Homi M. Davier has been a director of the Company since its inception
in March 1991. Mr. Davier served as president of the Company since its
inception in March 1991 until 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 1971 to
1975, and assisted in the start-up of Gulf Air in Oman from 1975 to 1978
and in the start-up of the Middle Eastern operations of Air Bangladesh and
Sabena Belgian Airlines from 1978 to 1980. Mr. Davier has served as
chairman of the board and president of Capricorn Travel and 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 vice chairman of the board of the
Company since its inception in March 1991. Dr. Gregory served as
treasurer, on a part-time basis, of the Company since its inception in
March 1991 until August 1995. Dr. Gregory is the Cullen Professor of
Economics and Finance at the University of Houston where he has been a
faculty member since 1972. Dr. 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. Dr. 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. Dr. Gregory has served as
chairman of the board of Amsovco International Consultants, Inc. since
1988. Dr. Gregory has also served as a consultant to the World Bank. Dr.
Gregory graduated from Harvard University with a Ph.D. in economics and is
fluent in Russian and German. Dr. Gregory is the author of a text on the
Soviet and Russian economies.
Juris Padegs has been a director of the Company since December 1993.
Mr. Padegs served as a managing director of Scudder, Stevens & Clark, an
international investment and management firm from 1985 to 1996, has been
employed with Scudder, Stevens & Clark since 1964 and is now Advisory
Managing Director at that firm. Mr. Padegs is the director of a number of
international investment companies, including Scudder New Europe Fund and
Scudder New Asia Fund. Mr. Padegs is the chairman and director of the
Korea Fund and the Brazil 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.
Mr. Reynolds has been president of Houston Grain Company since 1983 and
vice president of Mid-America Grain Commodities since 1976. He also 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 1995.
Mr. Sandler has been a consultant to Global TeleSystems Group, Inc.
("GTS"), an independent telecommunications company in Russia, since 1995.
Prior to that, Mr. Sandler served as executive vice president from February
1994 to November 1995 and acting chief operating officer from April 1993 to
February 1994 of GTS. From 1990 to 1994, Mr. Sandler was an employee of
Alan B. Slifka and Company. Since November 1995, Mr. Sandler has been a
principal of Pennwood Capital Corporation, a venture capital investment and
management firm. 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.
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 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.
The Company's Restated Articles of Incorporation 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 selected 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.
Donald D. Janacek (age 27) 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.
Daniel P. Solon (age 65) 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.
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. 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
of $1.375 per share for services rendered. Such options expire in December
2000. In December 1996, Messrs. Davier, Gregory, Padegs, Reynolds and Sandler
each received options to purchase 5,000 shares of Common Stock at a price of
$0.8125 per share. Such options expire in December 2001.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file
reports with the Securities and Exchange Commission relating to transactions
and holdings in the Company's common stock. The Company believes that during
the fiscal year ended December 31, 1996 all such filing requirements were
satisfied.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the chief
executive officer and the only executive officer of the Company who received
total annual salary and bonus for the fiscal year ended December 31, 1996, in
excess of $100,000:
<TABLE>
<CAPTION>
Summary Compensation Table
Long-Term Compensation
Annual Compensation (1) Securities
Underlying
Name and Principal Fiscal All Other Restricted Options
Position Year Salary Bonus Compensation Stock Awards and Warrants
<S> <C> <C> <C> <C> <C> <C>
Robert Knauss, 1996 $ 120,000 $ 0 $0 $0 0
Chief Executive 1995 120,000 75,000 (2) 0 0 125,000 (3)
Officer 1994 33,967 0 0 0 35,000
James Goodchild, 1996 $ 120,000 $ 0 $0 $0 0
Chief Operating and 1995 120,000 50,000 (2) 0 0 140,000 (3)
Financial Officer 1994 115,583 30,000 0 0 50,000
</TABLE>
(1) None 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 consists of cash payments of $37,500 and $25,000 and
the issuance of 25,000 and 16,667 shares of the Company's common stock
to Messrs. Knauss and Goodchild, respectively.
(3) Of these options and warrants, 35,000 and 50,000 stock options were
originally granted in October 1994 to Messrs. Knauss and Goodchild,
respectively, at an exercise price of $2.875 per share. In August
1995, these options were repriced at $1.125 per share.
Stock Options
In September 1992, the Company adopted its 1992 Equity Incentive Plan
("Plan"), which was amended effective March 1995 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 Proxy Statement, options to purchase an aggregate of 589,000 shares
were outstanding under the Plan.
The following table shows, as to the named executive officers,
information concerning individual grants of stock options and warrants during
1996. These options and warrants are currently exercisable.
<TABLE>
<CAPTION>
Option/Warrant Grants in Last Fiscal Year
Number of % of Total
Securities Options/Warrants
Underlying Granted to
Options/Warrants Employees in Exercise Price
Name Granted 1996 Per Share Expiration Date
<S> <C> <C> <C> <C>
Robert L. Knauss 25,000 41.67 $0.75 May 2001
James W. Goodchild 0 0.00 N/A N/A
David A. Grossman 25,000 41.67 $0.75 September 2001
</TABLE>
The following table shows, as to the named executive officers,
information concerning aggregate stock option and warrant exercises
during 1996 and the stock option and warrant values as of December 31,
1996.
<TABLE>
<CAPTION>
Aggregated Option and Warrant Exercises in Last Fiscal Year
and Year End Option and Warrant Values
Number of Securities
Underlying Value of Unexercised
Unexercised In-the-Money
Options/Warrants at Options/Warrnats at
Shares December 31, 1996 December 31, 1996
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert L. Knauss 0 $0 134,500/30,000 $0/$0
James W. Goodchild 26,666 0 130,334/30,000 $2,083/$0
David A. Grossman 0 0 25,000/0 $0/$0
</TABLE>
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 27, 1997, certain
information with respect to the beneficial ownership of the Company's
Common Stock by (i) each person known to the Company who beneficially owns
more than 5% of the Company's outstanding Common Stock; (ii) each director;
(iii) each named executive officer; and (iv) all directors and officers as
a group:
Shares Beneficially Owned
Name of Beneficial Owner(1) Number Percent
Citibank (Switzerland) 1,000,000 13.17
Paul R. Gregory 753,369 (2) 9.62
Robert L. Knauss 737,178 (3) 9.46
Homi M. Davier 600,000 (4) 7.78
Juris Padegs 262,107 (5) 3.41
James W. Goodchild 243,939 (6) 3.15
Morris A. Sandler 125,000 (7) 1.62
Ted Reynolds 75,000 (8) 0.98
David A. Grossman 41,667 (9) 0.55
All directors and officers as a
group (8 persons) 2,838,260 (10) 33.29
(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 CH-8021; 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 an aggregate of 238,000 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
(3) Includes an aggregate of 197,000 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
(4) Includes an aggregate of 120,000 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
(5) Includes an aggregate of 84,666 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(6) Includes 142,000 shares subject to options, warrants and Series A
Preferred Stock which are currently exercisable.
(7) Includes 100,000 shares subject to options and a warrant which are
currently exercisable.
(8) Includes 25,000 shares subject to options which are currently
exercisable.
(9) Includes 25,000 shares subject to options which are currently
exercisable.
(10) Includes an aggregate of 931,666 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective June 30, 1995, $125,000 in aggregate principal amount of
notes payable to Mr. Knauss was converted to 12,500 shares of Preferred
Stock, convertible into 62,500 shares of Common Stock. 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 May 1996,
Mr. Knauss loaned an aggregate of $250,00 to the Company, which loan bears
interest at a rate of 14% per annum. In connection with this loan,
Mr. Knauss received a warrant to purchase 25,000 shares of Common Stock at
an exercise price of $0.75 per share, which warrant became exercisable in
May 1996 and expires in May 2001. Mr. Knauss has received renewal fees
aggregating $25,000 for renewals of this loan through March 12, 1997.
In March 1995, the Gregory Family Partnership, an affiliate of Dr.
Gregory, loaned $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 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.
Effective June 30, 1995, a $50,000 note payable to Mr. Davier was
converted to 5,000 shares of Preferred Stock, which are convertible into
25,000 shares of Common Stock.
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 were subleased by this affiliate to BIA for an aggregate
monthly lease payment of $80,000. The affiliate assigned all of the
revenues and expenses under the leases and subleases to the Company and the
Company guaranteed the affiliate's obligations under the leases. The
Company returned the aircraft to the owner in 1996.
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 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 and
expire in December 2000. In October 1996, Mr. Padegs advanced an aggregate
of $10,000, bearing interest at a rate of 12% per annum. In connection
with this advance, the Company issued Mr. Padegs warrants to purchase an
aggregate of 1,000 shares of common stock at a price of $0.5625 per share,
which warrants are currently exercisable and expire in October 2001.
Effective June 30, 1995, a $50,000 note payable to Mr. Goodchild was
converted to 5,000 shares of Preferred Stock, which are convertible into
25,000 shares of Common Stock. 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 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
$50,000 at December 31, 1996 which matured in July 1996. The Company is
renegotiating an extension of this loan.
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.
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.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
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
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)_ airBaltic Joint Venture Agreement
10.37(9)_ Wet Lease Agreement with airBaltic
10.38(9)_ Articles of Incorporation of LAMCO
10.39(9)_ Memorandum of Understanding with TOPflight
10.40(9)_ Amendment to airBaltic Joint Venture Agreement
10.41(8)_ Share Purchase Agreement with SAS
10.42(10)_ AIRO Catering Services Joint Venture Agreement
10.43(10)- Riga Catering Services Shareholders' Agreement
16.1(6)_ Letter on Change in Certifying Accountant
16.2(11)_ Letter on Change in Certifying Accountant
_____________________
(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 (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 Registration Statement
on Form SB-2 (File No. 333-860), and incorporated herein by reference
thereto.
(10) 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.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference
thereto.
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K dated October 16, 1996
to satisfy certain continued listing requirements necessary in order to
maintain the listing of its common stock on The Nasdaq SmallCap Market.
The Company filed a Current Report on Form 8-K dated November 8, 1996
pursuant to the Company engaging Arthur Andersen LLP as its independent
accountant.
BALTIC INTERNATIONAL USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent publid accountants F-2
Independent auditors' report F-3
Consolidated balance sheets at December 31, 1996 and 1995 F-4
Consolidated statements of operations for the years ended
December 31, 1996 and 1995 F-5
Consolidated statements of stockholders' equity (deficit) for the years
ended December 31, 1996 and 1995 F-6
Consolidated statements of cash flows for the years ended
December 31, 1996 and 1995 F-8
Notes to consolidated financial statements F-9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
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, 1996, 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 operation 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, 1996, 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 1 to the consolidated financial statements, the Company has consistently
incurred losses for the last several years, including a loss of 1,248,543 in
1996. As of December 31, 1996, the Company has a working capital deficit of
$2,300,157 and generated an operating cash deficit of $2,082,722 in 1996.
The Company has historically relied on cash provided by financing activities
from outside sources to fund its capital and operating requirements. During
1996, managment obtained a short-term note payable due in November 1997 to
fund its currecnt operations and capital requirements. This note is secured
by an option agreement in which the Company may put its shares in airBaltic
to Scandinavian Airlines Systems (SAS) for $1,759,050 in cash during the
period from June 1, 1997 to August 31, 1998. Management believes that it
will be successful in its efforts to refinance this $2,000,000 note payable,
as well as the other notes payable discussed in Note 5 to the consolidated
financial statements. Should the Company be unable to refinance these notes
or obtain alternative financing, it would exercise its right to put its
shares and use the proceeds to partially repay the $2,000,000 note payable.
The Company has also engaged an investment banker to raise additional equity
financing of $2,500,000 on a best efforts basis to fund its long-term business
strategy. In the event the Company does not obtain the necessary financing,
there can be no assurance that the Company will be able to meet its
obligations as they become due or realize te recorded value of its assets.
The conditions described above raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to
these matters are described in Note 1. The consolidated financial
statements do not include any adjustments that might result from the outcome
of this uncertainty.
ARTHUR ANDERSEN LLP
Houston, Texas
April 15, 1997
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 operation 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 1 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
BALTIC INTERNATIONAL USA, INC.
Consolidated Balance Sheets
December 31,
1996 1995
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 384,245 $ 139,240
Accounts receivable:
Trade 43,810 87,178
Affiliates - 100,000
Income taxes receivable - 16,860
Inventory 47,741 14,265
Prepaids and deposits 166,362 6,418
Total current assets 642,158 363,961
PROPERTY AND EQUIPMENT, net 18,182 20,035
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 3,446,776 2,914,834
OTHER ASSETS 233,791 -
GOODWILL, NET 238,308 223,593
Total assets $4,579,214 $3,522,423
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 436,760 $ 807,470
Short-term debt, net 2,285,597 324,063
Commitments for guarantees on BIA liabilities 146,375 1,019,521
Other current liabilities 73,583 342,143
Total liabilities 2,942,315 2,493,197
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock:
Series A, convertible, $10 par value, 500,000
shares authorized, 123,000 shares issued
and outstanding 1,230,000 1,230,000
Series B, convertible, $10 par value, $25,000
stated value, 70 shares authorized,
34 shares issued and outstanding 850,000 -
Common stock, $.01 par value, 20,000,000 shares
authorized, 7,302,108 and 5,758,241 shares
issued and outstanding 73,021 57,582
Additional paid-in capital 9,905,403 8,703,883
Accumulated deficit (10,421,525) (8,962,239)
Total stockholders' equity 1,636,899 1,029,226
Total liabilities and stockholders' equity $4,579,214 $3,522,423
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Operations
Year Ended December 31,
1996 1995
REVENUES:
Freight revenue $ 557,057 $ 577,542
Food distribution 276,733 21,685
General sales agency revenue 59,000 -
Wet Lease Agreement with airBaltic - 1,500,000
Fee revenue - 1,500,000
Aircraft rental income from BIA - 480,000
Commissions from BIA - 78,845
Net equity in earnings of joint operations 420,467 369,223
Total operating revenues 1,313,257 4,527,295
OPERATING EXPENSES:
Cost of revenue:
Aircraft rental - 605,289
Freight 301,665 342,652
Food distribution 213,044 21,373
Personnel and consulting 965,560 1,108,946
Legal and professional 91,900 324,916
Other general and administrative 428,408 961,458
Net equity in losses of BIA 812,385 3,440,445
Total operating expenses 2,812,962 6,805,079
LOSS FROM OPERATIONS (1,499,705) (2,277,784)
OTHER INCOME (EXPENSE):
Interest expense (132,034) (197,505)
Interest income 3,800 195,415
Other 395,090 152,250
TOTAL OTHER INCOME (EXPENSE) 266,856 150,160
LOSS BEFORE INCOME TAXES (1,232,849) (2,127,624)
INCOME TAX EXPENSE (15,694) -
NET LOSS $ (1,248,543) $ (2,127,624)
LESS PREFERRED DIVIDENDS (210,743) (60,125)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (1,459,286) $ (2,187,749)
PER SHARE AMOUNTS:
Net loss $ (0.19) $ (0.50)
Net loss attributable to common shareholders $ (0.23) $ (0.51)
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Stockholders' Equity
<TABLE>
<CAPTION>
Preferred Stock
Series A Series B Common stock
Shares Amount Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1,
1995 2,919,400 $ 29,194
Shares issued 2,722,841 27,228
Debt converted to
common stock 116,000 1,160
Debt converted to
preferred stock 123,000 $1,230,000
Collection of stock
subscription
receivable
Net loss
Dividends on preferred
stock
Balance, December 31,
1995 123,000 1,230,000 - $ - 5,758,241 57,582
Shares issued:
Common stock 580,078 5,801
Preferred stock 50 1,250,000
Preferred stock
converted to common
stock (16) (400,000) 657,576 6,576
Debt converted to
common stock 306,213 3,062
Discount on debt
issued
Deferred compensation
on options granted
Net loss
Dividends on preferred
stock
Balance, December 31,
1996 123,000 $1,230,000 34 $ 850,000 7,302,108 $ 73,021
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Stockholders' Equity (Deficit)
(Continued)
Stock Additional
subscriptions paid-in Accumulated
receivable capital deficit Total
Balance, January 1,
1995 $ 5,760,123 $ (6,774,490) $ (985,173)
Shares issued $ (109,000) 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 109,000 109,000
Net loss (2,127,624) (2,127,624)
Dividends on preferred
stock (60,125) (60,125)
Balance, December 31,
1995 0 8,703,883 (8,962,239) 1,029,226
Shares issued:
Common stock 693,436 699,237
Preferred stock (159,800) 1,090,200
Preferred stock
converted to common
stock 409,958 16,534
Debt converted to
common stock 137,605 140,667
Discount on debt
issued 9,987 9,987
Deferred compensation
on options granted 110,334 110,334
Net loss (1,248,543) (1,248,543)
Dividends on preferred
stock (210,743) (210,743)
Balance, December 31,
1996 $ 0 $9,905,403 $(10,421,525) $ 1,636,899
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
1996 1995
Cash flows from operating activities:
Net loss $ (1,248,543) $ (2,127,624)
Noncash adjustments:
Net equity in (earnings) and losses of:
BIA 812,385 3,440,445
Other joint operations (420,467) (369,223)
Depreciation and amortization 35,474 19,678
Amortization of debt costs and discount 42,806 92,070
Deferred compensation expense 66,753 190,145
Gain on sale of assets (297,200) -
Increase/decrease in current assets and
liabilities:
Accounts receivable 143,368 (108,540)
Prepaid and other (174,733) 45,438
Inventory (33,476) (8,066)
Accounts payable and accrued liabilities (135,943) 337,253
Commitments for guarantees (873,146) 1,019,521
Net cash provided by (used by) operating
activities (2,082,722) 2,531,097
Cash flows from investing activities:
Investment in and advances to joint
operations (3,025,009) (6,070,445)
Distributions and repayments from joint
operations 206,208 282,999
Proceeds from sale of assets 1,700,000 -
Proceeds from repayment of airBaltic
subordinated debt 290,000 -
Acquisition of net assets of ADC, net of
$38,882 cash - (29,954)
Acquisition of property and equipment (5,299) (7,858)
Net cash used by investing activities (834,100) (5,825,258)
Cash flows from financing activities:
New borrowings 2,294,944 1,066,000
Repayment of debt and long-term obligations (232,229) (264,712)
Deferred lease credit - (85,659)
Issuance of stock, net of related costs 1,183,737 2,652,005
Preferred dividends paid (84,625) (29,500)
Net cash provided by financing activities 3,161,827 3,338,134
Net increase in cash and cash equivalents 245,005 40,483
Cash and cash equivalents, beginning of period 139,240 98,757
Cash and cash equivalents, end of period $ 384,245 $ 139,240
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Notes to Consolidated Financial Statements
NOTE 1 - BUSINESS OPERATIONS AND CURRENT FINANACIAL CONDITION
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 initially pursued its plans to participate in airline service in
Latvia through a 49% interest in a newly formed start-up airline - Baltic
International Airlines ("BIA"), a limited liability company registered in
the Republic of Latvia. The Company made significant investments in and
advances to BIA which has incurred losses of approximately $12,700,000 from
inception through December 31, 1996. On October 1, 1995, the routes and
passenger service operations of BIA were transferred as part of its capital
contribution to a new Latvian carrier, airBaltic Corporation SIA
("airBaltic"). The Company currently owns a 8.02% interest in airBaltic,
after the sale of 12% of airBaltic stock in January 1996 discussed in Note
4. As discussed in Note 4, BIA has no current operations and the Company is
currently in the process of restructuring its investment in BIA. BIA has
not conducted any substantive business operations since October 1995.
The Company is also engaged in providing services to airBaltic and other
airlines through its interest in Riga Catering Services ("RCS"), a Riga,
Latvia-based aviation catering company. In 1996, the Company transferred
its catering operations of Baltic Catering Services ("BSC") to RCS. The
Company will expand its catering operations through its 51% interest in AIRO
Catering Services ("AIRO"). The Company also serves as a cargo marketer to
airBaltic and other airlines through its wholly owned subsidiary, Baltic
World Air Freight ("BWAF"). American Distributing Company ("ADC"), a wholly
owned subsidiary, began operations on December 1, 1995 as a food and
beverage distribution company. The Company's current active operations
consist of these operations.
Financial condition
Management believes that results of operations of the Company have been and
will continue to be affected by various factors typically encountered by
businesses in the start-up phase. 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 ability to obtain additional capital.
The Company requires substantial capital to pursue its 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.
The Company's operations have been insufficient as a source of funds to meet
the Company's capital requirements and other liquidity needs. The majority
of the borrowings for 1996 consists of a loan in the amount of $2,000,000
that the Company entered into in November 1996. This loan is due in
November 1997 and is secured by an option agreement that the Company entered
into with Scandinavian Airlines Systems Denmark-Norway-Sweden ("SAS") during
1996 in which the Company has the right to put the shares that it owns of
airBaltic to SAS for $1,759,050 during the period from June 1, 1997 to
August 31, 1998. Under this option agreement, SAS has the right to call the
Company's airBaltic shares for a price ranging from $3,103,750 to $4,862,800
during the same period. Management believes that it will be successful in
its efforts to reinance the $2,000,000 loan. Should the Company be unable to
refinance this note, it will exercise its right to put its shares to SAS and
use the proceeds to partially repay this loan. 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, 1997. The Company has engaged Rauscher Pierce & Clark
as its investment banker in an effort to raise an additional equity financing
of up to $2.5 million on a best efforts basis at market rates with a warrant
priced at a premium to the current market price. Management believes that,
if the financing is completed, the Company will be able to achieve a
satisfactory level of liquidity to meets its business plan and capital needs
for the next twelve months. The earnings of the Company have been directly
affected by the losses of BIA. The Company does not anticipate any further
advances to BIA which would adversely impact earnings.
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 operations and the Company's ability to implement its
business strategy.
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 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. Of the conversions to Series A Preferred Stock, notes payable of an
aggregate amount of $535,000 was converted by officers and directors. In
September 1995, an additional $45,000 of bridge notes was
converted to 4,500 shares of Series A Preferred Stock convertible into
22,500 shares of Common Stock. Also during 1996 and 1995, the Company
received proceeds of $93,537 and $2,914,011, respectively, relating to the
issuance of 169,149 and 2,722,841 shares of common stock, respectively,
pursuant to private sales and the exercise of outstanding stock options.
Additionally in 1996, the Company issued 410,929 shares of common stock for
payment of accounts payable of $401,001. In February and March 1996, the
Company issued 50 shares of Series B Convertible Redeemable Preferred Stock
for net proceeds of $1,090,200. The Company believes it has sufficient
ability to obtain additional financing from key officers, directors and
certain investors.
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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principals of consolidation
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries (BWAF and ADC). All significant intercompany
acounts and transactions have been eliminated. The Company accounts for its
investment in the joint operations other than airBaltic, BIA and Lamco usig
the equity method. The Company's interest in airBaltic is accounted for
using the cost method because the Company owns only 8.02% of airBaltic and
has no control, voting or otherwise, over airBaltic. The Company's interest
in BIA is accounted for using the cost method because BIA has no current
operations and the Company is currently in the process of restructuring its
investment including the anticipated liquidation of BIA.
Revenue recognition
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 1995, the Company deferred
recognition of revenues earned from BIA due to the uncertain collectibility
of such revenues.
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 are amortized using the interest method until the
maturity date of the related note payable.
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.
Goodwill is amortized over ten years.
Long-lived assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting
for Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." The Company adopted SFAS No. 121 on January 1, 1996. SFAS No. 121
requires that long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company's adoption of SFAS No. 121 did not materially
impact the results of operations.
Income taxes
Deferred income taxes result from temporary differences between the
financial statements and tax basis of assets and liabilities (see Note 6).
Loss per common share
Net loss per common share is computed using the weighted average number of
common shares outstanding. The weighted average number of shares for the
years ended December 31, 1996 and 1995 were 6,461,561 and 4,273,858,
respectively. 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.
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.
Use of estimates
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. Failure of the Company's subsidiaries
and joint operations 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, 1996, the Company's cash in financial institutions exceeded
the federally insured deposits limit by $200,830.
Foreign currency translation
The functional currency of the Company's subsidiaries and joint operations,
except for AIRO, 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 tranlation 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,
1996 or 1995.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1996
consolidated financial statement presentation.
NOTE 3 - CONSOLIDATED SUBSIDIARIES
American Distributing Company
ADC, a wholly owned subsidiary of BIUSA, distributes Miller, Bartles &
Jaymes, Gulf Pacific Rice and various staple food products in the Baltic
States. This business commenced in December 1995, as a successor to the
Company's distribution activities which began in 1993. The Company has a
distribution system and offices in Riga, Latvia. ADC is currently negotiating
for the distribution of other food products, has opened a new office in
Vilnius, Lithuania and has plans to open an office in Tallinn, Estonia.
Baltic World Air Freight
On September 5, 1992, the Board of Directors of the Company approved the
formation of a joint operation 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 1995 and 1996,
the Company issued an aggregate of 174,000 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. Currently, BWAF
has cargo market agreements with airBaltic and Hamburg Airlines and is
concluding contract terms with Austrian Airlines.
NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS
The investment in and advances to joint operations are as follows:
December 31,
1996 1995
Joint operations accounted for using
cost method:
airBaltic $ 1,918,000 $ 2,630,000
BIA 1,186,824 -
LAMCO 40,000 -
Subtotal 3,144,824 2,630,000
Joint operations accounted for using
equity method:
BCS 43,097 284,834
AIRO 110,956 -
RCS 147,898 -
Subtotal 301,951 284,834
Total $ 3,446,776 $ 2,914,834
Joint operations at cost -
airBaltic Corporation
On August 29, 1995, a Joint Venture Agreement was signed between the
Company, the Republic of Latvia ("Latvia"), SAS, Investeringsfonden for
Ostlandene (the Investment Fund for Central and Eastern Europe - "IO") and
Swedfund International AB ("Swedfund") (collectively, the "Parties"), for
the establishment of a Latvian national airline, airBaltic Corporation.
Upon completion of the Joint Venture Agreement, as amended on November 27,
1995, airBaltic had 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%, IO - 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 airBaltic, 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 Company has agreed to pay
all aviation-related payables of BIA as of November 27, 1995.
On January 10, 1996, the Company sold 12% of airBaltic stock to SAS for $1.7
million in cash and the assumption by SAS of the Company's future debt
funding obligation to airBaltic of $2,175,000. The Company retains a 8.02%
interest in airBaltic. A gain of approximately $297,000 was recognized on
the sale of the airBaltic stock included in other income.
Summarized financial information for airBaltic is as follows (100%):
December 31,
1996 1995
Current assets $ 11,372,000 $ 5,351,000
Noncurrent assets 15,986,000 10,749,000
Total assets $ 27,358,000 $16,100,000
Current liabilities $ 8,768,000 $ 3,907,000
Noncurrent liabilities 16,536,000 5,198,000
Equity 2,054,000 6,995,000
Total liabilities and equity $ 27,358,000 $16,100,000
From
Year Ended October 1, 1995 to
December 31, 1996 December 31, 1995
Revenues $ 24,399,000 $ 2,081,000
Loss from operations (13,325,000) (3,473,000)
Net loss (17,245,000) (4,693,000)
Management believes that the Company's recorded investment in airBaltic
through airBaltic's future operations and/or the option agreement discussed
in Note 1.
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.
As discussed in Note 1, BIA has experienced significant losses which have been
recognized in the Company's financial statements through a reserve of its
investment in BIA. In conjunction with the transfer of BIA's passenger
service operations to airBaltic, the Company entered into negotiations with
its partner to restructure BIA and obtain full ownership. The Company also
made advances on behalf of BIA in 1996 to facilitate the termination of
operations of BIA. Management believes that the Company's remaining recorded
investment in BIA will be recovered through liquidation of its remaining
assets. The Company believes that maintaining BIA's airline certification
is beneficial to BIUSA.
Lithuanian Aircraft Maintenance Corporation
On September 28, 1995, the Company entered into a joint operation 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 joint operation is 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 totaled $40,000 for 2.8% of LAMCO. Further purchases of shares
are anticipated as the business plans for the operating entities of LAMCO
are concluded. Siauliai Aviacija owns 96.7% of LAMCO and 0.25% 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 1997 or
early 1998, if at all.
Joint operations using equity method -
A condensed summary of the financial position (100% basis) of the combined
joint operations accounted for using the equity method of accounting is as
follows:
December 31,
1996 1995
Current assets $ 641,263 $ 630,658
Property and other assets, net 551,105 658,230
Total assets $1,192,368 $1,288,888
Current liabilities $ 518,345 $4,089,558
Other liabilities 195,540 2,783,006
Stockholders' equity (deficit) 478,483 (5,583,676)
Total liabilities and stockholders'
equity $1,192,368 $1,288,888
A summary of the results of operations of the combined joint operations
accounted for using the equity method of accounting is as follows:
Combined 100% Basis:
Year Ended December 31,
1996 1995
Operating revenues $ 2,815,525 $ 11,102,871
Income (loss) from operations $ 1,098,275 $ (7,042,533)
Earnings (loss) $ 950,062 $ (3,436,175)
Company Percentage Interest:
Year Ended December 31,
1996 1995
Operating revenues $ 1,240,176 $ 5,463,826
Income (loss) from operations $ 482,003 $(3,443,694)
Earnings (loss) $ 420,467 $(2,515,449)
The above amounts as of and for the year ended December 31, 1995 include the
scheduled passenger carrier service operations of BIA which was
discontinued on October 1, 1995.
AIRO Catering Services and Riga Catering Services
In February 1996, the Company formed AIRO Catering Services with TOPflight AB
("TOPflight"). TOPflight operates kitchens in Malmo, Gothenburg and Stockholm,
Sweden and is soon to open a kitchen in Copenhagen. In this joint operation,
the Company contributed its management and operational expertise, its partial
interest in Riga Catering Services, market knowledge, knowledge of the regional
customer base and labor force for a 51% interest, while TOPflight contributed
its technical experience in building in-flight kitchens for a 49% interest.
AIRO is targeting six airports for in-flight catering development. AIRO is
accounted for using the equity method as certain provisions of the partnership
agreement result in the Company not having control of AIRO.
On April 2, 1996, the catering operations of BCS were acquired by RCS,
previously owned by TOPflight, in exchange for shares in RCS. RCS is
currently owned 35% by AIRO, 23.5% by the Company and 41.5% by the principals
of the Company's partner in BCS.
Summarized financial information for RCS is as follows (100%):
December 31, 1996
Current assets $ 468,989
Noncurrent assets 427,826
Total assets $ 896,825
Current liabilities $ 296,483
Noncurrent liabilities 195,540
Equity 404,802
Total liabilities and equity $ 896,825
Period From
May 1, 1996
to December 31, 1996
Revenues $ 1,937,422
Income from operations 813,164
Net income 629,351
Baltic Catering Services
BCS was formed on March 26, 1993 as a joint operation between ARVO, Ltd., a
Latvian limited liability company, and the Company. In February 1996, the
Company entered into a joint venture agreement with TOPflight to create a
joint operation, AIRO, that will set up airline catering facilities across
Eastern Europe. On April 2, 1996, the catering operations of BCS were
acquired by RCS in exchange for shares in RCS. The business of BCS after the
transfer of the catering business to RCS is primarily the operation of the
restaurant in the Riga Airport. The Company accounted for the acquisition of
its interest in RCS using the purchase method of accounting.
Summarized financial information for BCS is as follows (100%):
December 31,
1996 1995
Current assets $ 124,436 $ 291,967
Noncurrent assets 65,882 270,218
Total assets $ 190,318 $ 562,185
Current liabilities $ 104,124 $ 3,686
Equity 86,194 558,499
Total liabilities and equity $ 190,318 $ 562,185
Year Ended December 31,
1996 1995
Revenues $ 878,103 $ 2,341,881
Income from operations 336,500 714,734
Net income 333,225 727,278
Approximately 68% of the 1996 revenues of BCS were generated prior to the
transfer of operations to RCS in April 1996.
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.
NOTE 5 - SHORT-TERM DEBT
Short-term debt consists of the following:
December 31,
1996 1995
Note payable to third parties, secured by put
agreement with SAS on airBaltic shares and security
interest in all shares of stock owned in AIRO,
interest rate of 13% due at maturity, principal
payable on November 11, 1997 $ 2,000,000 $ -
Note payable to an officer and director of the
Company, unsecured, interest rate of 14%, due upon
maturity, principal payable on March 12, 1997 250,000 -
Convertible note payable, unsecured, interest rate
of 10%, due upon maturity, principal payable on
March 15, 1997 88,771 -
Note payable to a director of the Company,
unsecured, interest rate of 12%, due upon maturity,
principal payable on December 30, 1996 10,000 -
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 50,000 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 75,000 175,000
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
2,473,771 330,000
Less discount on loan financing (188,174) (5,937)
Short-term debt, net $ 2,285,597 $ 324,063
The Company is in the process of renegotiating the maturity of all notes
payable which matured prior to March 31, 1997. Management believes that it
will be able to extend the maturity of these loans on terms similar to the
previous loans. However, there can be no assurance the Company will be
successful in such efforts.
On April 5, 1996, the Company entered into a convertible note agreement in
connection with a $250,000 loan to the Company ("Convertible Note"). 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. On July 11, 1996, the holder of the Convertible
Note converted principal of $134,000 and accrued interest to 306,213 shares
of common stock.
On May 16, 1996, the Company entered into a promissory note in connection
with a $250,000 loan to the Company from an officer and director of the
Company. The lender received warrants to purchase 25,000 shares of the
Company's common stock at $0.75 per share. In connection with this
renewal, the Company paid a facility fee of $12,500 to the lender.
On October 2, 1996, the Company entered into a promissory note in
connection with a $10,000 loan to the Company from a director of the
Company. The lender received warrants to purchase 1,000 shares of the
Company's common stock at $0.5625 per share.
In November 1996, the Company entered into a promissory note in connection
with a $2,000,000 loan to the Company. In connection with this promissory
note, the Company issued warrants to the lender to purchase 500,000 shares
of the Company's common stock at a price of $0.75 per share.
NOTE 6 - INCOME TAXES
The components of deferred tax assets consisted of the following:
December 31,
1996 1995
Deferred tax assets:
Net operating loss carryforward $ 2,069,455 $ 1,824,170
Allowance for doubtful accounts 159,433 159,433
Deferred compensation 89,222 67,416
Investment in and advances to BIA 1,347,966 1,071,755
Total deferred tax assets 3,666,086 3,122,784
Deferred tax liabilities:
Unremitted earnings of joint operations 229,791 69,629
Other 32,017 17,327
Total deferred tax liabilities 261,808 86,956
Net deferred tax asset before valuation
allowance 3,404,278 3,035,828
Valuation allowance (3,404,278) (3,035,828)
Net deferred tax asset $ - $ -
Provisions for income taxes in the statements of operations were as follows:
Year ended December 31,
1996 1995
Current expense:
U.S. $ - $ -
Foreign 15,694 -
Deferred expense - -
Total expense $ 15,694 $ -
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 December 31, 1996, the Company had net operating loss carryforwards of
approximately $6,100,000 available to offset future taxable income. These
carryforwards will expire at various dates beginning in 2009.
NOTE 7 - COMMON STOCK
In 1992, the Company adopted an Equity Incentive Plan (the "Plan") under
which an aggregate of 800,000 shares of common stock may be issued. 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
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 or provide
services to the Company.
The Company accounts for the Plan under APB Opinion No. 25 and the related
interpretations. Accordingly, deferred compensation is recorded for stock
options based on the excess of the deemed value of the common shares on the
date the options were granted over the aggregate exercise price of the
options. This deferred compensation is amortized over the vesting period of
each option. The Company recorded compensation expense of $66,753 and
$190,145 for the years ended December 31, 1996 and 1995, respectively.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" which if fully adopted requires the Company to record stock-
based compensation at fair value. The Company has adopted the disclosure
requirements of SFAS No. 123 and has elected to continue to apply the
provisions of APB No. 25 to record compensation expense. Had compensation
expense for the Plan been determined consistent with SFAS No. 123, the
Company's net loss and loss per common share would have been increased to
the following pro forma amounts:
Year Ended December 31,
1996 1995
Net loss As Reported $ (1,248,543) $ (2,127,624)
Pro Forma (1,474,865) (3,595,537)
Loss per common share As Reported (0.23) (0.51)
Pro forma (0.26) (0.86)
The resulting pro forma compensation cost may not be representative of that
to be expected in future years because the method of accounting under SFAS
No. 123 has not been applied to options granted prior to January 1, 1995.
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.
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.
At December 31, 1996, the Company had 2,480,595 shares of common stock
reserved for issuance upon exercise of options and warrants, and 921,000
options were available for future grant under the Plan. A summary of
changes in outstanding options and warrants is as follows:
Year Ended December 31,
1996 1995
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
Shares under option, beginning
of period 653,616 $ 1.10 408,800 $ 0.88
Changes during the period:
Granted 160,000 0.67 894,680 0.95
Canceled (55,467) 0.61 (5,333) 0.50
Exercised (169,149) 0.58 (644,531) 0.76
Shares under option, end of
period 589,000 $ 1.18 653,616 $ 1.10
Shares under warrant,
beginning of period 1,267,970 $ 3.38 751,995 $ 4.86
Changes during the period:
Granted 623,625 0.96 516,000 1.21
Canceled - - - -
Exercised - - (25) 6.00
Shares under warrant, end of
period 1,891,595 $ 2.58 1,267,970 $ 3.38
All of the options and 1,811,595 of the warrants with a weighted average
exercise price of $2.63 per share are exercisable as of December 31, 1996.
The exercise price of the options and warrants outstanding at December 31,
1996 range from $0.50 to $9.80. The weighted average contractual life of
the options and warrants outstanding at December 31, 1996 was 3.4 years and
3.3 years, respectively. The weighted-average grant-date fair value of
options and warrants granted during 1996 was $1.17 and $1.22, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996: risk-free interest rate of 6.5%;
expected dividend yield of 0%; expected lives of 5 years; expected
volatility of 138%.
NOTE 8 - PREFERRED STOCK
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. The conversion price of
the Series A Preferred Stock is adjustable for certain issuances of
securities at less than 90% of the conversion price. At December 31, 1996,
the conversion price was $1.52 per share.
Effective February 22, 1996, the Company created its Series B Convertible
Redeemable 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. In October 1996, the Company amended the
conversion price to the lesser of $0.55 per share or 82% of the 5-day average
closing bid price of the Company's Common Stock.
During the year ended December 31, 1996, shareholders converted an
aggregate of 16 shares of Series B Preferred Stock into 657,576 shares of
the Company's common stock.
NOTE 9 - RELATED PARTY TRANSACTIONS
The following is a summary of material related party transactions which have
occurred during 1996 and 1995, other than those disclosed elsewhere in the
notes to the accompanying financial statements.
Baltic International Airlines
The Company earned management fees, aircraft rental income, and commission
income from BIA. Commissions were based upon a percentage of passenger
ticket and cargo revenue earned on sales originating outside of Riga. The
Company earned $78,845 in such commissions and fees for the year ended
December 31, 1995. The Company subleased 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 year ended
December 31, 1995, the Company charged BIA $611,792 in costs incurred on
behalf of BIA, including pilots' salaries, officers' salaries and consulting
costs. No revenue was earned by the Company from BIA in 1996.
airBaltic Corporation
The Company managed the interim flight operations of airBaltic and subleased
two western aircraft previously operated by BIA under a wet lease agreement
for $1.5 million through December 31, 1995. Additionally in 1995, airBaltic
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 earns general sales agency revenue by operating the North American
sales and marketing office of airBaltic. The Company earned $59,000 of such
revenue for the year ended December 31, 1996.
BWAF is dependent upon airBaltic for cargo transportation. airBaltic
purchases goods and services from RCS.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company leases certain equipment and office space under operating leases
that expire over the next five years. Rental expense under operating
leases was $35,447 and $572,826 for 1996 and 1995, respectively. Future
minimum lease payments under noncancelable operating leases are as follows:
1997 $ 38,878
1998 31,907
1999 3,027
2000 3,027
2001 1,513
Total $ 78,352
In December 1995, the Company guaranteed certain liabilities of BIA. As of
December 31, 1995, the Company accrued $1,019,521 as a commitment to pay
these liabilities as the Company signed an agreement to pay these
liabilities on behalf of BIA. The expense for these liabilities is included
in the Company's reserve of investment in BIA on the 1995 consolidated
statement of operations. At December 31, 1996, the Company had $146,375
remaining to be paid on these liabilities.
NOTE 11 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosure of noncash transactions are as follows:
Year Ended December 31,
1996 1995
Services and expenses contributed to BIA $ - $ 563,815
Conversion of accounts payable to equity 417,535 -
Conversion of notes payable to equity 140,667 1,288,137
Conversion of preferred stock to common stock 400,000 -
Dividends declared and paid in subsequent
period 89,584 30,625
Discount on debt for warrants 9,987 -
Deferred compensation on options exercised and
canceled 204,699 -
Supplemental disclosure of interest paid $ 44,459 $ 96,771
Supplemental disclosure of income taxes paid $ - $ -
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on the 14th day of
April, 1997.
BALTIC INTERNATIONAL USA, INC.
//s// ROBERT L. KNAUSS
ROBERT L. KNAUSS, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
//s// ROBERT L. KNAUSS Chairman of the Board and April 14, 1997
ROBERT L. KNAUSS Chief Executive Officer
(Principal Executive Officer)
//s// JAMES W. GOODCHILD Chief Operating and Financial Officer April 14, 1997
JAMES W. GOODCHILD and Director (Principal Financial and
Accounting Officer)
//s// HOMI M. DAVIER Director April 14, 1997
HOMI M. DAVIER
//s// PAUL R. GREGORY Director April 14, 1997
PAUL R. GREGORY
//s// JURIS PADEGS Director April 14, 1997
JURIS PADEGS
//s// TED REYNOLDS Director April 14, 1997
TED REYNOLDS
//s// MORRIS A. SANDLER Director April 14, 1997
MORRIS A. SANDLER
Exhibits
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)_ airBaltic Joint Venture Agreement
10.37(9)_ Wet Lease Agreement with airBaltic
10.38(9)_ Articles of Incorporation of LAMCO
10.39(9)_ Memorandum of Understanding with TOPflight
10.40(9)_ Amendment to airBaltic Joint Venture Agreement
10.41(8)_ Share Purchase Agreement with SAS
10.42(10)_ AIRO Catering Services Joint Venture Agreement
10.43(10)- Riga Catering Services Shareholders' Agreement
16.1(6)_ Letter on Change in Certifying Accountant
16.2(11)_ Letter on Change in Certifying Accountant
_________________________________
(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 (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, 1997, and incorporated herein by reference
thereto.
(9) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-860), and incorporated herein by reference
thereto.
(10) 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.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference
thereto.
</TABLE>
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<PERIOD-END> DEC-31-1996
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<RECEIVABLES> 43,810
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0
2,080,000
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