U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended June 30, 1997.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File Number: 0-26558
BALTIC INTERNATIONAL USA, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 76-0336843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1990 Post Oak Blvd., Suite 1630, Houston, Texas 77056
(Address of principal executive offices)
(713) 961-9299
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 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 .
Number of shares outstanding of each of the issuer's classes of common stock
as of August 14, 1997: 9,615,270 shares.
Transitional Small Business Disclosure Format (Check one): Yes
; No X .
BALTIC INTERNATIONAL USA, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Condensed Balance Sheets -
June 30, 1997 and December 31, 1996 3
Condensed Statements of Operations -
Three Months Ended June 30, 1997 and 1996
and Six Months Ended June 30, 1997 and 1996 4
Condensed Statements of Cash Flows -
Six Months Ended June 30, 1997 and 1996 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 11
Item 2 - Changes in Securities 11
Item 3 - Defaults on Senior Securities 11
Item 4 - Submission of Matters to a Vote of Security Holders 11
Item 5 - Other Information 11
Item 6 - Exhibits and Reports on Form 8-K 11
Signatures 12
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Balance Sheets
June 30, December 31,
1997 1996
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 40,815 $ 384,245
Accounts receivable 89,336 43,810
Inventory 129,488 47,741
Prepaids and deposits 258,956 166,362
---------- ----------
Total current assets 518,595 642,158
---------- ----------
PROPERTY AND EQUIPMENT, net 13,395 18,182
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 3,731,801 3,446,775
OTHER ASSETS 187,430 233,791
GOODWILL, NET 223,578 238,308
---------- ----------
Total assets $4,674,799 $4,579,214
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 685,907 $ 436,760
Short-term debt, net 2,438,125 2,285,597
Commitments for guarantees on BIA liabilities 146,375 146,375
Other current liabilities 65,837 73,583
---------- ----------
Total liabilities 3,336,244 2,942,315
---------- ----------
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,
27 and 34 shares issued and outstanding 675,000 850,000
Common stock, $.01 par value, 20,000,000 shares
authorized, 8,061,026 and 7,302,108 shares
issued and outstanding 80,610 73,021
Additional paid-in capital 10,284,940 9,905,403
Accumulated deficit (10,931,995) (10,421,525)
----------- -----------
Total stockholders' equity 1,338,555 1,636,899
----------- -----------
Total liabilities and stockholders' equity $ 4,674,799 $ 4,579,214
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended June 30, Six Months Ended June 30,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Freight revenue $ 58,273 $ 205,337 $ 112,055 $ 268,646
Food distribution 79,001 129,318 140,530 129,318
General sales agency revenue 19,500 22,000 39,000 22,000
Net equity in earnings of
joint operations 85,785 174,695 243,674 257,516
------- ------- ------- -------
Total operating revenues 242,559 531,350 535,259 677,480
------- ------- ------- -------
OPERATING EXPENSES:
Cost of revenue 99,178 188,636 176,231 216,302
General and administrative 204,272 417,367 497,830 804,616
Reserve of investment in BIA - - - 612,385
------- ------- ------- -------
Total operating expenses 303,450 606,003 674,061 1,633,303
------- ------- ------- -------
LOSS FROM OPERATIONS (60,891) (74,653) (138,802) (955,823)
------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense (141,980) (14,122) (275,232) (27,362)
Interest income 1 2,708 5 2,723
Other 66,642 - 70,563 297,200
------- ------- ------- -------
TOTAL OTHER INCOME (EXPENSE) (75,337) (11,414) (204,664) 272,561
------- ------- ------- -------
LOSS BEFORE INCOME TAXES (136,228) (86,067) (343,466) (683,262)
INCOME TAX EXPENSE - 27,904 - 27,904
------- ------- ------- -------
NET LOSS $ (136,228) $ (113,971) $ (343,466) $ (711,166)
------- ------- ------- -------
LESS PREFERRED DIVIDENDS (117,302) (30,625) (167,004) (61,250)
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (253,530) $ (144,596) $ (510,470) $ (772,416)
======= ======= ======= =======
PER SHARE AMOUNTS:
Net loss $ (0.02) $ (0.02) $ (0.05) $ (0.12)
Net loss attributable to common
shareholders $ (0.03) $ (0.02) $ (0.07) $ (0.13)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
For the Six Months
Ended June 30,
1997 1996
Cash flows from operating activities:
Net loss $ (343,466) $ (711,166)
Noncash adjustments:
Net equity in (earnings) and losses
of joint operations (243,674) 354,869
Gain on sale of assets (62,510) (297,200)
Other 127,045 38,107
Changes in assets and liabilities (100,271) (284,666)
------- ---------
Net cash used by operating activities (622,876) (900,056)
------- ---------
Cash flows from investing activities:
Investment in and advances to joint
operations (4,649) (1,853,671)
Distributions and repayments from joint
operations 47,228 125,000
Proceeds from sale of assets - 745,970
Proceeds from repayment of airBaltic
subordinated debt - 290,000
Acquisition of property and equipment - (1,501)
------- ---------
Net cash provided (used) by
investing activities 42,579 (694,202)
------- ---------
Cash flows from financing activities:
New borrowings 55,000 500,000
Repayment of debt and long-term obligations (10,000) (155,000)
Issuance of stock, net of related costs 191,867 1,239,741
Payment of dividends - (48,000)
------- ---------
Net cash provided by financing activities 236,867 1,536,741
------- ---------
Net decrease in cash and cash equivalents (343,430) (57,517)
Cash and cash equivalents,
beginning of period 384,245 139,240
------- ---------
Cash and cash equivalents, end of period $ 40,815 $ 81,723
======= =========
See accompanying notes to condensed consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Notes to Condensed Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by Baltic International USA, Inc. (the "Company") and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial results for the six months ended June 30, 1997 and
1996, pursuant to the rules and regulations of the Securities and Exchange
Commission. All adjustments and provisions included in these consolidated
statements are of a normal recurring nature.
The information contained herein is condensed from that which would
appear in the annual financial statements; accordingly, the financial
statements included herein should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Annual Report
on Form 10-KSB filed by the Company with the Securities and Exchange
Commission for the fiscal year ended December 31, 1996. Accounting
measurement at interim dates inherently involve greater reliance on estimates
than at year end. The results of operations for the interim period presented
are not necessarily indicative of the results which can be expected for the
entire year.
NOTE 1 - OPERATIONS AND FINANCIAL CONDITION
The Company was organized to identify, form and participate in aviation-
related and other business ventures in Eastern Europe. The Company currently
owns an 8.02% interest in airBaltic Corporation SIA ("airBaltic"), the
national airline of Latvia. 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 the catering operations of Baltic Catering Services ("BCS") 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
marketing and sales company 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 also owns 49% of Baltic International Airlines ("BIA"), a
joint venture registered in the Republic of Latvia. The routes and passenger
service operations of BIA were transferred to airBaltic effective October 1,
1995, and BIA has not conducted any substantive business operations since that
date. The Company made significant investment in and advances to BIA which
has incurred losses of approximately $12,700,000 from inception through June
30, 1997.
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 above factors historically 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 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS
The investment in and advances to joint operations are as follows:
June 30, December 31,
1997 1996
Joint operations accounted for using
cost method:
airBaltic $1,918,000 $1,918,000
BIA 1,191,473 1,186,824
LAMCO 40,000 40,000
--------- ---------
Subtotal 3,149,473 3,144,824
--------- ---------
Joint operations accounted for using
equity method:
BCS 44,298 43,097
AIRO 315,141 110,956
RCS 222,889 147,898
--------- ---------
Subtotal 582,328 301,951
--------- ---------
Total $3,731,801 $3,446,775
========= =========
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:
June 30, December 31,
1997 1996
Current assets $ 767,348 $ 641,263
Property and other assets, net 689,699 551,105
--------- ---------
Total assets $1,457,047 $1,192,368
========= =========
Current liabilities $ 413,293 $ 518,345
Other liabilities - 195,540
Stockholders' equity 1,043,754 478,483
--------- ---------
Total liabilities and stockholders'
equity $1,457,047 $1,192,368
========= =========
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:
Six Months Ended June 30,
1997 1996
Operating revenues $ 1,390,965 $ 1,258,857
========== ==========
Income from operations $ 420,347 $ 507,870
========== ==========
Earnings $ 613,986 $ 396,711
========== ==========
Company Percentage Interest:
Six Months Ended June 30,
1997 1996
Operating revenues $ 581,995 $ 586,377
========= =========
Income from operations $ 166,450 $ 234,649
========= =========
Earnings $ 246,005 $ 180,149
========= =========
NOTE 3 - LOSS PER COMMON SHARE
The computations of loss per common share are computed using 7,680,041
and 5,984,813 weighted average shares of common stock for the three months
ended June 30, 1997 and 1996, respectively, and 7,606,757 and 5,921,828
weighted average shares of common stock for the six months ended June 30, 1997
and 1996, respectively. Stock warrants and options are considered to be
dilutive for earnings per share purposes if the average market price during
the three and six month periods ending on the balance sheet date exceeds the
exercise price and the Company had earnings for the period.
NOTE 4 - EQUITY TRANSACTIONS
During the three months ended June 30, 1997, shareholders converted an
aggregate of three shares of Series B Convertible Redeemable Preferred Stock
into 267,440 shares of the Company's common stock.
NOTE 5 - SUBSEQUENT EVENTS
In July 1997, the Company entered into a promissory note with ORESA
Ventures N.V. in connection with a $500,000 loan to the Company. Principal
and interest at an annual rate of 13% will be due the earlier of November 11,
1997 or the date in which the funding of an equity placement in the aggregate
amount of $2,500,000 is received by the Company.
In August 1997, the Company sold an aggregate of 2,500,000 shares of
common stock to Celox S.A. and ORESA Ventures N.V. for $1,000,000. In
connection with these private placements, the Company issued warrants to
purchase 2,500,000 shares at an exercise price of $0.65 per share, which
warrants are currently exercisable and expire in August 2002. In connection
with the subscription agreements for these private placements, the
shareholders have declared their intentions not to offer for resale the shares
for at least 24 months from the date of purchase.
In July 1997, the Company entered into a memorandum of understanding to
execute a share purchase and shareholder agreement with LSG Lufthansa
Services/Sky Chefs ("LSG"). The primary purpose of the agreement is to
identify AIRO as the vehicle for the development of new LSG in-flight kitchens
in Eastern Europe and the Republics of the former Soviet Union. Under the
agreement, the Company will transfer 5% of its 51% ownership of AIRO in return
for the LSG commitments and $600,000 in cash. Following the share purchase,
the Company will control 46% of AIRO and LSG 54%. The agreement provides that
the Company will remain as the day-to-day operating partner of AIRO, and AIRO
will become part of the worldwide network of LSG in all aspects consistent
with other LSG in-flight catering operations. The share purchase and
shareholder agreement is subject to the approval of the Company's Board of
Directors and the Supervisory Board of LSG Lufthansa Services Holding AG.
These approvals are expected in early September 1997.
BALTIC INTERNATIONAL USA, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's revenues are derived from its equity in the net income of
its joint operations and from revenue generated by BWAF and ADC.
Quarter Ended June 30, 1997 and 1996
For the quarter ended June 30, 1997, the Company had revenues of
$242,559 compared with $531,350 for the quarter ended June 30, 1996. The 54%
decrease is due to decreases in freight revenue and net equity in earnings of
catering operations. The decrease in net equity in earnings of joint
operations is principally due to the start-up costs associated with AIRO's
headquarters.
The Company's operating expenses for the quarter ended June 30, 1997
were $303,450 compared to $606,003 for the same quarter in 1996. The decrease
is due to decreases in cost of revenue and general and administrative
expenses. General and administrative expenses decreased to $204,272 in 1997
from $417,367 in the same quarter of 1996. This decrease was due primarily to
decreased personnel and consulting costs.
Interest expense increased to $141,980 in the second quarter of 1997
from $14,122 in 1996, reflecting the increased interest costs and amortization
of debt costs and discount for borrowings incurred during the second and
fourth quarters of 1996. This interest expense is related to debt used for a
capital contribution to airBaltic and the expansion of the Company's
activities.
The Company recorded a gain of $62,510 on the transfer of 2.82% of RCS
to AIRO during the second quarter of 1997. No such gain was recorded in 1996.
Six months Ended June 30, 1997 and 1996
For the six months ended June 30, 1997, the Company had revenues of
$535,259 compared with $677,480 for the six months ended June 30, 1996. Year-
to-date revenues were impacted by the same factors that affected the second
quarter results.
The Company's operating expenses for the six months ended June 30, 1997
were $674,061 compared to $1,633,303 for 1996. In addition to the factors
affecting the second quarter operating expenses, the decrease is due to no
reserve being required in 1997 on the investment in BIA similar to the reserve
of $612,385 for the first quarter of 1996.
As a result of the changes in revenues and expenses discussed above, the
operating loss for the Company decreased 85% to $138,802 for the first six
months of 1997 from $955,823 for the first six months of 1996.
The Company recorded a gain of $297,200 on the sale of the 12% airBaltic
stock during the first quarter of 1996. The Company recorded a gain of
$62,510 on the transfer of 2.82% of RCS to AIRO during the second quarter of
1997.
The Company had a net loss of $343,466 for the six months ended June 30,
1997 compared to a net loss of $683,262 for the six months ended June 30,
1996.
The Company's consolidated financial statements included elsewhere
herein present 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 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.
Pro forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 1997
Proportionate Pro forma
Company Share of Combined
(As reported) Joint Operations Eliminations Company
Operating revenues $ 535,259 $ 581,995 $(246,005) $ 871,247
Operating expenses 674,061 415,545 - 1,089,606
--------- --------- -------- --------
Income (loss) from
operations (138,802) 166,450 (246,005) (218,357)
Other income (expense) (204,664) 4,037 - (200,627)
--------- --------- -------- --------
Income (loss) before
income taxes (343,466) 170,487 (246,005) (418,984)
Benefit for income
taxes - 75,518 - 75,518
--------- --------- -------- --------
Net income (loss) $ (343,466) $ 246,005 $(246,005) $ (343,466)
========= ========= ======== ========
Liquidity and Capital Resources
The Company had $40,815 in cash at June 30, 1997, compared to $384,245
at December 31, 1996.
At June 30, 1997, the Company had a working capital deficit of
$2,817,649 as compared to $2,300,157 at December 31, 1996. The increase in
the working capital deficit is due primarily to a decrease in cash of $343,430
and an increase in accounts payable and accrued liabilities of $249,147.
Net cash used in operating activities for the six months ended June 30,
1997 was $622,876 as compared to $900,056 for the same period of 1996. Such
decrease was primarily due to the improved results from operations. Net cash
provided by investing activities was $42,579 for the six months ended June 30,
1997 compared to $694,202 used by investing activities for the six months
ended June 30, 1996. The decrease was due primarily to the decrease in
advances to BIA offset by proceeds from the sale of airBaltic shares in 1996.
Net cash provided by financing activities was $236,867 for the six months
ended June 30, 1997 compared to $1,536,741 for the six months ended June 30,
1996. The decrease was due to the proceeds of $1,090,200 raised from the
issuance of the Series B Convertible Redeemable Preferred Stock during 1996.
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 June 30, 1997
Proportionate Pro forma
Company Share of Combined
(As reported) Joint Operations Eliminations Company
Current assets $ 518,595 $ 328,507 $ - $ 847,102
Investments in and
advances to joint
operations 3,731,801 - (582,328) 3,149,473
Property and other
assets, net 424,403 304,598 54,037 783,038
--------- --------- -------- ---------
Total assets $4,674,799 $ 633,105 $(528,291) $4,779,613
========= ========= ======== =========
Current liabilities $3,336,244 $ 201,819 $ (97,005) $3,441,058
Stockholders' and
partners' equity 1,338,555 431,286 (431,286) 1,338,555
--------- --------- -------- ---------
Total liabilities and
equity $4,674,799 $ 633,105 $(528,291) $4,779,613
========= ========= ======== =========
BALTIC INTERNATIONAL USA, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings, None
Item 2. Changes in Securities, None
Item 3. Defaults Upon Senior Securities, None
Item 4. Submission of Matters to a Vote of Security-Holders, None
Item 5. Other Information, None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits, None
(b) No reports on Form 8-K were filed during the quarter ended
June 30, 1997.
BALTIC INTERNATIONAL USA, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
BALTIC INTERNATIONAL USA, INC.
(Registrant)
Date: August 14, 1997 BY: /s/ Robert L. Knauss
--------------------------- --------------------------
Robert L. Knauss,
Chairman of the Board and
Chief Executive Officer
Date: August 14, 1997 BY: /s/ James W. Goodchild
--------------------------- --------------------------
James W. Goodchild,
Chief Operating and Financial
Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997
<PERIOD-END> JUN-30-1997 JUN-30-1997
<CASH> 40,815 40,815
<SECURITIES> 0 0
<RECEIVABLES> 89,336 89,336
<ALLOWANCES> 0 0
<INVENTORY> 129,488 129,488
<CURRENT-ASSETS> 518,595 518,595
<PP&E> 13,395 13,395
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,674,799 4,674,799
<CURRENT-LIABILITIES> 3,336,244 3,336,244
<BONDS> 0 0
0 0
1905,000 1,905,000
<COMMON> 80,610 80,610
<OTHER-SE> (647,055) (647,055)
<TOTAL-LIABILITY-AND-EQUITY> 4,674,799 4,674,799
<SALES> 156,774 291,585
<TOTAL-REVENUES> 242,559 535,259
<CGS> 99,178 176,231
<TOTAL-COSTS> 303,450 674,061
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 141,980 275,232
<INCOME-PRETAX> (136,228) (343,466)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (136,228) (343,466)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (136,228) (343,466)
<EPS-PRIMARY> (0.03) (0.07)
<EPS-DILUTED> (0.03) (0.07)
</TABLE>
