As filed with the Securities and Exchange Commission on December 22, 1997
Registration No. 333-860
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
POST-EFFECTIVE AMENDMENT NO. 1 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BALTIC INTERNATIONAL USA, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 4511 76-0336843
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification
Number)
1990 Post Oak Blvd., Suite 1630 Robert L. Knauss
Houston, Texas 77056-3813 Baltic International USA, Inc.
(713) 961-9299 1990 Post Oak Blvd., Suite 1630
(Address, including zip code, and Houston, Texas 77056-3813
telephone number, including (713) 961-9299
area code, of registrant's (Name, address, including zip code,
principal executive offices) and telephone number, including
area code, of agent for service)
COPY TO:
Norman T. Reynolds, Esq.
Bowersox, Herron & Williamson, L.L.P.
5005 Riverway, Suite 160
Houston, Texas 77056
Phone (281) 820-5050
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities To Be Being Price Per Offering Registration
Registered Registered Share (1) Price (1) Fee
<S> <C> <C> <C> <C>
Shares Underlying Public Warrants 399,975 $6.000 $2,399,850 (2)
Shares Underlying Public Options 769,700 0.689 530,702 (3)
Shares to be Issued 119,175 0.422 50,277 17
Common Stock to be Resold (4):
Shares Outstanding 9,048,388 0.367 (5) 3,322,455 1,146
Shares to be Issued 119,175 0.422 50,277 17
Shares Underlying Preferred
Stock 1,322,579 0.930 1,230,000 -
Shares Underlying Resale
Warrants 9,515,870 0.695 6,609,226 2,279
Shares Underlying Resale
Options 302,666 1.000 302,583 104
TOTAL 21,597,528 - $14,495,370 $3,563 (6)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(2) The shares underlying Public Warrants were registered effective
April 26, 1994 under registration statement 33-74654-D. A filing fee of
$951.73 was previously paid.
(3) The shares underlying Public Options were registered effective March 6,
1995 and December 2, 1997 under registration statements 33-90030 and 333-
1210, respectively. Filing fees of $1,299 were previously paid.
(4) Common Stock to be Resold includes shares of Common Stock underlying
certain outstanding securities which are exercisable for or convertible
into shares of Common Stock which have not yet been exercised or converted.
(5) Based on the average of the high and low price per share of Common Stock as
reported by Nasdaq on December 17, 1997.
(6) A filing fee of $2,000.00 was previously paid.
Use of a combined prospectus is permitted pursuant to Rule 429(a), and
this Prospectus shall be deemed to constitute compliance with the undertakings
set forth in registration statements 33-74654-D and 33-90030.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
BALTIC INTERNATIONAL USA, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
Form SB-2 Item Number and Caption Location In Prospectus
1. Front of Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk
Factors; The Company
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page;
Risk Factors
6. Dilution *
7. Selling Security-Holders Plan of Distribution and
Selling Shareholders
8. Plan of Distribution Plan of Distribution and
Selling Shareholders
9. Legal Proceedings *
10. Directors, Executive Officers, Promoters
and Control Persons The Company; Management -
Executive Officers and
Directors
11. Security Ownership of Certain Beneficial
Owners and Management Principal Shareholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities *
15. Organization Within Last Five Years The Company
16. Description of Business Business
17. Management's Discussion and Analysis
or Plan of Operation Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Management - Certain
Transactions
20. Market for Common Equity and Related
Stockholder Matters Risk Factors; Price Range
of Common Stock and
Dividend Policy;
Description of Securities
21. Executive Compensation Management - Executive
Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure *
_____________________________
(*) None or Not Applicable
SUBJECT TO COMPLETION, DATED DECEMBER 22, 1997
Baltic International USA, Inc.
Issuance of 1,288,850 Shares of Common Stock
Resale of 20,308,678 Shares of Common Stock
This Prospectus relates to the issuance by Baltic International USA, Inc.
("Company") to related and unrelated parties of an aggregate of 1,288,850 shares
of the Company's Common Stock, $.01 par value ("Common Stock"). Of the
1,288,850 shares to be issued by the Company, (i) 769,700 shares are to be
issued upon the exercise of outstanding public options ("Public Options") which
are exercisable at prices ranging from $0.40625 to $1.375 per share which expire
on various dates from December 2000 to December 2001, and (ii) 119,175 shares
to be issued by the Company for services to be rendered which vest in August
1999, (iii) 399,975 shares are to be issued upon the exercise of outstanding
public warrants ("Public Warrants") which are exercisable for $6.00 per share
and expire on April 26, 1998. The Public Warrants may be redeemed by the
Company at $.05 per Public Warrant, on not less than 30 days' nor more than
60 days' written notice, if the average of the last sales price of the Common
Stock for a period of 30 consecutive trading days equals or exceeds $10.00 per
share, subject to adjustment, provided that such notice is mailed not later
than 20 days after the end of such period. This Prospectus also relates to
the resale of 20,308,678 shares of Common Stock which may be sold by the
holders thereof ("Selling Shareholders") from time to time as market conditions
permit in the market, or otherwise, at prices and terms then prevailing or at
prices related to the then current market price, or in negotiated transactions.
The shares to be resold include (i) 9,048,388 shares issued and outstanding;
(ii) 9,515,870 shares underlying outstanding warrants ("Resale Warrants")
exercisable at prices ranging from $0.4375 to $2.40 per share which expire
on various dates from August 1998 to September 2002; (iii) 302,666 shares
underlying outstanding options ("Resale Options") exercisable at prices
ranging from $0.50 to $1.125 per share which expire on various dates from
September 1999 to October 1999; (iv) 1,322,579 shares underlying outstanding
shares of the Company's Convertible Redeemable Series A Preferred Stock
("Series A Preferred Stock") convertible at a current conversion price of
$0.93 per share; and (v) 119,175 shares to be issued by the Company for
services to be rendered which vest in February 1998. See "Management-Stock
Options," "-Certain Transactions," "Description of Securities" and "Plan of
Distribution and Selling Shareholders." Shares offered by the Selling
Shareholders may be sold in unsolicited ordinary brokerage transactions or
privately negotiated transactions between the Selling Shareholders and
purchasers without a broker-dealer. A current prospectus must be
in effect at the time of the sale of the shares of Common Stock to which this
Prospectus relates. Each Selling Stockholder or dealer effecting a transaction
in the registered securities, whether or not participating in a distribution,
is required to deliver a current prospectus upon such sale. The shares to be
issued by the Company upon exercise of the Public Options and Public Warrants
are being offered on a "best-efforts, no minimum" basis. The Company will
retain all proceeds from the exercise of the Public Options and Public Warrants,
regardless of the number exercised. Such proceeds (approximately $2.7 million)
will be used for working capital and general corporate purposes. The Company
will not receive any proceeds from the resale of Common Stock by the Selling
Stockholders. The Company's Common Stock is traded on the Nasdaq SmallCap
Market under the symbol "BISA." On December 17, 1997, the last sales price
of the Common Stock as reported by Nasdaq was $0.375.
___________________________
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 6.
___________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
TABLE OF CONTENTS
Page
Available Information 2
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 11
Price Range of Common Stock and Dividend Policy 11
Capitalization 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Business 19
Management 24
Principal Shareholders 31
Description of Securities 32
Plan of Distribution and Selling Shareholders 36
Legal Matters 41
Experts 41
Index to Financial Statements F-1
No person is authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having
been authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby, or an offer to sell or a solicitation of an offer
to buy any securities offered hereby to or from any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the business or
affairs of the Company since the date hereof or that the information in this
Prospectus is correct as of any time subsequent to the date as of which such
information is furnished.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), and, in
accordance therewith, files periodic reports, proxy materials and other
information with the Securities and Exchange Commission ("Commission"). Such
reports, proxy materials and other information are available for inspection
at, and copies of such materials may be obtained upon payment of the fees
prescribed therefor by the Commission from the Commission at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549, as well as the following regional offices: 7 World
Trade Center, New York, New York 10048, and 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661.
The Company has filed a registration statement on Form SB-2
("Registration Statement") under the Securities Act of 1933, as amended
("Securities Act") with respect to the securities being registered. This
Prospectus does not contain all the information set forth in the Registration
Statement and the exhibits and schedules thereto, to which reference is hereby
made. Copies of the Registration Statement and its exhibits are on file at
the offices of the Commission and may be obtained upon payment of the fees
prescribed by the Commission or may be examined, without charge, at the public
reference facilities of the Commission.
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is
qualified in its entirety by, the more detailed information appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the caption "Risk Factors." Unless otherwise
indicated, all monetary amounts have been expressed in U.S. dollars.
The Company
Baltic International USA, Inc. (the "Company") is a Texas corporation
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, the Company 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.
Value is being created 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. The Company provides freight marketing services through
Baltic World Air Freight ("BWAF"), a wholly owned Latvian limited liability
company based in Riga. The Company provides food distribution services
through American Distributing Company ("ADC"), a wholly owned Latvian limited
liability company.
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, Air Baltic Corporation
("Air Baltic"). Air Baltic 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.
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, its partial 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 Air Baltic. AIRO has 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 five years exclusivity. This kitchen should be open in early
1998. AIRO is in discussion with relevant airport authorities to open
additional kitchens during 1998.
In April 1997, LSG Lufthansa Services/Sky Chefs ("LSG") purchased a 51%
interest in TOPflight. In December 1997, the Company entered into a share
purchase and shareholder agreement with 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 sold 5% of its 51% ownership of AIRO
to LSG in return for the LSG commitments and $600,000 in cash. Following the
share purchase, the Company controls 46% of AIRO and LSG controls 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.
On April 2, 1996, the catering operations of Baltic Catering Services
("BCS") were acquired by Riga Catering Services ("RCS"), previously owned by
TOPflight, in exchange for shares in RCS. RCS is currently owned 37.82% by
AIRO, 20.68% by the Company and 41.5% by the principals of the Company's partner
in BCS. The business of BCS after the transfer of the catering business to RCS
is primarily the operation of the restaurant in the Riga Airport. BCS is owned
50% by the Company and 50% by ARVO, Ltd., a Latvian limited liability company.
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 is beneficial to
BIUSA.
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 1998, and no significant revenues are expected.
The Company will continue to use its 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.
Members of the Company's Board of Directors have substantial experience
in business dealings with officials, practices and customs in the former
Soviet Union and Asia. Robert Knauss and Paul Gregory have served as
consultants and advisors to the former Soviet Union and Russian government;
Juris Padegs has been involved in international investments for over 25 years;
and Homi Davier has participated in the start-up and management of the
national aviation company of Oman and the Middle Eastern operations of the
national aviation company of Bangladesh, and has extensive experience in the
travel agency industry.
The Company was incorporated in Texas in March 1991. Unless otherwise
indicated, references to the Company include its interests in BIA, Air Baltic,
BWAF, BCS, ADC, AIRO, RCS, and LAMCO. The offices of the Company are located
at 1990 Post Oak Boulevard, Suite 1630, Houston, Texas 77056-3813 and its
telephone number is (713) 961-9299.
The Company's current subsidiaries and joint operations include:
Baltic International USA, Inc.
Airlines Catering Distribution Cargo & Maintenance
-------- -------- ------------ -------------------
Air Baltic AIRO Catering American Baltic World Air
Corporation 8% Services 46% Distributing Freight 100%
Riga Catering Company 100% Baltic Int'l
Services 20.68% Airlines 49%
Baltic Catering LAMCO 2.6%
Services 50%
Note: Percentages reflect the Company's ownership interest.
The Offering
Common Stock Outstanding
Prior to Offering 15,460,348 (1)
Common Stock to be Issued 1,288,850 (2)
Common Stock to be Resold 20,308,678 (3) See "Plan of Distribution and
Selling Shareholders."
Use of Proceeds Working capital. See "Use of Proceeds."
Nasdaq Symbol BISA
_____________________
(1) Does not include (i) 1,072,366 shares issuable upon exercise of
outstanding Resale Options and Public Options; (ii) 10,035,845 shares
underlying the Resale Warrants, Public Warrants and Representative's
Warrants; (iii) 238,950 shares to be issued for services to be rendered
currently and in the future; (iv) 1,322,579 shares underlying
outstanding shares of Series A Preferred Stock; and (v) 800,611 shares
underlying outstanding shares of Series B Preferred Stock. See
"Management -Stock Options" and "Description of Securities."
(2) Includes (i) 769,700 shares to be issued upon exercise of the Public
Options (ii) 119,175 shares to be issued for services to be rendered in
the future, and (iii) 399,975 shares to be issued upon exercise of the
Public Warrants. See "Plan of Distribution and Selling Shareholders."
(3) Includes (i) 9,048,388 shares issued and outstanding; (ii) 9,515,870
shares underlying currently exercisable Resale Warrants; (iii) 302,666
shares underlying currently exercisable Resale Options; (iv) 119,175
shares to be issued for services to be rendered currently; and (v)
1,322,579 shares underlying outstanding shares of convertible Series A
Preferred Stock.
Summary Financial Data
Nine Months Ended Year Ended December 31,
Statement of Operations Data: September 30, 1997 1996 1995
Revenues $ 837,040 $ 1,313,257 $ 4,527,295
Loss before income taxes (648,552) (1,232,849) (2,127,624)
Net loss (648,552) (1,248,543) (2,127,624)
Net loss per common share (0.10) (0.23) (0.51)
September 30, December 31,
Balance Sheet Data: 1997 1996
Working capital deficit $ (1,269,951) $ (2,300,157)
Total assets 6,209,647 4,579,214
Total long-term liabilities 0 0
Stockholders' equity 3,272,251 1,636,899
RISK FACTORS
An investment in the Company involves certain risks. Prospective
investors should carefully review the following factors together with the
other information contained in this Prospectus prior to making an investment
decision.
History of Operating Losses; Profitability Uncertain
From its inception in 1991 through September 30, 1997, the Company has
incurred operating losses on an annual basis. For the years ended
December 31, 1996 and 1995, the Company had revenues of $1,313,257 and
$4,527,295, respectively, with net losses of $1,248,543 and $2,127,624,
respectively. BIA's losses have historically directly affected the Company's
results of operations. The Company recorded losses relating to BIA of
$612,385 and $3,440,445 for the years ended December 31, 1996 and 1995,
respectively. However, BIA has had no operations since September 1995 and the
Company has recorded no losses relating to BIA in 1997. For the nine months
ended September 30, 1997, the Company had revenues of $837,040 with a net loss
of $648,552. The Company believes that its results of operations have been
and will continue to be affected by various factors, including market
acceptance of the Company's business ventures, regional, economic and
political factors and the need for additional capital. There can be no
assurance that the Company, or any of its business operations, including Air
Baltic, will experience profitability in the future, if at all. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Capital Requirements; Limited Sources of Liquidity
The Company requires substantial capital to pursue its operating
strategy. At September 30, 1997, the Company had a working capital deficit of
$1,269,951 and its debt to equity ratio was 90%. To date, the Company has
relied on net cash provided by financing activities to fund its capital
requirements. Financing activities, primarily through the issuance of stock
and debt, provided the Company with $3,161,827 and $3,338,134 of cash during
1996 and 1995, respectively, and $2,056,123 of cash for the nine months ended
September 30, 1997. In November 1996, the Company entered into a promissory
note in connection with a $2,000,000 loan to the Company. In August and
September 1997, the Company raised additional equity of $2,775,000. Operating
activities generated $2,531,097 in cash during 1995; however, operating
activities used net cash of $2,082,722 during 1996. Furthermore, the Company
used $834,100 and $5,825,258 of cash in investing activities during 1996 and
1995, respectively. Through September 30, 1997, the Company has advanced an
aggregate of approximately $13 million to BIA. At September 30, 1995, the
Company elected to forgive $4,042,255 of debt from BIA as it was deemed to be
uncollectible. As of September 30, 1997, the Company had recorded an
investment to Air Baltic of $1,918,000. In October 1997, the Company
contributed an additional $226,333 of capital to Air Baltic. The Company will
be dependent upon Air Baltic generating sufficient cash flow and profitability
from operations, of which there can be no assurance, in order to maintain the
Company's collectibility of the investment. The Company has no obligation to
make further capital contributions to Air Baltic. Air Baltic may make capital
calls of its shareholders including the Company. The Company has no
obligations under any such capital calls and may take a dilution in its
ownership of Air Baltic or at the Company's option may make additional
contributions to maintain or increase its ownership percentage. The Company's
influence over and participation in the management of Air Baltic is nominal.
The Company's operations have been and are expected to continue to be
insufficient as a source of funds to meet the Company's capital requirements
and other liquidity needs. In August and September 1997, the Company raised
additional equity of $2,775,000 in exchange for a private placement of
6,800,000 shares of Common Stock. In connection with these private
placements, the Company issued warrants to purchase 6,800,000 shares of the
Common Stock 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 private placements for 6,250,000 of these shares
sold, the shareholders have declared their intentions not to offer for resale
the shares for at least 24 months from the date of purchase. Management
believes that the Company will be able to achieve a satisfactory level of
liquidity to meets its business plan and capital needs for the next 12 months.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations."
Modified Opinions Regarding Financial Statements
The Company's internally generated cash flows from operations have
historically been insufficient for cash needs. BIA historically relied upon
financing provided by the Company to supplement its operations. The Company's
current and prior independent accountants modified their opinion 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 have
raised substantial doubt about the ability of the Company to continue as a
going concern. Furthermore, these financial statements do not include any
adjustments that might result from the outcome of such uncertainty. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Company's financial statements included elsewhere in this
prospectus.
Dispute Resolution Under Joint Venture Agreements; Lack of United States
Jurisdiction
The Air Baltic joint venture agreement provides that disputes that
cannot be resolved between the parties be submitted to binding arbitration
under the rules of the Arbitration Institute of the Stockholm Chamber of
Commerce in Stockholm, Sweden. The Air Baltic Joint Venture Agreement is
governed by Swedish law, except where Latvian law is mandatory. Therefore,
any such dispute would not be resolved in the courts of the United States. As
substantially all of the assets of Air Baltic are located outside of the
United States, the Company may have difficulty in enforcing a judgment against
Air Baltic. Moreover, investors in the Company may have difficulty
prosecuting a claim, or enforcing any judgment, against the Company due to
these factors.
Default Under Joint Venture Agreements
The Air Baltic Joint Venture Agreement provides that in the event of a
default of the terms and provisions of the Air Baltic Joint Venture Agreement
by any of the parties thereto, the nondefaulting parties have the right to
continue the business of Air Baltic. The nondefaulting parties may do so by
paying any defaulting party the nominal value ($100 per share) of the
defaulting party's percentage share ownership in hard currency. The Company
owns 1,918 shares of Air Baltic; and therefore, the Company would receive
$1,918,000 if it were to default. The Air Baltic Joint Venture Agreement
provides for a 30-day cure period in the event of a default; provided,
however, that the cure period for a default caused by failure to make
subordinated debt financing available is 10 days.
Government Factors and Licensing
The Company currently operates in Latvia and intends to expand its
operations to the other Baltic States and the Newly Independent States, a
region that is in the early stages of developing a market economy. New laws
are being enacted but many remain untested. Although the Company believes
that the Republic of Latvia has advanced in the area of commercial law,
Latvian laws and courts are not well tested in contract enforcement. While
Latvia's law on foreign investment provides guarantees against nationalization
and expropriation, there is little or no judicial precedent in this area.
Additionally, the Latvian law on foreign investment currently allows free
repatriation of funds and includes certain tax holiday provisions; however, no
assurances can be given that these provisions will not be modified or repealed
in the future.
Unfavorable Operating Costs or Political Developments
The Company's business strategy is to identify aviation-related business
opportunities in Latvia, the other Baltic States and Newly Independent States.
This strategy is based on the Company's view that this region has a low cost
work force, and generally lower costs to conduct business as compared to such
costs in Western Europe and in the United States. In the event that inflation
or other factors were to increase the cost of doing business in Latvia, the
other Baltic States and the Newly Independent States, 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,
the other Baltic States and the Newly Independent States remains dependent, in
part, on political events in neighboring republics. Without significant armed
forces for self-defense, the Baltic States and the Newly Independent States
remain dependent on support from Europe and the United States, and the
development of pro-Democracy and pro-Western political forces in Russia and
neighboring regions. Although Russian troops were withdrawn from Latvia in
August 1994, the proximity of Russian armed forces represents a political
risk. It is presumed that Russian political influence will remain strong in
the Baltic States and the Newly Independent States in which the Company
intends to operate. Accordingly, unforeseeable and uncontrollable costs and
political factors could adversely affect the Company's operations and ability
to implement its business strategy.
Dependence on Key Personnel; Management of Foreign Operations; Management of
Growth
The success of the Company is dependent upon, among other things, the
expertise of Messrs. Knauss, Chief Executive Officer, and James Goodchild,
President and Chief Operating Officer. The loss of the services of Messrs.
Knauss or Goodchild would have an adverse effect on the Company's operations.
In order to manage the Company's business operations, management must continue
to improve and expand the level of expertise of its personnel and must
attract, train and manage qualified managers and employees to oversee and
manage the foreign operations. Management of foreign operations is subject to
political and socioeconomic factors different from operating a business in the
United States. Accordingly, if the Company is unable to manage the foreign
operations of its business interests effectively, operating results will be
adversely affected. Additionally, the success of the Company's business
strategy is dependent, in part, on the ability of the Company and of its joint
operations to acquire the equipment, personnel and financing necessary to
support the Company's operations and growth. There can be no assurance that
the Company or its joint operations will be able to successfully finance
equipment acquisitions on favorable terms, attract and train qualified
personnel, obtain additional financing, or manage a larger operation. See
"Management."
Exchange Risk
The Company operates its current ventures in convertible currencies.
The Latvian currency ("Lat") is currently freely convertible, but there can be
no assurance that other governments will not place restrictions on currency
conversion. If this were to occur, the Company's earnings would be subject to
exchange rate risk on those sales that occur in the local market. If the
Company expands into other Baltic States or the Newly Independent States with
less stable currencies, exchange rate risks could be greater. In Western
markets in which the Company operates, the exchange rate risk would be that of
exchange rate fluctuations among major currencies (such as the United States
dollar to the German mark). There can be no assurance that currency exchange
rates will not fluctuate, or that adverse currency restrictions will not be
imposed in the future.
Competition
The Company's operations encounter varying degrees of competition from
diverse markets. Air Baltic competes on the basis of price, quality of
service and convenience. Many of the airlines against which Air Baltic
competes against, have longer operating histories, greater name recognition,
greater financial resources, more extensive facilities and equipment, and
better marketing resources than those available to Air Baltic. Many scheduled
carriers compete for customers in a variety of ways, including wholesaling to
tour operators, discounting seats on scheduled flights, promotions to travel
agents, prepackaging tours for sale to retail customers and selling
discounted, excursion airfare only products to the public. As a result, Air
Baltic is required to compete for customers against the lowest revenue
generating seats of the scheduled airlines. During periods of dramatic fare
cuts by scheduled airlines, Air Baltic may be forced to respond with reduced
fares, which could have a material adverse effect on its operating results.
Air Baltic competes with private carriers on certain of its routes.
Competition may also be affected by governmental actions including licensing,
bilateral agreements and other regulatory actions. There can be no assurance
that competitive conditions will not have an adverse effect on Air Baltic's
operations.
BWAF will experience competition from other cargo and marketing sales
companies which are establishing a presence in the Baltic States and
surrounding region including the cargo marketing divisions of airlines which
are expanding service within current markets in which BWAF is working or
targeting for expansion. However, BWAF has no specific knowledge of the plans
of the activities of other potential competitors into the existing or future
planned markets of BWAF.
The operations of AIRO may also experience competitive pressures.
However, currently and during the early years of the development of AIRO, it is
targeting to develop operations in markets in which there is currently no
direct competition. As AIRO's activities and the markets in which AIRO has
developed operations mature, AIRO can expect competition from other in-flight
catering companies. The Company has no knowledge of any plans of the other
companies involved in in-flight catering services in the existing and planned
markets of AIRO.
ADC competes directly with other similar companies in the distribution of
its products. However, ADC retains specific licenses to exclusively distribute
the products which it sells and the competition is directed between a choice of
different brands of similar products. ADC expects the competition in food and
consumer goods distribution to continue to increase. However, the Company and
ADC have no knowledge of the specific plans of any of the distributing
companies in the region. See "Business-Competition."
Conflicts of Interests; Difficulty in Evaluating Financial Statements
The management of the Company also has management responsibilities for
the day-to-day affairs of AIRO, RCS, BWAF, ADC, BCS and BIA. Additionally,
these companies have or will enter into contracts and business relationships
with each other and with other third parties. An inherent conflict of
interest exists due to the interests of the Company through its ownership of
BWAF and ADC and, as joint operation partner-operator of BIA, BCS, AIRO, RCS
and Air Baltic when such ventures and other companies of the Company enter
into business relationships with each other. A potential for pecuniary gain
to management of the Company and for the compromise of management's fiduciary
duties exists in any related party transaction. No independent determination
has been made as to the fairness and reasonableness of any related party
transaction and no guidelines have been established to resolve any conflicts
of interest. It should be assumed that all agreements and arrangements
between and among the ventures are not negotiated on an arm's length basis;
however, all agreements and arrangements by and between the ventures and third
parties are negotiated at arm's length and are approved by management of the
respective parties and those relating to Air Baltic are approved by the Board
of Directors of Air Baltic. The Company's joint operation partners handle
contract negotiations between the joint operations. In dealings between and
among the Company and its subsidiaries and joint operations, management of the
Company will seek to have potential conflicting matters approved by its
independent directors, or will seek the advice of independent counsel.
Management may be faced with the issue of whether to bring opportunities to
the attention of the Company for its participation or to other affiliated
firms.
The Company is a joint operation partner in a group of affiliated
companies and has extensive transactions and relationships with members of the
group. Therefore, the Company's financial statements may be difficult to
evaluate. See Financial Statements.
No Dividend History
The Company has never paid cash dividends on its Common Stock and
presently intends to retain any earnings to finance the expansion of its
business. See "Price Range of Common Stock and Dividend Policy."
Need to Maintain a Current Prospectus
The Company must maintain a current prospectus in order for the Selling
Shareholders to sell the shares of Common Stock to which this Prospectus
relates. In the event the Company is unable to maintain a current prospectus
due to lack of sufficient financial resources or for other reasons, the
Selling Shareholders will be unable to resell their shares in any public
market.
Shares Reserved for Issuance
The Company has 13,216,401 shares of Common Stock reserved for issuance
upon the exercise of the outstanding Public Warrants, Resale Warrants, Public
Options, Resale Options and Representative's Warrants, as well as upon the
conversion of the Series A Preferred Stock and the Series B Preferred Stock.
These securities are convertible or exercisable at prices that range from
$0.421875 to $9.80 per share and expire on various dates extending to August
2004. The shares to be issued upon exercise of the Public Options and Public
Warrants are being offered by the Company on a "best efforts - no minimum"
basis, and the Company will retain all proceeds from the exercise of the
Public Options and Public Warrants regardless of the amount exercised. There
can be no assurance that any of these securities will be converted or
exercised, or that the Company will receive any proceeds from the conversion
or exercise thereof. The exercise or conversion of these securities, and the
resale of the underlying shares, could have a dilutive effect on the
prevailing market price of the Common Stock. See "Management-Stock Options"
and "Description of Securities."
10
USE OF PROCEEDS
Assuming exercise of all of the Public Options and Public Warrants, the
Company will receive aggregate proceeds of approximately $2,900,000 prior to
deducting estimated offering expenses of approximately $175,000. The Company
will use the proceeds, if any, for working capital and will have broad
discretion in the application of such proceeds. As there are no commitments
from the holders of the Public Options and Public Warrants to exercise such
securities, there can be no assurance that the Public Options and Public
Warrants will be exercised. The Company will receive no proceeds from the
resale of shares by the Selling Stockholders. See "Plan of Distribution and
Selling Stockholders."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the Nasdaq Small-Cap Market
under the symbol "BISA." Public trading of units (consisting of one share of
Common Stock and one Public Warrant) ("Units") on Nasdaq commenced on April
28, 1994. The Units separated and public trading of the Common Stock and
Public Warrants on Nasdaq commenced on June 27, 1994. The following table
sets forth the high and low last sales prices of the Common Stock for the
periods indicated:
1997 1996 1995
High Low High Low High Low
First Quarter $0.750 $0.375 $2.875 $1.000 $2.375 $1.250
Second Quarter 0.500 0.375 2.750 0.813 2.000 0.688
Third Quarter 1.031 0.375 1.156 0.563 3.625 1.313
Fourth Quarter N/A N/A 1.188 0.344 3.500 0.938
On December 17, 1997, the last sales price for the Common Stock was
$0.375, and the Company believes there were approximately 1,000 beneficial
holders of its Common Stock.
The Company has not paid, and the Company does not currently intend to
pay cash dividends on its Common Stock. The current policy of the Company's
Board of Directors is to retain earnings, if any, to provide funds for
operation and expansion of the Company's business. Such policy will be
reviewed by the Board of Directors of the Company from time to time in light
of, among other things, the Company's earnings and financial position.
11
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997. This table should be read in conjunction with the
Company's financial statements and notes thereto that are included elsewhere
in this Prospectus.
September 30,
1997 (1)
(unaudited)
Shareholders' equity:
Preferred stock:
Series A, convertible, $10 par value, 499,930
shares authorized, 123,000 shares issued
and outstanding $ 1,230,000
Series B, convertible, $10 par value, 70
shares authorized, 18 shares issued and
outstanding 450,000
Common stock, $.01 par value, 40,000,000
shares authorized, 15,361,263 shares issued
and 14,849,377 shares outstanding 153,613
Additional paid-in capital 12,991,218
Accumulated deficit (11,304,859)
Treasury stock, at cost (247,721)
------------
Total shareholders' equity $ 3,272,251
============
_________________________
(1) Does not give effect to the issuance of (i) 9,515,870 shares of Common
Stock upon exercise of the Resale Warrants; (ii) 399,975 shares upon
exercise of the Public Warrants; (iii) 302,666 shares upon exercise of
outstanding Resale Options; (iv) 769,700 shares upon exercise of
outstanding Public Options; (v) 238,950 shares to be issued for services
to be rendered currently and in the future; (vi) 1,322,579 shares upon
conversion of the Series A Preferred Stock; and (vii) 141,529 shares of
Common Stock issued subsequent to September 30, 1997.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions contain forward-looking information. Readers
are cautioned that such information involves risks and uncertainties,
including those created by general market conditions, competition and the
possibility of events may occur which limit the ability of the Company to
maintain or improve its operating results or execute its primary growth
strategy. Although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any of the assumptions could be
inaccurate, and there can therefore be no assurance that the forward-looking
statements included herein will prove to be accurate. The inclusion of such
information should not be regarded as a representation by the Company or any
other person that the objectives and plans of the Company will be achieved.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
General
In 1996 and 1997, 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 12% of Air Baltic stock to SAS for $1.7
million in cash and the assumption by SAS of the remaining subordinated debt
obligation of the Company to Air Baltic. The Company retains an 8.02% interest
in Air Baltic.
In February 1996, the Company and Topflight AB 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 1997, LSG purchased a 51% interest in Topflight. In December
1997, the Company entered into an agreement to sell 5% interest in AIRO to LSG
in return for LSG commitments and $600,000 in cash. Following the share
purchase transaction with LSG, the Company controls 46% of AIRO and LSG
controls 54%.
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 Air Baltic in 1995, the Company has not earned any revenue
for management fees and commissions from BIA after 1995. 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 of the
year ending December 31, 1998. See discussion of the Company's financing
activities during 1997 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
13
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 position 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 Latvian 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
Nine months Ended September 30, 1997 and 1996. For the nine months
ended September 30, 1997, the Company had revenues of $837,040 compared with
$1,099,114 for the nine months ended September 30, 1996. The 23% decrease is
due to decreases in freight revenue and net equity in earnings of catering
operations. The decrease in freight revenue is due to a shift in the
frequency of destinations flown by Air Baltic, which now include code share
arrangements with other airlines of some destinations. 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 nine months ended September 30,
1997 were $1,147,481 compared to $2,148,388 for 1996. The decrease is due
primarily 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.
Additionally the decrease is due to decreases in cost of revenue and general
and administrative expenses. The decrease in cost of revenue results from
lower freight revenue. General and administrative expenses which includes
personnel and consulting, legal and professional and other general and
administrative costs, decreased to $865,294 in 1997 from $1,152,950 in 1996.
This decrease was due primarily to decreased personnel and consulting costs.
As a result of the changes in revenues and expenses discussed above, the
operating loss for the Company decreased 70% to $310,441 for the first nine
months of 1997 from $1,049,274 for the first nine months of 1996. However,
the Company had a net loss (including interest expense and non-recurring gains
discussed below) of $648,552 for the nine months ended September 30, 1997
compared to a net loss of $771,580 for the nine months ended September 30,
1996.
Interest expense increased to $408,381 in 1997 from $47,513 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 Air Baltic 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 1997. The Company recorded a gain of $297,200 on the sale of the 12%
Air Baltic stock during the 1996.
14
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 Air Baltic, 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 Nine Months Ended September 30, 1997
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
<S> <C> <C> <C> <C>
Operating revenues $ 837,040 $ 934,925 $(354,337) $1,417,628
Operating expenses 1,147,481 664,042 - 1,811,523
Income (loss) from operations (310,441) 270,883 (354,337) (393,895)
Other income (expense) (338,111) 9,032 - (329,077)
Income (loss) before
income taxes (648,552) 279,915 (354,337) (722,974)
Provision for income taxes - 74,422 - 74,422
Net income (loss) $ (648,552) $ 354,337 $ (354,337) $ (648,552)
</TABLE>
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 Air Baltic in payment of market development
and training for Latvian pilots, flight attendants and mechanics and non-
recurring wet lease revenue of $1,500,000 received from Air Baltic 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 Air Baltic stock to SAS
for $1.7 million in cash and the assumption by SAS of the Company's future debt
funding obligation to Air Baltic 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 Air Baltic. A gain of $297,000 was recognized on this sale.
The Company had a net loss of $1,248,543 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 Air
Baltic using the equity method of accounting in
15
accordance with generally
accepted accounting principles. The Company's interests in Air Baltic, 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 September 30, 1997, the Company had a working capital deficit of
$1,269,951 as compared to $2,300,157 at December 31, 1996. The decrease in
the working capital deficit is due primarily to an increase in cash of
$879,311 and a decrease in short-term debt of $215,679 partially offset by an
increase in accounts payable and accrued liabilities of $285,479.
Net cash used in operating activities for the nine months ended
September 30, 1997 was $909,691 as compared to $1,004,998 for the same period
of 1996. Such decrease was primarily due to the improved results from
operations. Net cash used by investing activities was $267,121 for the nine
months ended September 30, 1997 compared to $774,472 used by investing
activities for the nine months ended September 30, 1996. The decrease was due
primarily to the decrease in advances to BIA offset by proceeds from the sale
of Air Baltic shares in 1996. Net cash provided by financing activities was
$2,056,123 for the nine months ended September 30, 1997 compared to $1,699,827
for the nine months ended September 30, 1996. The increase was due to the net
proceeds of $2,725,394 raised from the issuance of common stock during 1997
compared to proceeds of $1,090,200 raised from the issuance of the Series B
Convertible Redeemable Preferred Stock and net proceeds of $349,252 raised
from the issuance of common stock during 1996. This increase was partially
offset by the decrease in new borrowings and the increase in repayment of
debt.
16
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 Air Baltic, 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 $1,640,445 $ 327,392 $ - $1,967,787
Investments in and
advances to joint
operations 4,419,952 - (991,262) 3,158,690
Property and other
assets, net 490,250 737,044 61,042 1,217,336
Total assets $6,209,647 $1,064,386 $ (938,220) $6,343,813
Current liabilities $2,951,766 $ 290,794 $(156.628) $3,085,932
Other liabilities - - - -
Stockholders' and
partners' equity 3,257,881 773,592 (773,592) 3,257,881
Total liabilities and
equity $6,209,647 $1,064,386 $(938,220) $6,343,813
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 consisted of a loan in the amount of $2,000,000 that the Company
entered into in November 1996. This loan was refinanced in October 1997 and is
now due in January 1999 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 Air Baltic to SAS for $2,144,333 during the period from
June 1, 1997 to February 28, 1999. Under this option agreement, SAS has the
right to call the Company's Air Baltic shares for a price ranging from
$3,329,962 to $5,089,012 during the same period. 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.
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 order to meet its goals with respect to AIRO, the Company raised
additional equity in August and September 1997 of $2,775,000 in exchange for
6,800,000 shares of Common Stock. In connection with these private
placements, the Company issued warrants to purchase 6,800,000 shares at an
exercise price of $0.65 per share of Common Stock, which warrants are
currently exercisable and expire in August 2002. In connection with the
subscription agreements for private placements for 6,250,000 of these shares
sold, the shareholders have declared their intentions not to offer for resale
the shares for at least 24 months from the date of purchase. Management
believes that the Company will be able to achieve a satisfactory level of
liquidity to meets its business plan and capital needs for the next 12 months.
17
As of September 30, 1997, 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.
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.
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. In May 1997, the Company capitalized $6.5
million of BIA's debt to the Company. 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 or early 1998. 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.
18
BUSINESS
The Company is a Texas corporation 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, the Company is directly involved in management, and in all
instances assists in allocation of capital either directly from the Company or
through the investment of third parties. BIUSA has not taken significant
profits, or management fees from these investments. Value is being created 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.
The Company will continue to use its 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.
The Company's current subsidiaries and joint operations include:
Baltic International USA, Inc.
Airlines Catering Distribution Cargo & Maintenance
-------- -------- ------------ -------------------
Air Baltic AIRO Catering American Baltic World Air
Corporation 8% Services 46% Distributing Freight 100%
Riga Catering Company 100% Baltic Int'l
Services 20.68% Airlines 49%
Baltic Catering LAMCO 2.6%
Services 50%
Note: Percentages reflect the Company's ownership interest.
Air Baltic Corporation
In 1992, the Company developed Baltic International Airlines ("BIA") -
the first independent airline in the former Soviet Union. In October 1995, the
Company sold the scheduled passenger service operations of its 49% interest in
BIA, to the newly created national airline of Latvia, Air Baltic. Air Baltic 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, Air Baltic 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.
Air Baltic 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.
Air Baltic is pursuing a strategy of operating a fleet of low cost Western
aircraft for expansion to the East from its hub in Riga as well as Western
Europe. Cockpit, cabin crew, and maintenance personnel have been and are being
trained in Western operations. Air Baltic 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.
Air Baltic 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 FAA standards. Air Baltic provides routine
19
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 Air Baltic 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 airlines, 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 Air Baltic.
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 -that is, food for both legs of the
trip is carried on board from the originating point - increasing food costs and
reducing 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 interest in RCS for a 49%
interest. During 1997, LSG Lufthansa Services/Sky Chefs ("LSG") purchased 51%
of TOPflight. AIRO currently operates Riga Catering Services in Riga, which was
started by the Company, and caters all carriers which serve Riga International
Airport including SAS, Lufthansa and Air Baltic.
AIRO has finalized a contract to open an in-flight catering kitchen in
Kiev, Ukraine. The contract provides for a 20-year lease to AIRO with at least
five years exclusivity. This kitchen should be open by the beginning of 1998.
AIRO is also completing contract negotiations to open a new kitchen in Tallinn,
Estonia by the end of 1997. AIRO has identified three more destinations for
opening new kitchens in 1998.
In December 1997, the Company entered into a share purchase and shareholder
agreement with 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
sold 5% of its 51% ownership of AIRO to LSG in return for the LSG commitments
and $600,000 in cash. Following the share purchase, the Company controls 46% of
AIRO and LSG controls 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.
Riga Catering Services
On April 2, 1996, the catering operations of Baltic Catering Services
("BCS") were acquired by Riga Catering Services ("RCS"), previously owned by
TOPflight, in exchange for shares in RCS. RCS is currently owned 37.82% by
AIRO, 20.68% 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.
American Distributing Company
American Distributing Company ("ADC"), is currently a wholly-owned
subsidiary of the Company. It 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, offices and a 9 person staff in Riga, Latvia. ADC, which 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.
20
Baltic World Air Freight
Through its wholly-owned subsidiary Baltic World Air Freight ("BWAF"), the
Company 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 Air Baltic 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 market agreements with Hamburg
Airlines and Air Baltic and is concluding contract terms with 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 is beneficial to the
Company.
LAMCO
The Company has a 2.6% interest in 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. The Company has the
opportunity to increase its share interest to 50%. LAMCO will continue to be
in a development phase in 1997 and 1998, and no significant revenues are
expected.
Business Strategy of the Company
The Company was created as a vehicle for identifying, forming, and
participating in aviation-related business ventures in the Baltic States and
the Newly Independent States. The Company's initial business venture was to
form and develop BIA. In connection with developing BIA, the Company formed
related aviation ventures to provide support services through BIA, including a
catering service and a freight marketing company. The Company is entitled to
its pro rata share of profits and losses from the operations of all of its
business ventures.
The Company intends to continue to form and operate ventures in the
Baltic States and the Newly Independent States. Management believes that
there are many low cost opportunities due to the general underdeveloped nature
of the marketplace and the need for essential services in the region, such as
air transportation and aviation-related services. Management believes that an
opportunity exists to utilize its expertise in order to establish business
opportunities to take advantage of existing market conditions.
The Company intends to market its abilities primarily through
management's long standing network in the region. Management is regularly
afforded business opportunities in this region and will utilize its discretion
in determining which ventures, if any, to pursue.
Government Regulation
Republic of Latvia Law on Foreign Investment. In November 1991, the Republic
of Latvia adopted the Law on Foreign Investment ("Foreign Investment Law"),
which was designed to encourage the participation by foreigners in the
establishment of Latvian joint ventures. The Foreign Investment Law generally
provides certain preferential tax advantages to ventures formed under the
Foreign Investment Law beginning in the year in which profits are first
generated from the operations of such ventures. In addition, the Foreign
Investment Law permits non-Latvian entities to own up to a 100% interest in
most Latvian business entities, including airlines.
Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are exempt from profit taxes for a period of two years, and thereafter for the
following two years, profit taxes for such ventures are reduced by 50%.
Ventures having foreign participation in excess of 50% (equal to at least
$1,000,000), are exempt from profit taxes for a period of three years, and
thereafter for the following five years, profit taxes for such ventures are
reduced by 50%. In addition, ventures which are active in certain industries
deemed to be "preferential" by the government of the Republic of Latvia and
having foreign participation of at least 30% (with a minimum investment of at
least $50,000) are entitled to a three-year tax holiday from the payment of
profit taxes, and thereafter for the following two years, profit taxes for
these "preferential" ventures are reduced by 50%.
The businesses of BIA and Air Baltic are deemed to be a preferential
industry, entitling them to a three-year profit tax holiday for the first year
in which they generate profits, and a 50% reduction in profit taxes for the
following two years. To date, BIA and Air Baltic have not generated any
profits in any year. Furthermore, RCS is entitled to a three-year profit tax
holiday from the first year it generates profits which was 1996, and a 50%
reduction in profit taxes for the following two years.
Republic of Latvia Law on Limited Liability Companies. The formation and
operation of joint venture-limited liability companies within the Republic of
Latvia is regulated and governed by the Republic of Latvia Law on Limited
Liability Companies ("Company Law"). A joint venture-limited liability
company is recognized as a separate legal entity under the Company Law for
purposes of transacting business in the Republic of Latvia, and accordingly, a
joint venture-limited liability company can incur its own obligations and
liabilities with respect to its business operations. Furthermore, the capital
shareholders of a joint venture-limited liability company are afforded limited
liability with respect to any acts or obligations of the joint venture-limited
liability company. Accordingly, the Company will not be liable, because of
its status as owner of a joint venture-limited liability company interest or
as owner of any subsidiary registered as a Latvian limited liability company,
for any obligations incurred by Air Baltic, BIA, BCS, BWAF or ADC resulting
from their respective business operations.
Political, Economic and Social Climate of Destination Countries
Air Baltic intends to expand its operations to geographic areas which
are subject to evolving political, economic and social climates, including
other Baltic States and other republics of the former Soviet Union. Failure
to improve political, economic or social stability in these regions could have
an adverse effect on the future operations and expansion efforts of Air
Baltic.
Competition
The Company's aviation business ventures face competition from other
companies and individuals who have also recognized the Baltic States and the
Newly Independent States as a developing market. Air Baltic as a passenger
service carrier, faces competition from other airlines, many of which have
longer operating histories, greater name recognition, greater financial
resources, more extensive facilities and equipment, and better marketing
resources. Other aviation-related ventures that the Company currently
operates, or in the future may operate, presently compete and will compete with
other entities, many of which may have greater financial, marketing and
technical resources.
Air Baltic assumed the scheduled passenger service operations of BIA and
Latvian Airlines and is designated as the international air carrier of Latvia.
As such, Air Baltic will experience no competition from other Latvian-owned
airlines. Management believes that competition may develop in the future from
private start-up regional carriers based in Latvia or in nearby states which
may want to provide service between Riga and other destinations. These
competitors may wish to compete directly with Air Baltic on the same routes or
compete for new routes which Air Baltic also desires to serve.
Western airline traffic to Riga has increased since the restoration of
independence in the Baltic States. Riga International Airport is now served by
approximately 10 European carriers on a scheduled basis. Air Baltic can expect
increased competition at its major Western European destinations, and from
carriers which offer interline service from North America to Riga via other
hubs. Air Baltic currently competes with Lufthansa German Airlines on its
Riga-Frankfurt route; with RIAIR on its London-Riga route; and with FinnAir on
its Riga-Helsinki route. Air Baltic experiences no competition on its
Stockholm or Copenhagen routes.
The development strategy for Air Baltic includes expansion to
destinations in the other Baltic States and the Newly Independent States, and
other major metropolitan centers. At present, such markets are either not
served with regularly-scheduled service or are underdeveloped and serviced only
infrequently by carriers such as Lufthansa German Airlines or the national
carrier of the given state. The Company has no specific knowledge of the plans
of Lufthansa German Airlines or any other major airline as it relates to
expansion into markets which Air Baltic may develop in the future.
BWAF will experience competition from other cargo and marketing sales
companies which are establishing a presence in the Baltic States and
surrounding region including the cargo marketing divisions of airlines which
are expanding service within the markets in which BWAF is working or targeting
for expansion. However, BWAF has no specific knowledge of the plans of the
activities of other potential competitors into the existing or future planned
markets of BWAF.
The operations of AIRO may also experience competitive pressures.
However, currently AIRO is targeting to develop operations in markets in which
there is currently no direct competition. As AIRO's activities and the markets
in which AIRO has developed operations mature, AIRO can expect competition from
other in-flight catering companies. The Company has no knowledge of any plans
of the other companies involved in in-flight catering services in the existing
and planned markets of AIRO.
ADC competes directly with other similar companies in the distribution of
its products. However, ADC retains specific licenses to exclusively distribute
the products which it sells and the competition is directed between a choices
of different brands of similar products. ADC expects the competition in food
and consumer goods distribution to continue to increase. However, the Company
and ADC has no knowledge of the specific plans of any of distributing companies
in the region.
Employees
The Company currently employs six persons on a full time basis. The
Company has in the past, and will continue in the future, to employ independent
contractors, and to make extensive use of its outside directors and others as
consultants. Air Baltic currently employs approximately 200 persons on a full
time basis, including pilots, mechanics, cabin crews, airport services and
administrative personnel. BIA currently employs one person, AIRO employs five
persons, RCS employs an aggregate of approximately 60 persons, BCS employs 26
persons, BWAF employs three persons, and ADC employs nine 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.
Facilities
The Company leases approximately 3,500 square feet of office space in
Houston, Texas for a monthly rental of approximately $3,000. The Company
believes that its facilities are adequate for its current operations. The
facilities of the Company's other business ventures are satisfactory for
current purposes.
MANAGEMENT
Executive Officers and Directors
The following table gives certain information with respect to the
executive officers and directors of the Company:
Name Age Position
Robert L. Knauss (3) 66 Chairman of the Board and Chief Executive
Officer, Director - Class III
James W. Goodchild 42 President and Chief Operating and
Director - Class II
David A. Grossman 34 Chief Financial Officer and Corporate
Secretary
Homi M. Davier (1) 49 Director - Class I
Paul R. Gregory (2) 56 Director - Class I
Adolf af Jochnick (1) 68 Director - Class II
Jonas af Jochnick (3) 60 Director - Class III
Juris Padegs (1)(3) 66 Director - Class III
Ted Reynolds (2) 67 Director - Class II
Morris Sandler (2) 51 Director - Class I
___________________________
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Nominating Committee.
(4)
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. He 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.
He has served as a director of Equus Investments, Inc. since 1984 and as one
of the two United States directors for the Mexico Fund since 1985. He was
elected as a director of Philip Services Corp. in 1997 following the merger of
Allwaste, Inc. and Philip Services Corp. Securities of the Mexico Fund,
Philip Services Corp. 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.
Mr. Goodchild has served as president since September 1997 and as chief
operating officer since October 1994. He served as chief financial officer of
the Company from September 1993 until September 1997. 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. He 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,
he 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.
Mr. Grossman has served as chief financial officer since September 1997
and as corporate secretary since December 1996. He served as comptroller from
November 1995 until September 1997. From 1985 to 1995, he 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.
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 Baltic International Airlines ("BIA") since
June 1991. He 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. He
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. He 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.
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. He 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. He
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. He has served as chairman of the board of Amsovco International
Consultants, Inc. since 1988. He 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.
Mr. Adolf af Jochnick, an American citizen, has been general counsel of
Oriflame International, S.A. since 1990. He is admitted to the Bar in New
York and Connecticut. Mr. Jochnick holds an LLB from Harvard Law School, an
MA from the University of Kansas and a BA from the University of Stockholm,
Sweden.
Mr. Jonas af Jochnick, a Swedish citizen, has been chairman of the board
and chief executive officer of ORESA Ventures S.A., a venture capital company
concentrating on Eastern Europe and listed on the Stockholm stock exchange,
since January 1995. Since June 1990, he has been chairman of the board and
chief executive officer of Oriflame Eastern Europe, S.A. and vice chairman of
Oriflame International S.A. The two Oriflame companies both manufacture
cosmetic and skin care products which are marketed on a global basis.
Oriflame International is listed on the London Stock exchange. Mr. Jochnick
holds a law degree from the University of Stockholm, Sweden and an MBA from
Harvard Business School.
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. He is the chairman and director of the Korea Fund and
the Brazil Fund. He 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.
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.
Mr. Sandler has been a consultant to Global TeleSystems Group, Inc.
("GTS"), an independent telecommunications company in Russia, since 1995.
Prior to that, he 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, he was an employee of Alan B. Slifka and
Company. Since November 1995, he 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 divided into three classes with three directors in each
class. The Class I directors hold office until the 1998 Annual Meeting of
Shareholders, the Class II directors hold office until the 1999 Annual Meeting
of Shareholders, and the Class III directors hold office until the 2000 Annual
Meeting of Shareholders 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.
The Nominating Committee selects director nominees for election to the Board
of Directors. 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, except for Jonas af
Jochnick and Adolf af Jochnick who are brothers.
Executive Compensation
The following table sets forth information with respect to the Chief
Executive Officer as well as the executive officers of the Company who
received total annual salary and bonus for the fiscal year ended December 31,
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) Neither of the named executive officers received perquisites or other
benefits valued in excess of 10% of the total of reported annual salary
and bonus.
(2) The bonus for 1995 consisted 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.
Director Compensation
Outside directors are entitled to receive options to purchase 10,000
shares of Common Stock in their first year of service and options to purchase
5,000 shares of Common Stock per year thereafter as compensation and
reimbursement of out-of-pocket expenses to attend board meetings. Messrs.
Padegs and Reynolds have each received options to purchase 5,000 shares of
Common Stock pursuant to this arrangement. In addition, Mr. Padegs received an
option to purchase 5,000 shares of Common Stock for consulting services
rendered. Such options are exercisable for $1.125 per share and expire in
October 1999. In December 1995, Messrs. Padegs, Reynolds and Sandler each
received options to purchase 15,000 shares of Common Stock at a price of
$1.375 per share pursuant to this arrangement. Also in December 1995, Messrs.
Davier and Gregory each received options to purchase 50,000 shares of Common
Stock at a price of $1.375 per shares 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.
In December 1997, Adolf af Jochnick and Jonas af Jochnick each received options
to purchase 10,000 shares of common stock at a price of $0.40625 per share and
Messrs. Davier, Gregory, Padegs, Reynolds and Sandler each received options to
purchase 5,000 shares of common stock at a price of $0.40625 per share. Such
options expire in December 2002. See "-Stock Options" and "--Certain
Transactions."
Stock Options
In September 1992, the Company adopted its 1992 Equity Incentive
Plan ("Plan"), which was amended effective March 1995, December 1995 and
September 1997. The Plan provides for the issuance of incentive stock
options and non-qualified options. An aggregate of 1,500,000 shares of the
Company's Common Stock may be issued pursuant to options granted under the
Plan to employees, non-employee directors and consultants, subject to
evergreen provisions included in the Plan. The Plan is administered by the
compensation committee of the Company's Board of Directors. The
compensation committee has the authority to determine, among other things,
the size, exercise price, and other terms and conditions of awards made
under the Plan. Subject to certain restrictions, the exercise price of
incentive stock options may be no less than 100% of fair market value of a
share of Common Stock on the date of grant. As of the date of this
Prospectus, options to purchase an aggregate of 1,072,366 shares were
outstanding under the Plan. Such options include:
Expiration Date Shares Under Option Price Date Exercisable
September 1999 60,666 $0.50 September 1994
October 1999 242,000 1.125 October 1994
December 2000 198,000 1.375 December 1995
September 2001 25,000 0.75 September 1996
December 2001 25,000 0.8125 December 1996
February 2003 238,350 0.421875 February 1998
August 2004 238,350 0.421875 August 1999
December 2002 45,000 0.40625 December 1997
In August 1995, the Board of Directors repriced the options that
were previously exercisable for $2.875 per share to $1.125 per share which
was a price more consistent with current market prices. Such repricing was
in consideration of services rendered in lieu of granting additional
options to the holders. The resale of shares of Common Stock issued upon
exercise of all of the Company's outstanding options is being registered
under the Act pursuant to this Prospectus.
The following table shows, as to the named executive officers,
information concerning individual grants of stock options and warrants
during 1996.
<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/Warrants 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.
Certain Transactions
Effective June 30, 1995, $125,000 in aggregate principal amount of
notes payable to Mr. Knauss was converted into 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 $250,000 to the Company bearing interest at a rate of
14% per annum, which was repaid in September 1997. 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. In May 1997, Mr. Knauss
advanced an aggregate of $10,000, bearing interest at a rate of 12% per annum,
which was repaid in August 1997. In connection with this advance, the Company
issued Mr. Knauss warrants to purchase an aggregate of 1,000 shares of common
stock at a price of $0.50 per share, which warrants are currently exercisable
and expire in May 2002.
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. In May 1997, Mr. Gregory and the Gregory Family Partnership
advanced an aggregate of $10,000, bearing interest at a rate of 12% per annum,
which was repaid in August 1997. In connection with this advance, the Company
issued Mr. Gregory and the Gregory Family Partnership warrants to purchase an
aggregate of 1,000 shares of common stock at a price of $0.50 per share, which
warrants are currently exercisable and expire in May 2002.
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, which was repaid in August 1997. 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. In May 1997, Mr. Padegs
advanced an aggregate of $10,000, bearing interest at a rate of 12% per annum,
which was repaid in August 1997. 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 $0.50 per share, which warrants are currently exercisable
and expire in May 2002.
In May 1997, Mr. Reynolds advanced an aggregate of $10,000, bearing
interest at a rate of 12% per annum, which was repaid in August 1997. In
connection with this advance, the Company issued Mr. Reynolds warrants to
purchase an aggregate of 1,000 shares of common stock at a price of $0.50 per
share, which warrants are currently exercisable and expire in May 2002.
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 $21,800 at
September 30, 1997 and is being amortized through monthly payments until the
end of 1997.
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.
In July 1997, ORESA Ventures N.V., an affiliate of Jonas af Jochnick,
advanced $500,000 to the Company, bearing interest at a rate of 13% per annum.
This loan was repaid in September 1997.
In August and September 1997, Celox S.A., an affiliate of Jonas af
Jochnick, purchased an aggregate of 2,500,000 shares of Common Stock for
$1,000,000. In connection with this private placement, the Company issued
warrants to purchase 2,500,000 shares of Common Stock at an exercise price of
$0.65 per share, which warrants are currently exercisable and expire in August
2002. Additionally in August and September 1997, ORESA Ventures N.V.
purchased an aggregate of 3,750,000 shares of Common Stock for $1,500,000. In
connection with this private placement, the Company issued warrants to
purchase 3,750,000 shares of Common Stock at an exercise price of $0.65 per
share, which warrants will be currently exercisable and expire in August 2002.
In October 1997, ORESA Ventures N.V. advanced $2,000,000 to the Company,
bearing interest at a rate of 13% per annum. Principal and interest are due
at the maturity date of January 29, 1999.
Management believes that all prior related party transactions are on
terms no less favorable to the Company as could be obtained from unaffiliated
third parties. All ongoing and future transactions with such persons,
including any loans to such persons, will be approved by a majority of
disinterested, independent outside members of the Company's Board of
Directors.
Limitation on Directors' Liability; Indemnification
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages for breach of directors' fiduciary duty of care. The Articles of
Incorporation of the Company limit the liability of directors of the Company
(in their capacity as directors but not in their capacity as officers) to the
Company or its stockholders to the fullest extent permitted by Texas law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Article 2.41 under the Texas Business Corporation Act, or (iv) for any
transaction from which the director derived an improper personal benefit,
whether or not the benefit resulted from an action taken in the person's
official capacity. Section 2.41 of the Texas Business Corporation Act relates
to directors' liability for unlawful dividends and stock issuances.
The inclusion of this provision in the Articles of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited the
Company and its stockholders. However, such limitation on liabilities does
not affect the standard of conduct with which directors must comply, the
availability of equitable relief or any causes of action based on federal law.
The Company's Articles of Incorporation provide for the indemnification
of its executive officers and directors, and the advancement to them of
expenses in connection with any proceedings and claims, to the fullest extent
permitted by the Texas Business Corporation Act. The Articles of
Incorporation include related provisions meant to facilitate the indemnitees'
receipt of such benefits. These provisions cover, among other things: (i)
specification of the method of determining entitlement to indemnification and
the selection of independent counsel that will in some cases make such
determination; (ii) specification of certain time periods by which certain
payments or determinations must be made and actions must be taken; and (iii)
the establishment of certain presumptions in favor of an indemnitee. Insofar
as indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Act and is therefore unenforceable.
PRINCIPAL SHAREHOLDERS
The following table presents certain information regarding the
beneficial ownership of all shares of Common Stock at December 17, 1997 by (i)
each person who owns beneficially more than five percent of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each named
executive officer and (iv) all directors and officers as a group. See
"Management-Certain Transactions."
Shares Beneficially Owned
Name of Beneficial Owner (1) Number Percent
Jonas af Jochnick 12,510,000 (2) 57.60
Citibank (Switzerland) 1,000,000 6.47
Robert L. Knauss 910,763 (3) 5.78
Paul R. Gregory 894,557 (4) 5.65
Homi M. Davier 640,180 (5) 4.09
James W. Goodchild 354,034 (6) 2.26
Juris Padegs 311,252 (7) 2.00
Morris A. Sandler 130,000 (8) 0.84
Ted Reynolds 81,000 (9) 0.52
David A. Grossman 65,667 (10) 0.42
Adolf af Jochnick 10,000 (11) 0.06
All directors and executive officers
as a group (10 persons) 15,907,454 (12) 68.93
(1) The business address of each individual is the same as the address of
the Company's principal executive offices except for Mr. Jonas af Jochnick
whose business address is Place Flagey 7, bte 7, 1050 Brussels, Belgium;
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; Mr. Sandler whose business
address is 477 Madison Avenue, 8th Floor, New York, New York 10022; and Mr.
Adolf af Jochnick whose business address is P.O. Box 71859, West Hartford,
Connecticut 06127.
(2) Includes an aggregate of 6,260,000 shares subject to warrants which are
currently exercisable. Celox S.A., which is 100% owned by Jonas af Jochnick,
owns 2,500,000 shares and 2,500,000 warrants. ORESA Ventures N.V., an affiliate
of Mr. Jochnick, owns 3,750,000 shares and 3,750,000 warrants.
(3) Includes an aggregate of 299,909 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 367,050 shares subject to options which are not currently
exercisable and shares to be issued for services to be rendered.
(4) Includes an aggregate of 379,188 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
(5) Includes an aggregate of 174,013 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable.
(6) Includes an aggregate of 200,763 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 216,000 shares subject to options which are not currently
exercisable and shares to be issued for services to be rendered.
(7) Includes 133,811 shares subject to options, warrants and Series A
Preferred Stock which are currently exercisable.
(8) Includes 105,000 shares subject to options and warrants which are
currently exercisable.
(9) Includes 31,000 shares subject to options and warrants which are
currently exercisable.
(10) Includes 25,000 shares subject to options which are currently
exercisable. Excludes an aggregate of 132,000 shares subject to options which
are not currently exercisable and shares to be issued for services to be
rendered.
(11) Includes an aggregate of 10,000 shares subject to options which are
currently exercisable.
(12) Includes an aggregate of 7,618,685 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 715,050 shares subject to options which are not currently
exercisable and shares to be issued for services to be rendered.
DESCRIPTION OF SECURITIES
Under the Company's Articles of Incorporation, the authorized capital
stock of the Company consists of 40,500,000 shares, of which 40,000,000 shares
are Common Stock, 499,930 shares are Series A Preferred Stock, par value
$10.00 per share ("Series A Preferred Stock") and 70 shares are Series B
Preferred Stock, par value $10.00 per share ("Series B Preferred Stock"). As
of the date of this Prospectus, the Company had outstanding 15,460,348 shares
of Common Stock, 123,000 shares of Series A Preferred Stock and 16 shares of
Series B Preferred Stock. The Company has reserved 1,072,366 shares for
issuance upon exercise of outstanding stock options, 10,035,845 shares for
issuance upon exercise of outstanding warrants, 1,322,579 shares for issuance
upon conversion of outstanding shares of Series A Preferred Stock and 800,611
shares for issuance upon conversion of outstanding shares of Series B
Preferred Stock.
Common Stock
The holders of Common Stock are entitled to one vote per share with
respect to all matters required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company's Articles, including provisions
governing any Preferred Stock. The Common Stock does not have any cumulative
voting, preemptive, subscription or conversion rights. Election of directors
and other general shareholder action requires the affirmative vote of a
majority of shares represented at a meeting in which a quorum is represented.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will be, upon payment therefor, validly issued, fully paid and
non-assessable.
Subject to the rights of any outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor.
In the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding. The resale of 9,048,388 shares of Common Stock issued
and outstanding is being registered hereby.
Preferred Stock
The Board of Directors is authorized, without action by the holders of
the Common Stock, to provide for the issuance of the Preferred Stock in one or
more series, to establish the number of shares to be included in each series
and to fix the designations, powers, preferences and rights of the shares of
each such series and the qualifications, limitations or restrictions thereof.
This includes, among other things, voting rights, conversion privileges,
dividend rates, redemption rights, sinking fund provisions and liquidation
rights which shall be superior to the Common Stock. The issuance of one or
more series of the Preferred Stock could adversely affect the voting power of
the holders of the Common Stock and could have the effect of discouraging or
making more difficult any attempt by a person or group to attain control of
the Company.
Effective June 30, 1995, the Company created its Convertible Redeemable
Series A Preferred Stock (defined herein as "Series A Preferred Stock"), $10 par
value, and issued 118,500 shares thereof upon conversion of $1,185,000 in
aggregate principal amount of long-term indebtedness. In September 1995, the
Company issued an additional 4,500 shares of Series A Preferred Stock upon
conversion of $45,000 in aggregate principal amount of long-term indebtedness.
The Series A Preferred Stock: (i) is redeemable only at the option of the
Company and only during the 30-day period beginning on December 31 and June 30
of each year that the Preferred Stock is outstanding; (ii) is convertible at any
time by the holders thereof at the initial conversion price of $2.00 per share;
(iii) carries a liquidation preference of $10 per share; (iv) is non-voting; and
(v) accrues cumulative cash dividends per share at an annual rate equal to 10%
of the stated value per share, payable in equal quarterly installments. As of
the date of this Prospectus, the conversion price of the Series A Preferred
Stock is $0.93 per share. The resale of 1,322,579 shares of Common Stock
issuable upon conversion of the outstanding shares of Series A Preferred Stock
is being registered hereby.
Effective February 22, 1996, the Company created its Series B Convertible
Redeemable Preferred Stock ("Series B Preferred Stock"). The Company is
authorized to issue 70 shares of Series B Preferred Stock, $25,000 stated value
and $10 par value per share. The Company issued 50 shares thereof for aggregate
net proceeds of $1,093,750 in February and March 1996. The Series B Preferred
Stock: (i) is not entitled to receive dividends; (ii) is convertible at any time
by the holders thereof on or after the 55th day after the date that the shares
were issued at a conversion price equal to the lesser of $2 per share or 82% of
the five-day average closing bid price of the Company's Common Stock; (iii) is
non-voting; (iv) carries a liquidation preference of $25,000 per share plus
interest equal to 10% of the stated value per annum since the issuance date, and
after payment in full of the Series A Preferred Stock; and (v) is redeemable
only at the option of the Company if the conversion price is $0.75 or less per
share. In October 1996, the conversion price was changed to the lessor of
$0.55 per share or 82% of the five-day average closing bid price of the
Company's Common Stock.
The voting rights of the holders of Company Common Stock will be diluted
upon conversion of the Preferred Stock and the holders of the Preferred Stock
will have preferential dividend and liquidation rights over the holders of
Common Stock. Furthermore, when and if the Company becomes profitable, the
issuance of shares of Preferred Stock will have a dilutive effect on the per
share value of the Common Stock.
Public Warrants
The Company issued 800,000 Public Warrants in its initial public offering
in April 1994, of which 799,950 are currently outstanding. The Public Warrants
are exercisable to purchase an aggregate of 399,975 shares of Common Stock at a
price of $6.00 per share, and expire on April 26, 1998. The warrant agreement
governing the Public Warrants provides for the right of redemption at $0.05 per
Public Warrant if the high bid price of the Common Stock as reported on Nasdaq
equals or exceeds $10.00 for 30 consecutive trading days. The issuance of
399,975 shares of Common Stock upon exercise of the outstanding Public Warrants
is being registered hereby.
Each holder of a Public Warrant may exercise such Public Warrant by
surrendering the certificate evidencing such Public Warrant, with the form of
election to purchase on the reverse side of such certificate properly completed
and executed, together with payment of the exercise price to the Warrant Agent.
The exercise price will be payable in cash or by certified or official bank
check payable to the Company. Subject to certain limited exceptions, no
adjustments as to any dividends with respect to the shares of Common Stock of
the Company will be made upon any exercise of Public Warrants. If less than
all of the Public Warrants evidenced by a warrant certificate are exercised,
a new certificate will be issued for the remaining number of Public Warrants.
Certificates evidencing the Public Warrants may be exchanged for new
certificates of different denominations by presenting the Public Warrant
certificate at the office of the Warrant Agent.
Warrants
Representative's Warrants. In connection with the Company's initial
public offering in April 1994, the Company issued to the representative of the
group of underwriters of such offering a warrant authorizing its holder to
purchase 120,000 shares of Common Stock at exercise prices between $6.00 and
$9.80 per share, exercisable between April 1995 and April 1999. The holder of
this warrant holds certain registration rights; however, the issuance of the
shares underlying this warrant is not being registered hereby.
Bridge Warrants. In connection with certain financing obtained by the
Company from related and unrelated parties between August 1993 and May 1997,
the Company issued bridge warrants to purchase a total of 9,070,370 shares of
Common Stock at a price from $0.4375 to $1.1875 per share, subject to
adjustment. These bridge warrants are presently exercisable and terminate as
follows:
Expiration Date Shares Under Warrant Price
August 1998 4,000 $1.00
August 1998 129,996 0.82
February 1999 29,999 0.82
October 1999 148,000 0.82
December 2000 10,000 0.82
March 2001 78,125 2.40
May 2001 25,000 0.75
October 2001 1,000 0.5625
November 2001 500,000 0.75
December 2001 25,000 0.75
February 2002 10,000 0.50
March 2002 10,000 0.53125
April 2002 10,000 0.50
April 2002 267,500 0.75
April 2002 6,750 0.8438
April 2002 6,750 0.9063
April 2002 6,750 1.1875
May 2002 10,000 0.45313
May 2002 4,000 0.50
May 2002 750,000 0.65
June 2002 10,000 0.4375
June 2002 58,750 0.75
July 2002 10,000 0.4375
July 2002 63,750 0.75
August 2002 6,250,000 0.65
August 2002 625,000 0.50
August 2002 10,000 0.6875
September 2002 10,000 0.65625
----------
Total 9,070,370
==========
Employees' and Consultants' Warrants. In 1995, the Company issued
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$1.00 per share, which warrants expire in May 2000. In August 1995, the
Company issued warrants to purchase an aggregate of 90,500 shares of Common
Stock at an exercise price of $1.00 per share, which warrants expire in August
2000. In November 1995, the Company issued warrants to purchase an aggregate
of 15,000 shares of Common Stock at an exercise price of $2.25 per share,
which warrants expire in November 2000. All of the foregoing warrants were
issued to consultants and employees for services rendered and are presently
exercisable. In December 1995, the Company issued warrants to purchase an
aggregate of 240,000 shares of Common Stock to employees for services
rendered. These warrants are exercisable for $1.375 per share and expire in
December 2000. All of these warrants are currently exercisable.
The resale of the shares of Common Stock underlying the Bridge Warrants
and Employees' and Consultants' Warrants is being registered hereby pursuant
to registration rights granted to the holders thereof. The Company has agreed
to pay all expenses in connection with such registration, except for
underwriting discounts and commissions and legal fees for counsel to the
holders.
Transfer Agent
The Company's transfer agent for the Common Stock, and the Warrant
Agent for the Public Warrants, is Harris Trust & Savings Bank, 700 Louisiana,
Suite 3350, Houston, Texas 77002-2729.
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS
This Prospectus relates to the issuance of an aggregate of 1,288,850
shares upon exercise of Public Options and Public Warrants and shares to be
issued for services to be rendered in the future. This Prospectus also
relates to the resale of 20,308,678 shares by the Selling Shareholders. The
shares being registered for resale include (i) 119,175 shares to be issued for
services rendered; (iii) 9,048,388 shares issued and outstanding; (ii)
9,515,870 shares to be issued upon exercise of outstanding Resale Warrants;
(iv) 302,666 shares to be issued upon exercise of outstanding Resale Options;
and (v) 1,322,579 shares to be issued upon conversion of outstanding shares of
Series A Preferred Stock.
The following tables set forth certain information with respect to the
issuance by the Company of shares of Common Stock upon exercise of Public
Options and Public Warrants and shares to be issued for services to be
rendered in the future; as well as the resale of Common Stock by the Selling
Shareholders, including the resale of shares of Common Stock issued and
outstanding, and shares to be issued for services rendered and shares
underlying Resale Warrants, Resale Options and, Series A Preferred Stock. The
Company will not receive any proceeds from the resale of Common Stock by the
Selling Shareholders. However, the Company will receive the exercise price
per share upon exercise of the Public Options and Public Warrants.
Issuance of Common Stock by the Company Upon
Exercise of Public Warrants ("PW") and Public Options ("PO") and
Shares to be Issued for Services to be Rendered in the Future("IF")
Exercise or
Conversion Number Expiration
Holder Price of Shares Date
Public Warrant Holders $6.00 399,975 PW April 1998
R. Knauss (1) 0.421875 122,350 PO February 2003
0.421875 122,350 PO August 2004
0.421875 61,175 IF August 1999
J. Goodchild (1) 0.421875 72,000 PO February 2003
0.421875 72,000 PO August 2004
0.421875 36,000 IF August 1999
D. Grossman (1) 0.75 25,000 PO September 2001
0.421875 44,000 PO February 2003
0.421875 44,000 PO August 2004
0.421875 22,000 IF August 1999
H. Davier (1) 1.375 50,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
P. Gregory (1) 1.375 50,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
D. Janacek 1.375 30,000 PO December 2000
J. Padegs (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
M. Sandler (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
T. Reynolds (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
A. Jochnick (1) 0.40625 10,000 PO December 2002
J. Jochnick (1) 0.40625 10,000 PO December 2002
D. Arnett 1.375 10,000 PO December 2000
D. Solon 1.375 10,000 PO December 2000
M. Behrana 1.375 3,000 PO December 2000
(1) These persons are officers and/or directors of the Company. See
"Management-Executive Officers and Directors" and "- Certain
Transactions."
Resale by Selling Shareholders of Shares Currently Outstanding ("S"); and
Shares Underlying Series A Preferred Stock ("P"), Resale Warrants ("W") and
Resale Options ("O") and Shares to be Issued Currently ("IC")
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
ORESA Ventures N.V. (1) 7,500,000 3,750,000 S 0 0.00
3,750,000 W
Celox S.A. (1) 5,000,000 2,500,000 S 0 0.00
2,500,000 W
Citibank (Switzerland) 1,000,000 1,000,000 S 0 0.00
R. Knauss (1) 938,763 35,179 S 542,500 3.51
134,409 P
130,500 W
35,000 O
61,175 IC
P. Gregory (1) 834,557 44,702 S 470,667 3.04
252,688 P
26,500 W
40,000 O
R. Chiste 800,000 400,000 S 0 0.00
400,000 W
Rauscher Pierce & Clark
(Guernsey) Limited 705,000 705,000 W 0 0.00
R. Gibson 665,965 537,634 P 0 0.00
128,331 W
H. Davier (1) 587,442 7,262 S 466,167 3.02
53,763 P
25,250 W
35,000 O
Roanne Securities Limited 400,000 200,000 S 0 0.00
200,000 W
J. Goodchild (1). 395,391 31,429 S 127,199 0.82
53,763 P
97,000 W
50,000 O
36,000 IC
Otto Candies, Inc. 340,000 340,000 W 0 0.00
Eureka Communications, Inc. 306,213 6,213 S 300,000 1.94
J. Padegs (1). 286,252 14,107 S 163,334 1.06
80,645 P
11,500 W
16,666 O
R. Nelson 200,000 100,000 S 0 0.00
100,000 W
E. B. Mosher 196,527 107,527 P 68,000 0.44
10,000 W
11,000 O
T.G. Shown Associates, Inc. 174,000 174,000 S 0 0.00
Regal International Capital,
Inc. 151,250 151,250 W 0 0.00
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
T. Glenister 143,627 63,627 S 0 0.00
60,000 W
20,000 O
M. Sandler (1) 105,000 25,000 S 0 0.00
80,000 W
Nelson Partners 100,000 100,000 W 0 0.00
D. Brown 100,000 50,000 S 0 0.00
50,000 W
N. Alston 100,000 100,000 W 0 0.00
Celcius Limited 100,000 100,000 S 0 0.00
D. Brown 95,000 95,000 S 0 0.00
N. Young 80,000 80,000 S 0 0.00
D. Grossman (1) 62,667 16,667 S 24,000 0.16
22,000 IC
Young Family Trust 58,763 5,000 W 0 0.00
53,763 P
T. Reynolds (1) 56,000 1,000 W 50,000 0.32
5,000 O
M. Weisser 52,887 4,500 W 0 0.00
48,387 P
JS Partners 50,000 50,000 S 0 0.00
M. Ostrow. 50,000 50,000 S 0 0.00
S. Collector 40,000 18,000 S 0 0.00
22,000 O
Concordia Partners, L.P. 40,000 40,000 W 0 0.00
Celika Storm Management Trust
1996 37,500 37,500 W 0 0.00
Sheffield Corporation 35,500 35,500 W 0 0.00
S. Beracha and/or B.
Beracha 32,500 32,500 W 0 0.00
A. Mann 30,000 20,000 S 10,000 0.06
Profin Enterprises SA 30,000 30,000 W 0 0.00
Bypass Trust Created Under
the 1992 Plant Management
Trust Dtd 3/6/92 25,000 25,000 W 0 0.00
A. Abele 25,000 25,000 S 0 0.00
R. DelVecchio 25,000 25,000 S 0 0.00
A. Meruelo 25,000 25,000 S 0 0.00
J. Moriarty 25,000 25,000 S 0 0.00
Wheaten Partners 25,000 25,000 W 0 0.00
George S. Hawn Properties 25,000 25,000 W 0 0.00
D.A. and A.R. Smith 25,000 25,000 W 0 0.00
J. Copeland 24,000 24,000 S 0 0.00
R. Beracha and/or F. Beracha 23,750 23,750 W 0 0.00
B. Young 23,433 18,333 W 5,100 0.03
Wall Street Financial 21,202 21,202 S 0 0.00
Adriatica de Seguros, C.A. 20,000 20,000 W 0 0.00
K. Lowe 20,000 20,000 S 0 0.00
S. Cole 20,000 20,000 S 0 0.00
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
D. Boorman 20,000 20,000 S 0 0.00
S. Oliver 20,000 20,000 O 0 0.00
Mosher International 20,000 4,000 W 16,000 0.10
R. Beracha 16,250 16,250 W 0 0.00
D. Solon 15,000 15,000 O 0 0.00
Hawn Interests Ltd.
Partnership 12,500 12,500 W 0 0.00
William B. Miller Family
Investments Ltd. . 12,500 12,500 W 0 0.00
Daniel A. Pedrotti Family
Investments Ltd. 12,500 12,500 W 0 0.00
Chapman Freeborn 10,000 10,000 W 0 0.00
G. Lejins 10,000 10,000 O 0 0.00
Patrick B. Sands 10,000 10,000 W 0 0.00
M. Beracha 10,000 10,000 W 0 0.00
Inversora HS 2014, C.A. 10,000 10,000 W 0 0.00
A. Santos-Buch 10,000 10,000 S 0 0.00
E. O. Boshell, Jr. 10,000 10,000 W 0 0.00
Perseus Holdings, Ltd. 9,375 9,375 W 0 0.00
C. R. Mueller 8,333 8,333 W 0 0.00
M. Walsh 8,333 8,333 W 0 0.00
M. Behrana 7,000 7,000 O 0 0.00
J. Valhanrat 6,000 6,000 O 0 0.00
D. Janacek 5,800 5,000 O 800 0.01
D. Arnett 5,000 5,000 O 0 0.00
D. Evans 5,000 5,000 W 0 0.00
H. Azadian 5,000 5,000 W 0 0.00
V. Rodricks 5,000 5,000 W 0 0.00
P. Gerard 5,000 5,000 W 0 0.00
D. Mills 5,000 5,000 W 0 0.00
Bailey Lafayette Harrison
Trust B 4,583 4,583 W 0 0.00
Peyton Bunker Sands Trust B 4,583 4,583 W 0 0.00
Julia Elizabeth Sands Trust B 3,056 3,056 W 0 0.00
Haven Starbuck Sands Trust B 3,055 3,055 W 0 0.00
Stark Bunker Sands Trust B 3,055 3,055 W 0 0.00
Jacob Cayce Sands Trust B 3,055 3,055 W 0 0.00
Lydia Lygon Sands Trust B 3,055 3,055 W 0 0.00
John Clayton Sands Trust B 3,055 3,055 W 0 0.00
N. Sethi 2,500 2,500 W 0 0.00
V. K. Sethi 2,500 2,500 W 0 0.00
Caroline Anne Harrison Trust B 2,292 2,292 W 0 0.00
Hassie Elizabeth Harrison
Trust B 2,292 2,292 W 0 0.00
Laurie Francis Harrison Trust B 2,292 2,292 W 0 0.00
Lyda Hunt Caroline Trust-
Patrick B. Sands 2,292 2,292 W 0 0.00
B. Higley 2,000 2,000 S 0 0.00
D. Cameron 2,000 2,000 W 0 0.00
________________________
(1) These shares are beneficially owned by officers and/or directors of the
Company. See "Management-Executive Officers and Directors" and "-
Certain Transactions."
(2) Shares Beneficially Owned Before Resale include shares of Common Stock
by the Company currently outstanding ("S") and shares underlying
exercisable Preferred Stock ("P"), Resale Warrants ("W"), and Resale
Options ("O") and shares to be issued currently ("IC").
The 20,308,678 shares offered by the Selling Stockholders may be sold
by the Selling Stockholders from time to time as market conditions permit in
the market, or otherwise at prices and terms then prevailing or at prices
related to the current market price, or in negotiated transactions. The
Selling Shareholders may sell their shares in unsolicited ordinary brokerage
transactions or privately negotiated transactions between the Selling
Shareholders and purchasers without a broker. The 1,288,850 shares to be
issued by the Company upon exercise of the Public Options and Public Warrants
and for services to be rendered in the future are being offered on a "best-
efforts, no minimum" basis.
A current prospectus must be in effect at the time of the sale of the
Common Stock to which this Prospectus relates. Any Selling Stockholder or
dealer effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a Prospectus.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares
hereby will be passed upon for the Company by Norman T. Reynolds, Esq. of
Bowersox, Herron & Williamson, L.L.P., Houston, Texas. Mr. Norman Reynolds is
no relation to Ted Reynolds, a director of the Company.
EXPERTS
On August 30, 1996, BDO Seidman, LLP 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 as the
Company's independent accountants. The audit opinion of BDO Seidman, LLP for
the year ended December 31, 1995 included an explanatory paragraph relating to
the Company's ability to continue as a going concern. There were no
disagreements between the Company and BDO Seidman, LLP on any matter of
accounting principles or practices, financial statement disclosure, or
auditing scope or procedure, which if unresolved, would have caused BDO
Seidman, LLP to make reference to the disagreement in their report.
The financial statements and schedules as of December 31, 1995 and for
the year then ended included in this Prospectus and in the Registration
Statement have been audited by BDO Seidman, LLP, independent certified public
accountants, to the extent and for the period set forth in their report
(which contains an explanatory paragraph regarding going concern uncertainties)
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such reports given upon the authority of said firm as experts
in auditing and accounting.
The financial statements and schedules as of December 31, 1996 and for
the year then ended included in this Prospectus and in the Registration
Statement to the extent and for the periods set forth in their report, as
indicated in their report with respect thereto, have been audited by Arthur
Andersen LLP, independent public accountants, are included herein in reliance
upon the authority of said firm as experts in auditing and accounting.
Reference is made to said report in which the opinion is qualified with respect
to the Company's ability to continue as a going concern.
BALTIC INTERNATIONAL USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent public accountants F-2
Independent auditors' report F-3
Consolidated balance sheets at September 30, 1997 and December 31, 1996 F-4
Consolidated statements of operations for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995 F-5
Consolidated statements of shareholders' equity for the nine months
ended September 30, 1997 and the years ended December 31, 1996 and 1995 F-6
Consolidated statements of cash flows for the nine months ended
September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995 F-8
Notes to consolidated financial statements F-9
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders 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, shareholders' 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,
management obtained a short term note payable due in November 1997 to fund its
current operations and capital requirements. This note is secured by an option
agreement in which the Company may put its shares in Air Baltic 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 the 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
F-2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders 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, shareholders' 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
F-3
BALTIC INTERNATIONAL USA, INC.
Consolidated Balance Sheets
September 30, December 31,
1997 1996
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 1,263,556 $ 384,245
Accounts receivable 113,549 43,810
Inventory 180,425 47,741
Prepaids and deposits 82,915 166,362
---------- ----------
Total current assets 1,640,445 642,158
---------- ----------
PROPERTY AND EQUIPMENT, net 15,607 18,182
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 4,149,952 3,446,775
OTHER ASSETS 187,430 233,791
GOODWILL, NET 216,213 238,308
---------- ----------
Total assets $ 6,209,647 $ 4,579,214
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 722,239 $ 436,760
Short-term debt, net 2,069,918 2,285,597
Commitments for guarantees on BIA liabilities 71,375 146,375
Other current liabilities 73,864 73,583
---------- ----------
Total liabilities 2,937,396 2,942,315
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock:
Series A, convertible, $10 par value,
499,930 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, 18 and 34 shares issued and
outstanding 450,000 850,000
Common stock, $.01 par value, 20,000,000
shares authorized, 15,361,263 and
7,302,108 shares issued and 14,849,377
and 7,302,108 shares outstanding 153,613 73,021
Additional paid-in capital 12,991,218 9,905,403
Accumulated deficit (11,304,859) (10,421,525)
Treasury stock, at cost (247,721) -
---------- ----------
Total stockholders' equity 3,272,251 1,636,899
---------- ----------
Total liabilities and stockholders' equity $ 6,209,647 $ 4,579,214
========== ==========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Operations
Nine Months Ended
September 30, Year Ended December 31,
------------------ -----------------------
1997 1996 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Freight revenue $ 160,654 $ 454,383 $ 557,057 $ 577,542
Food distribution 263,549 229,574 276,733 21,685
General sales agency revenue 58,500 38,500 59,000 -
Wet Lease Agreement with Air
Baltic - - - 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 354,337 376,657 420,467 369,223
---------- ---------- ---------- ----------
Total operating revenues 837,040 1,099,114 1,313,257 4,527,295
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Cost of revenue:
Aircraft rental - - - 605,289
Freight 104,133 216,578 301,665 342,652
Food distribution 178,054 166,475 213,044 21,373
Personnel and consulting 474,752 775,029 965,560 1,108,946
Legal and professional 73,193 65,308 91,900 324,916
Other general and
administrative 317,349 312,613 428,408 961,458
Reserve of investment in BIA - 612,385 812,385 3,440,445
---------- ---------- ---------- ----------
Total operating expenses 1,147,481 2,148,388 2,812,962 6,805,079
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS (310,441) (1,049,274) (1,499,705) (2,277,784)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense (408,381) (47,513) (132,034) (197,505)
Interest income 3,278 19,845 3,800 195,415
Other 66,992 352,790 395,090 152,250
---------- ---------- ---------- ----------
TOTAL OTHER INCOME (EXPENSE) (338,111) 325,122 266,856 150,160
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES (648,552) (724,152) (1,232,849) (2,127,624)
INCOME TAX EXPENSE - (47,428) (15,694) -
---------- ---------- ---------- ----------
NET LOSS $ (648,552) $ (771,580) $(1,248,543) $(2,127,624)
---------- ---------- ---------- ----------
LESS PREFERRED DIVIDENDS (234,782) (92,500) (210,743) (60,125)
---------- ---------- ---------- ----------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (883,334) $ (864,080) $(1,459,286) $(2,187,749)
========== ========== ========== ==========
PER SHARE AMOUNTS:
Net loss $ (0.08) $ (0.12) $ (0.19) $ (0.50)
Net loss attributable to
common shareholders $ (0.10) $ (0.14) $ (0.23) $ (0.51)
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
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
Common 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
Common shares issued 7,040,294 70,403
Preferred stock
converted to common
stock (16) (400,000) 1,018,861 10,189
Purchase of treasury
shares
Reissuance of treasury
shares
Net loss
Dividends on preferred
stock
------- --------- --- --------- ---------- -------
Balance, September 30,
1997 (unaudited) 123,000 $1,230,000 18 $ 450,000 15,361,263 $153,613
======= ========= === ========= ========== =======
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
(Continued)
Stock Additional
subscriptions paid-in Accumulated Treasury
receivable capital deficit stock Total
---------- ------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $ - $ 5,760,123 $ (6,774,490) $ - $ (985,173)
Common 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 - 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 - 9,905,403 (10,421,525) - 1,636,899
Common shares issued 2,624,244 2,694,647
Preferred stock
converted to common
stock 440,817 51,006
Purchase of treasury
Shares (292,300) (292,300)
Reissuance of treasury
Shares 20,754 44,579 65,333
Net loss (648,552) (648,552)
Dividends on preferred
Stock (234,782) (234,782)
-------- ---------- ----------- ---------- ----------
Balance, September 30,
1997 (unaudited) $ - $12,991,218 $(11,304,859) $ (247,721) $3,272,251
======== ========== =========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30, Year Ended December 31,
------------------ -----------------------
1997 1996 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (648,552) $ (771,580) $(1,248,543) $(2,127,624)
Noncash adjustments:
Net equity in (earnings) and
losses of:
BIA - 612,385 812,385 3,440,445
Other joint operations (354,337) (376,657) (420,467) (369,223)
Depreciation and amortization 26,882 28,071 35,474 19,678
Amortization of debt costs and
discount 161,292 15,924 42,806 92,070
Deferred compensation expense - 7,257 66,753 190,145
Gain on sale of assets (62,510) (297,200) (297,200) -
Change in current assets and
liabilities:
Accounts receivable (69,739) 1,010,107 143,368 (108,540)
Prepaid and other 108,387 (70,531) (174,733) 41,948
Inventory (132,684) (41,973) (33,476) (8,066)
Accounts payable and accrued
liabilities 136,570 (322,655) (135,943) 337,253
Commitments for guarantees (75,000) (798,146) (873,146) 1,019,521
-------- ---------- ---------- ----------
Net cash provided by (used
by) operating activities (909,691) (1,004,998) (2,082,722) 2,527,607
-------- ---------- ---------- ----------
Cash flows from investing
activities:
Investment in and advances to
joint operations (375,866) (2,012,411) (3,025,009) (6,070,445)
Distributions and repayments
from joint operations 110,957 203,738 206,208 282,999
Proceeds from sale of assets - 745,970 1,700,000 -
Proceeds from repayment of Air
Baltic subordinated debt - 290,000 290,000 -
Acquisition of net assets of
ADC, net of $38,882 cash - - - (29,954)
Acquisition of property and
equipment (2,212) (1,769) (5,299) (7,858)
-------- ---------- ---------- ----------
Net cash used by investing
activities (267,121) (774,472) (834,100) (5,825,258)
-------- ---------- ---------- ----------
Cash flows from financing
activities:
New borrowings 55,000 500,000 2,294,944 1,066,000
Repayment of debt and long-term
obligations (431,971) (155,000) (232,229) (264,712)
Deferred lease credit - - - (85,659)
Issuance of stock, net of
related costs 2,725,394 1,439,452 1,183,737 2,652,005
Purchase of treasury stock (292,300) - - -
Preferred dividends paid - (84,625) (84,625) (29,500)
---------- ---------- ---------- ----------
Net cash provided by
financing activities 2,056,123 1,699,827 3,161,827 3,338,134
---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents 879,311 (79,643) 245,005 40,483
Cash and cash equivalents,
beginning of period 384,245 139,240 139,240 98,757
---------- ---------- ---------- ----------
Cash and cash equivalents, end of
period $ 1,263,556 $ 59,597 $ 384,245 $ 139,240
========== ========== ========== ==========
</TABLE>
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, Air Baltic Corporation SIA ("Air Baltic"). The
Company currently owns a 8.02% interest in Air Baltic, after the sale of 12% of
Air Baltic 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 Air Baltic 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 Air Baltic
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 was refinanced in October
1997, is due in January 1999 and is secured by an option agreement that the
Company entered into with Scandinavian Airlines Systems Denmark-Norway-Sweden
("SAS") in which the Company has the right to put the shares that it owns of
Air Baltic to SAS for $2,144,333 during the period from June 1, 1997 to
February 28, 1999. Under this option agreement, SAS has the right to call the
Company's Air Baltic shares for a price ranging from $3,329,962 to $5,089,012
during the same period. Should the Company be unable to refinance this note in
the future, it will exercise its right to put its share to SAS and use the
proceeds to partially repay this loan.
Management believes that 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 historical 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 Convertible Redeemable Series
A Preferred 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 was converted to 4,500 shares of Convertible Redeemable Series A
Preferred Stock. Of the conversions to Convertible Redeemable Series A
Preferred Stock, notes payable of an aggregate amount of $535,000 was converted
by officers and directors of the Company. 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 as of September 30, 1997 and December 31, 1996. However, as
discussed in Note 5, in October 1997, the Company refinanced its $2,000,000 loan
to a maturity date of January 29, 1999. Management believes that the
refinancing of the debt along with the Company's equity financing completed
during the third quarter discussed in Note 7 and the sale of 5% of AIRO to
LSG Lufthansa Services/Sky Chefs discussed in Note 4 should enable the Company
to fund its capital obligations and meet its liquidity needs for the next
twelve months. 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.
Interim financial information
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include all adjustments which are, in the opinion of
management, necessary for a fair presentation of financial results for the nine
months ended September 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.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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. The Company accounts for its
investment in the joint operations other than Air Baltic, BIA and Lithuanian
Aircraft Maintenance Corporation ("LAMCO") using the equity method. The
Company's interest in Air Baltic is accounted for using the cost method because
the Company owns only 8.02% of Air Baltic and has no control, voting or
otherwise, over Air Baltic. 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 were earned when
transportation on BIA was provided. In 1995, the Company deferred recognition
of revenues earned from BIA due to the uncertain collectibility of such
revenues.
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 nine
months ended September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995 were 8,423,048, 6,215,284, 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.
The FASB issued SFAS No. 128, Earnings Per Share, which establishes the
disclosure requirements of basic and diluted earnings per share. Basic
earnings per share is computed by dividing income available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings. This pronouncement is effective for
periods ending December 15, 1997. The Company has not determined the impact of
this statement on the earnings per share amounts computed for 1997 or 1996, but
does not believe it will be significant.
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 September 30, 1997 and December 31, 1996, the Company's cash in financial
institutions exceeded the federally insured deposits limit by $1,108,735 and
$200,830, respectively.
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 translation of assets and liabilities are accumulated
as a separate component of joint venture partners' equity. There were no such
gains or losses on the Company's consolidated balance sheet as of September 30,
1997 or December 31, 1996.
Reclassifications
Certain prior year amounts have been reclassified to conform to 1997
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 Air
Baltic and Austrian Airlines.
NOTE 4 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS
The investment in and advances to joint operations are as follows:
September 30, December 31,
1997 1996
Joint operations accounted for using
cost method:
airBaltic $1,918,000 $1,918,000
BIA 1,200,690 1,186,824
LAMCO 40,000 40,000
--------- ---------
Subtotal 3,158,690 3,144,824
--------- ---------
Joint operations accounted for using
equity method:
BCS 44,298 43,097
AIRO 720,022 110,956
RCS 226,942 147,898
--------- ---------
Subtotal 991,262 301,951
--------- ---------
Total $4,149,952 $3,446,775
========= =========
Joint operations at cost -
Air Baltic 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, Air Baltic Corporation.
Upon completion of the Joint Venture Agreement, as amended on November 27,
1995, Air Baltic 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 Air Baltic, totaling approximately $10.1 million, of which the Company's
portion was $290,000. In January 1996, SAS assumed the Company's $290,000
portion of the subordinated debt. The 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 Air Baltic stock to SAS for $1.7
million in cash and the assumption by SAS of the Company's future debt funding
obligation to Air Baltic of $2,175,000. The Company retains an 8.02% interest
in Air Baltic. A gain of approximately $297,000 was recognized on the sale of
the Air Baltic stock included in other income in 1996.
In October 1997, the Company contributed an additional $226,333 of capital to
Air Baltic.
Summarized financial information for Air Baltic is as follows (100%):
September 30, December 31,
1997 1996
Current assets $ 6,926,000 $11,372,000
Noncurrent assets 15,748,000 15,986,000
---------- ----------
Total assets $22,674,000 $27,358,000
========== ==========
Current liabilities $ 5,928,000 $ 8,768,000
Noncurrent liabilities 17,125,000 16,536,000
Equity (379,000) 2,054,000
---------- ----------
Total liabilities and equity $22,674,000 $27,358,000
========== ==========
From
Nine Months Ended Year Ended October 1, 1995 to
September 30, 1997 December 31, 1996 December 31, 1995
Revenues $26,152,000 $ 24,399,000 $ 2,081,000
Loss from operations (3,344,000) (13,325,000) (3,473,000)
Net loss (4,270,000) (17,245,000) (4,693,000)
Management believes that the Company's recorded investment in Air Baltic will
be recovered through Air Baltic'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 Air Baltic, 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 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:
September 30, December 31,
1997 1996
Current assets $ 765,074 $ 641,263
Property and other assets, net 1,535,182 551,105
--------- ---------
Total assets $2,300,256 $1,192,368
========= =========
Current liabilities $ 591,768 $ 518,345
Other liabilities - 195,540
Stockholders' equity 1,708,488 478,483
--------- ---------
Total liabilities and stockholders'
equity $2,300,256 $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:
Nine Months Ended Year Ended December 31,
September 30, 1997 1996 1995
Operating revenues $ 2,267,316 $ 2,815,525 $ 11,102,871
Income (loss) from operations $ 695,738 $ 1,098,275 $ (7,042,533)
Earnings (loss) $ 901,860 $ 950,062 $ (3,436,175)
Company Percentage Interest:
Nine Months Ended Year Ended December 31,
September 30, 1997 1996 1995
Operating revenues $ 934,925 $ 1,240,176 $ 5,463,826
Income (loss) from operations $ 270,883 $ 482,003 $ (3,443,694)
Earnings (loss) $ 354,337 $ 420,467 $ (2,515,449)
The above amounts 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. 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.
In December 1997, the Company entered into 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 sold 5% of its 51% ownership of AIRO
in return for the LSG commitments and $600,000 in cash. Following the share
purchase, the Company controls 46% of AIRO and LSG controls 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.
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 37.82% by AIRO, 20.68% 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%):
September 30, 1997 December 31, 1996
Current assets $ 558,126 $ 468,989
Noncurrent assets 408,992 427,836
------------- -------------
Total assets $ 967,118 $ 896,825
============= =============
Current liabilities $ 89,951 $ 296,483
Noncurrent liabilities - 195,540
Equity 877,167 404,802
------------- -------------
Total liabilities and equity $ 967,118 $ 896,825
============= =============
Period From
Nine Months Ended May 1, 1996 to
September 30, 1997 December 31, 1996
Revenues $ 2,089,271 $ 1,937,422
Income from operations 798,420 813,164
Net income 820,729 813,164
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. 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%):
September 30, 1997 December 31, 1996
Current assets $ 105,182 $ 124,436
Noncurrent assets 27,776 65,882
------------- -------------
Total assets $ 132,958 $ 190,318
============= =============
Current liabilities $ 44,362 $ 104,124
Equity 88,596 86,194
------------- -------------
Total liabilities and equity $ 132,858 $ 190,318
============= =============
Nine Months Ended Year Ended December 31,
September 30, 1997 1996 1995
Operating revenues $ 151,920 $ 878,103 $ 2,341,881
Income (loss) from operations $ 14,673 $ 336,500 $ 714,734
Earnings (loss) $ 2,402 $ 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. The Company fully reserved the investment as of September 30,
1995.
NOTE 5 - SHORT-TERM DEBT
Short-term debt consists of the following:
September 30, December 31,
1997 1996
Note payable to third parties, secured by put
agreement with SAS on Air Baltic shares and
security interest in all shares of stock owned in
AIRO, interest rate of 13% due at maturity,
refinanced in October 1997 $ 2,000,000 $ 2,000,000
Note payable to an officer and director of the
Company, unsecured, interest rate of 14%, due
upon maturity, repaid in September 1997 - 250,000
Convertible note payable, unsecured, interest rate
of 10%, due upon maturity, repaid in August 1997 - 88,771
Note payable to a director of the Company,
unsecured, interest rate of 12%, due upon
maturity, repaid in August 1997 - 10,000
Note payable to bank, unsecured, interest rate of
10.75%, due upon maturity, principal payable July
1996, guaranteed by an officer of the Company 21,800 50,000
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 75,000
--------- ---------
2,096,800 2,473,771
Less discount on loan financing (26,882) (188,174)
--------- ---------
Short-term debt, net $ 2,069,918 $ 2,285,597
========= =========
The Company is in the process of renegotiating the maturity of the
subordinated bridge loan financing all notes payable which matured prior to
September 30, 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.
The remaining principal was repaid in August 1997.
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. This loan was repaid in September
1997.
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. This loan was repaid in August 1997.
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 lenders to purchase 500,000 shares
of the Company's common stock at a price of $0.75 per share. This loan was
refinanced in October 1997 as discussed below.
In May 1997, the Company entered into promissory notes in connection with
loans to the Company aggregating $40,000 from directors of the Company. The
lenders received warrants to purchase on aggregate of 4,000 shares of common
stock at $0.50 per share. These loans were repaid in August 1997.
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% was 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 was received by the Company. This loan was repaid in September
1997.
In October 1997, the Company entered into a promissory note with ORESA
Ventures N.V., a shareholder of the Company, in connection with a $2,000,000
loan to the Company. Principal and interest at an annual rate of 13% will be
due on January 29, 1999. The proceeds from this loan were used to repay the
principal of another loan to the Company which was to mature in November 1997.
The Company reissued 469,442 shares of its treasury shares to pay the accrued
interest of the repaid loan.
NOTE 6 - INCOME TAXES
The components of deferred tax assets consisted of the following:
September 30, December 31,
1997 1996
Deferred tax assets:
Net operating loss carryforward $ 2,651,870 $ 2,069,455
Allowance for doubtful accounts 159,443 159,443
Deferred compensation 89,222 89,222
Investment in and advances to BIA 1,071,755 1,347,966
--------- ---------
Total deferred tax assets 3,972,290 3,666,086
--------- ---------
Deferred tax liabilities:
Unremitted earnings of joint operations 316,119 229,791
Other 26,708 32,017
--------- ---------
Total deferred tax liabilities 342,827 261,808
--------- ---------
Net deferred tax asset before valuation
allowance 3,629,464 3,404,278
Valuation allowance (3,629,464) (3,404,278)
--------- ---------
Net deferred tax asset $ - $ -
========= =========
Provisions for income taxes in the statements of operations were as follows:
Nine Months Ended September 30, Year ended December 31,
1997 1996 1996 1995
Current expense:
U.S. $ - $ - $ - $ -
Foreign - 47,428 15,694 -
Deferred expense - - - -
Total expense $ - $47,428 $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 August and September 1997, the Company sold an aggregate of 6,250,000 shares
of common stock to Celox S.A. and ORESA Ventures N.V. for $2,500,000. In
connection with these private placements, the Company issued warrants to
purchase 6,250,000 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 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 $0, $48,425, $66,753 and $190,145
for the nine months ended September 30, 1997 and 1996 and 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:
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year ended December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Net loss As Reported $ (648,552) $ (771,580) $ (1,248,543) $ (2,127,624)
Pro Forma (669,998) (979,709) (1,474,865) (3,595,537)
Loss per common
share As Reported (0.10) (0.14) (0.23) (0.51)
Pro forma (0.11) (0.17) (0.26) (0.86)
</TABLE>
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.
At September 30, 1997, the Company had 11,063,211 shares of common stock
reserved for issuance upon exercise of options and warrants, and 472,634
options were available for future grant under the Plan. A summary of changes
in outstanding options and warrants is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended December 31,
September 30, 1997 1996 1995
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C> <C> <C>
Shares under option,
beginning of period 589,000 $ 1.18 653,616 $ 1.10 408,800 $ 0.88
Changes during the
period:
Granted 476,700 0.42 160,000 0.67 894,680 0.95
Canceled (25,000) 1.53 (55,467) 0.61 (5,333) 0.50
Exercised (13,334) 0.50 (169,149) 0.58 (644,531) 0.76
--------- ------- -------
Shares under option,
end of period 1,027,366 $ 0.83 589,000 $ 1.18 653,616 $ 1.10
========= ======= =======
Options exercisable 550,666 $ 1.18 589,000 $ 1.18 619,794 $ 1.13
========= ======= =======
Shares under warrant,
beginning of period 1,891,595 $ 2.58 1,267,970 $ 3.38 751,995 $ 4.86
Changes during the
period:
Granted 8,144,250 0.64 623,625 0.96 516,000 1.21
Canceled - - - - - -
Exercised - - - - (25) 6.00
---------- --------- ---------
Shares under warrant,
end of period 10,035,845 $ 1.01 1,891,595 $ 2.58 1,267,970 $ 3.38
========== ========= =========
Warrants exercisable 9,955,845 $ 1.00 1,811,595 $ 2.63 1,107,945 $ 3.66
========== ========= =========
</TABLE>
The exercise price of the options and warrants outstanding at September 30, 1997
range from $0.42 to $9.80. The weighted average contractual life of the options
and warrants outstanding at September 30, 1997 was 4.3 years and 4.4 years,
respectively. The weighted-average grant-date fair value of options and
warrants granted during 1996 was $0.37 and $0.40, respectively, and 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 1997, 1996
and 1995: risk-free interest rate of 6.5%, 6.5% and 6.5%, respectively expected
dividend yield of 0%, 0% and 0%, respectively; expected lives of 5 years,
5 years and 5 years, respectively; expected volatility of 130%, 138% and 138%,
respectively.
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 September 30, 1997,
the conversion price was $0.93 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. For the nine months ended September 30, 1997 shareholders
converted an aggregate of 16 shares of Series B Preferred Stock into 1,018,861
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 1997, 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 or 1997.
Air Baltic Corporation
The Company managed the interim flight operations of Air Baltic and subleased
two western aircraft previously operated by BIA under a wet lease agreement for
$1.5 million through December 31, 1995. Additionally in 1995, Air Baltic paid a
$1.5 million fee to the Company for services rendered in connection with the
training of Latvian cockpit, cabin and ground personnel. The Company earns
general sales agency revenue by operating the North American sales and
marketing office of Air Baltic. The Company earned $59,000 of such revenue for
the year ended December 31, 1996 and $58,500 for the nine months ended
September 30, 1997.
BWAF is dependent upon Air Baltic for cargo transportation. Air Baltic
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 as of September 30, 1997 are as
follows:
Three months ended December 31, 1997 $ 9,734
1998 31,952
1999 3,027
2000 3,027
2001 1,513
Total $ 49,253
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 September 30, 1997 and December 31, 1996, the Company had $71,375 and
$146,375, respectively, remaining accrued for these liabilities.
NOTE 11 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosure of noncash transactions are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30 Year ended December 31,
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Services and expenses contributed
to BIA $ - $ - $ - $ 563,815
Conversion of accounts payable to
equity 76,791 - 417,535 -
Conversion of notes payable to
equity - 140,667 140,667 1,288,137
Conversion of preferred stock to
common stock 400,000 325,000 400,000 -
Dividends declared and paid in
subsequent period 234,782 43,875 89,584 30,625
Discount on debt for warrants - 9,987 9,987 -
Deferred compensation on options
exercised and canceled - - 204,699 -
Transfer of RCS shares to
AIRO......... 28,434 - - -
Supplemental disclosure of
interest paid $ 62,238 $ 24,243 $ 44,459 $ 96,771
Supplemental disclosure of income
taxes paid $ - $ - $ - $ -
</TABLE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Restated Articles of Incorporation of the Company ("Restated
Articles") provide for indemnification of Directors and Officers in accordance
with the Texas Business Corporation Act. Article Nine of the Restated
Articles provides as follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Article 2.41 under the Texas Business
Corporation Act, or (iv) for any transaction from which the director derived
an improper personal benefit, whether or not the benefit resulted from an
action taken in the person's official capacity.
Article Eight of the Restated Articles provides as follows:
A. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending, or completed
action, suit or proceedings, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement, actually
and reasonably incurred by him in connection with such action, suit or
proceeding, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe his conduct was unlawful. The termination of any action, suit, or
proceeding by judgment, order, settlement, conviction or upon a plea of nolo
contendere or its equivalent, shall not, of itself, create a presumption that
the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interest of the Corporation, and,
with respect to any criminal action or proceedings, had reasonable cause to
believe that his conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against expenses (including
attorneys' fees) actually and reasonably incurred by him in connection with
the defense or settlement of such action or suit if he acted in good faith and
in a manner he reasonably believed to be in or not opposed to the best
interests of the Corporation and except that no indemnification shall be made
in respect of any claim, issue, or matter as to which such person shall have
been adjudged to be liable to the Corporation unless and only to the extent
that the court in which such action or suit was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which such court shall deem proper.
C. To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceedings referred to in A and B, or in defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorney's fees) actually and reasonably incurred by him in
connection therewith.
D. Any indemnification under paragraphs A and B of this Article
Eight (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of
the director, officer, employee or agent is proper in the circumstances
because he has met the applicable standard of conduct set forth in paragraphs
A and B. Such determination shall be made (1) by the Board of Directors by a
majority vote of a quorum consisting of directors who were not parties to such
action, suit or proceeding, or (2) if such a quorum is not obtainable, or,
even if obtainable, a quorum of disinterested directors so directs, by
independent legal counsel in a written opinion, or (3) by a majority of the
stockholders.
E. Expenses incurred in defending a civil or criminal action, suit
or proceeding shall be paid by the Corporation in advance of the final
disposition of such action, suit or proceeding as authorized by the Board of
Directors upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall ultimately be
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article Eight.
F. The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
G. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article
Eight.
H. For purposes of this Article Eight, references to the
"Corporation" shall include, in addition to the resulting Corporation, any
constituent corporation (including any constituent of a constituent) absorbed
in a consolidation or merger which, if its separate existence had continued,
would have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article Eight with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
I. For purposes of this Article Eight, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to
in this Article Eight.
J. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Eight shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The foregoing discussion of the Company's Restated Articles and of
the Texas Business Corporation Act is not intended to be exhaustive and is
qualified in its entirety by such Restated Articles and statutes,
respectively.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred
in connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant. No expenses will be paid by the
security holders.
SEC Registration Fee $ 3,563
Nasdaq Application and Listing Fee 7,500
Printing and Engraving Expenses 10,000
Legal Fees and Expenses 50,000
Accounting Fees and Expenses 80,000
Blue Sky Fees and Expenses 15,000
Transfer Agent Fees 1,000
Miscellaneous 7,937
TOTAL $ 175,000
Item 26. Recent Sales of Unregistered Securities
Set forth below is certain information regarding securities that the
Company has sold in the past three years to directors ("D"), officers ("O"),
employees ("E"), consultants ("C"), institutional investors ("I"), affiliates
("A") and non-affiliates ("N").
In January 1994, the Company issued to Benjamin V. Young (N) and
Richard A. Gibson (N) warrants to purchase an aggregate of 30,000 shares of
Common Stock at an exercise price of $1.00 per share, in connection with loans
made to the Company in an aggregate amount of $150,000.
In February 1994, the Company issued 3,000 shares of Series A
Preferred Stock, par value $10.00 per share, for $30,000, and issued warrants
to purchase 29,999 shares of Common Stock at an exercise price of $1.00 per
share to a non-affiliated group of investors, in connection with loans made to
the Company in an aggregate amount of $120,000.
In October and November 1994, the Company issued warrants to purchase
an aggregate of 42,500 shares of Common Stock to Messrs. Knauss (D), Davier
(D), Gregory (D), Padegs (D), Boshell (N) and Mosher (N) at an exercise price
of $1.00 per share, in connection with loans made to the Company in the
aggregate principal amount of $425,000.
In October 1994, the Company issued options to purchase an aggregate
of 250,000 shares to Juris Padegs (D), Ted Reynolds (D), Robert Knauss (D),
Homi Davier (D), Paul Gregory (D), James Goodchild (D), Diana Arnett (E),
Mehelli Behrana (E), Don Evans (E), Jo Ann Johnson (O), Daniel Solon (E),
Blake Mosher (N), Sally Oliver (C), Don Janacek (E) and Tom Glenister (O) at
an exercise price of $1.125 per share for services rendered.
In December 1994, the Company issued warrants to purchase an
aggregate of 25,500 shares of Common Stock to Robert Knauss (D), Paul R.
Gregory Family Partnership, Ltd. (D), James Goodchild (O), Matthew Weisser
(N), Nalin Sethi (N) and V.K. Sethi (N) at an exercise price of $1.00 per
share, in connection with loans made to the Company in the aggregate principal
amount of $255,000.
In January 1995, the Company issued warrants to purchase an aggregate
of 50,000 shares of Common Stock to Richard and Elaine Gibson (N) at an
exercise price of $1.00 per share, in connection with a loan made to the
Company in the principal amount of $500,000.
In January 1995, the Company issued warrants to purchase 5,000 shares
to the Young Family Trust (N) at an exercise price of $1.00 per share in
connection with a $50,000 loan to the Company.
In March 1995, the Company issued warrants to purchase an aggregate
of 25,000 shares to Chapman Freeborn (N), Paul R. Gregory Family Partnership,
Ltd. (D), and Juris Padegs (D), in connection with loans made to the Company
in the aggregate principal amount of $250,000.
Between March 1995 and May 1996, the Company issued an aggregate of
2,063,285 shares of its Common Stock to various unaffiliated private placement
investors for an aggregate amount of $2,225,188.
In July 1995, the Company issued a warrant to purchase 100,000 shares
to Norman Alston (C) for consulting services rendered.
In August 1995, the Company issued, effective June 30, 1995, an
aggregate of 118,500 shares of Convertible Redeemable Series A Preferred Stock
("Series A Preferred Stock") to Messrs. Gibson (N), Davier (O), Knauss (O),
Gregory (D), Padegs (D), Mosher (N) and Goodchild (O) and to the Young Family
Trust (N) upon conversion of $1,1850,000 in aggregate principal amount of
indebtedness.
In August 1995, the Company issued, effective June 30, 1995, 116,000
shares of Common Stock to T.G. Shown Associates, Inc., the Company's former
partner in BWAF, (A) upon conversion of $145,000 in principal amount of short-
term debt. In December 1995, April 1996 and May 1996, an additional 29,000,
10,000 and 19,000 shares, respectively, of Common Stock were issued to T.G.
Shown Associates, Inc. as part of this conversion of short-term debt.
In September 1995, the Company issued an aggregate of 4,500 shares of
Series A Preferred Stock to Mr. Weisser (N) upon conversion of $145,000 in
aggregate principal amount of indebtedness.
In September 1995, the Company issued warrants to purchase an
aggregate of 85,500 shares to Messrs. Sandler (D) and Harrington (C) for
consulting services rendered.
In November 1995, the Company issued warrants to purchase an
aggregate of 15,000 shares of Common Stock to Hratch Azadian (E), Don Evans
(E) and Vincent Rodricks (E) at an exercise price of $2.25 per share in
connection with services rendered prior to and in connection with their
termination with the Company.
In December 1995, the Company issued warrants to purchase an
aggregate of 10,000 shares of Common Stock to Dougal Cameron (N), Robert
Knauss (D), the Gregory Family Partnership (D), James Goodchild (O) and Juris
Padegs (D) at an exercise price of $1.00 per share in connection with loans
made to the Company in the aggregate principal amount of $100,000.
In December 1995, the Company issued options to purchase an aggregate
of 213,000 shares of Common Stock to the Gregory Family Partnership (D), Homi
Davier (D), Juris Padegs (D), Ted Reynolds (D), Morris Sandler (D), Dan Solon
(E), Jo Ann Johnson (O), Mehelli Behrana (E), Diana Arnett (E), Don Janacek
(E) and Jean Wilson (E) at an exercise price of $1.375 per share for services
rendered.
In January 1996, the Company issued 21,202 shares of Common Stock to
Wall Street Financial Corporation (C) for consulting services rendered.
In February and March 1996, the Company issued an aggregate of 50
shares of Series B Convertible Redeemable Preferred Stock to a group of
unaffiliated private placement investors for an aggregate amount of
$1,250,000. This offering was conducted pursuant to Regulation S. In
connection with this offering, the Company paid commissions of $156,250 and
issued warrants to purchase an aggregate of 78,125 shares to Regal
International Capital, Inc. (N), Wheaton Partners (N) and Perseus Holdings,
Ltd. (N), the placement agents, at an exercise price of $2.40 per share, which
warrants expire in March 2001. From May 1996 to November 1997, the Company
issued an aggregate of 1,676,437 shares of Common Stock for the conversion of
32 shares of Series B Preferred Stock.
In April 1996, the Company issued a convertible note to Eureka
Communications, Inc. (N) in connection with a loan to the Company in the
original principal amount of $250,000.
In May 1996, the Company issued warrants to purchase an aggregate of
25,000 shares of Common Stock to Robert Knauss (D) at an exercise price of
$0.75 per share in connection with a loan made to the Company in the aggregate
principal amount of $250,000.
Between June 1996 and January 1997, the Company issued an aggregate
of 121,961 shares of Common Stock to Robert Knauss (D), James Goodchild (D),
David Grossman (O) and Thomas Glenister (O) for services rendered.
In October 1996, the Company issued warrants to purchase an aggregate
of 1,000 shares of Common Stock to Juris Padegs (D) at an exercise price of
$0.5625 per share in connection with a loan made to the Company in the
aggregate principal amount of $10,000.
In November 1996, the Company issued warrants to purchase an
aggregate of 500,000 shares of Common Stock to various non-affiliated parties
at an exercise price of $0.75 per share in connection with loans made to the
Company in the aggregate principal amount of $2,000,000. In connection with
this loan, the Company paid aggregate commissions of $160,000 to Rauscher
Pierce & Clark, Inc. and Rauscher Pierce Refsnes, Inc., the placement agents.
In April 1997, the Company issued warrants to purchase an aggregate
of 20,250 shares of Common Stock to Homi Davier (D) at exercise prices from
$0.8438 to $1.1875 per share in connection with a guarantee on a loan made to
the Company.
In April 1997, the Company issued warrants to purchase an aggregate
of 160,000 shares of Common Stock to holders of Series B Preferred Stock at an
exercise price of $0.75 per share in connection with an agreement with the
Company. In connection with this agreement, the Company issued warrants to
purchase an aggregate of 107,500 shares to Regal International Capital, Inc.
(N), , the placement agent, at an exercise price of $0.75 per share, which
warrants expire in April 2002.
In May 1997, the Company issued warrants to purchase an aggregate of
4,000 shares of Common Stock to Robert Knauss (D), Paul R. Gregory (D), the
Gregory Family Partnership (D), Juris Padegs (D) and Ted Reynolds (D) at an
exercise price of $0.50 per share in connection with loans made to the Company
in the aggregate principal amount of $40,000.
In July 1997, the Company entered into a promissory note with ORESA
Ventures N.V., an affiliate of Jonas af Jochnick (D), in connection with a
$500,000 loan to the Company. Principal and interest at an annual rate of 13%
were paid off in September 1997.
In August and September 1997, the Company sold an aggregate of
6,250,000 shares of common stock to Celox S.A. and ORESA Ventures N.V.,
affiliates of Jonas af Jochnick (D), for $2,500,000. In connection with these
private placements, the Company issued warrants to purchase 6,250,000 shares
of Common Stock at an exercise price of $0.65 per share, which warrants are
currently exercisable and expire in August 2002.
In October 1997, the Company entered into a promissory note with
ORESA Ventures N.V., an affiliate of Jonas af Jochnick (D), in connection with
a $2,000,000 loan to the Company. Principal and interest at an annual rate of
13% will be due on January 29, 1999.
Unless otherwise indicated above, the issuance of securities was
exempt from registration under the Securities Act under Section 4(2) as a
transaction by an issuer not involving any public offering. In each instance,
the purchaser had a pre-existing relationship with the Company, the offers and
sales were made without public solicitation, the certificates bear restrictive
legends, and appropriate stop-transfer orders have been given to the transfer
agent. No underwriter was involved in the transactions and no commissions were
paid.
Item 27. Exhibits
The following exhibits are filed as part of this Registration
Statement:
Exhibit No. Identification of Exhibit
2.1(2) Plan and Agreement of Recapitalization
3.1(a)(2) Restated Articles of Incorporation
3.1(b)(2) Amended Articles of Incorporation
3.1(c)(2) Articles of Correction
3.2(2) Bylaws
3.3(2) Statement of Resolution Establishing and Designating a Series of
Shares of the Company, Series A Cumulative Preferred Stock,
$10.00 par value
3.4(5) Certificate of Elimination of Shares Designated as Series A
Cumulative Preferred Stock
3.5(5) Certificate of the Designation, Preference, Rights and
Limitations of Convertible Redeemable Series A Preferred Stock
4.1(2) Common Stock Specimen
5.1(1) Opinion Regarding Legality
10.1(2) Form of August 1993 through January 1994 Loan Documents
10.2(2) Form of August 1993 through January 1994 Common Stock Warrants
10.3(4) 1992 Equity Incentive Plan, as amended
10.4(2) Employment Agreement between the Company and Robert L. Knauss
10.5(2) Employment Agreement between the Company and Homi M. Davier
10.6(2) Employment Agreement between the Company and Michael Pemberton
10.7(2) Baltic International Airlines Joint Venture Limited Liability
Company Agreement between the Latvian Civil Aviation Board and
the Company
10.8(2) Protocol No. 1 dated July 1991
10.9(2) Protocol No. 4 dated May 9, 1992
10.10(2) Protocol No. 5 dated July 21, 1992
10.11(2) Protocol No. 6 dated February 5, 1993
10.12(2) Settlement Agreement between the Company and Latvian Airlines
and Ministry of Transportation of the Republic of Latvia
10.13(2) Partnership Agreement of Baltic World Air Freight between the
Company and T.G. Shown & Associates, Inc.
10.14(2) Baltic Catering Limited Liability Company Agreement between the
Company and ARVO, Ltd.
10.15(2) Assignment to the Company from Baltic World Holdings, Ltd.
10.16(2) Baltic Travel Services Joint Venture Agreement between the
Company and Chapman Freeborn GmbH
10.17(2) Agreement of Representation between the Latvian Civil Aviation
Department and the Company
10.18(2) DC9 Lease Agreement
10.19(2) Letter of Intent between the Company and Northwest Airlines
10.20(2) Facilities Lease Agreement
10.21(2) Management Services Agreement between the Company and Baltic
International Airlines
10.22(2) Memorandum of Understanding between the Company and the
Department of Air Transport of the Republic of Georgia
10.23(2) Maintenance Training Services Agreement
10.24(2) Bank Settlement Plan Agreement
10.25(2) Letter of Intent regarding lease of Boeing aircraft
10.26(2) Extension Agreement regarding lease of Boeing aircraft
10.27(3) Lease Agreement for Boeing aircraft
10.28(3) Amendment to Lease of Boeing aircraft
10.29(3) Baltic Aerospace Interiors Letter of Intent
10.30(3) BIUSA/SAS Letter of Intent
10.31(3) Lithuania/Northwest Airlines/BIUSA Letter of Intent
10.32(3) Assignment Agreement between Baltic World Holdings, Ltd. and
the Company
10.33(3) Acquisition Agreement with T.G. Shown & Associates, Inc.
10.34(3) Memorandum of Understanding between the Company, BIA and SAS
10.35(3) Loan Agreement with Charter Bank
10.36(7) Air Baltic Joint Venture Agreement
10.37(10) Wet Lease Agreement with Air Baltic
10.38(10) Articles of Incorporation of LAMCO
10.39(10) Memorandum of Understanding with TOPflight
10.40(10) Amendment to Air Baltic Joint Venture Agreement
10.41(8) Share Purchase Agreement with SAS
10.42(9) AIRO Catering Services Joint Venture Agreement
10.43(9) Riga Catering Services Shareholders' Agreement
10.44(10) Amendment to Articles of Incorporation of LAMCO
10.45(10) Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred Stock,
as amended
10.46(12) Compensatory Plan for Robert Knauss, James Goodchild and David
Grossman
10.47(12) Promissory Note Agreement with ORESA Ventures N.V.
11.1(1) Computation of Per Share Earnings
16.1(6) Letter on Change in Certifying Accountant
16.2(11) Letter on Change in Certifying Accountant
23.1(1) Consent of Counsel (included in Exhibit 5.1)
23.2(1) Consent of Arthur Andersen LLP
23.3(1) Consent of BDO Seidman, LLP
_____________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-1210), and incorporated herein by reference
thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended June 30, 1995, and incorporated herein by
reference thereto.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated July 14, 1995, and incorporated herein by reference thereto.
(7) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 29, 1995, and incorporated herein by reference thereto.
(8) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated January 10, 1996, and incorporated herein by reference
thereto.
(9) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), and incorporated herein by reference
thereto.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference thereto.
(12)` Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997, and incorporated herein
by reference thereto.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
i. To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
iii. To include any additional or changed material
information with respect to the plan of
distribution.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form SB-2 and authorized this
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of Texas, on the
19th day of December, 1997.
BALTIC INTERNATIONAL USA, INC.
By /s/ ROBERT L. KNAUSS
----------------------------------
ROBERT L. KNAUSS, Chairman of the
Board and Chief Executive Officer
____________________________
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Robert L. Knauss Chairman of the Board and Chief December 19, 1997
- -----------------------
ROBERT L. KNAUSS Executive Officer (Principal
Executive Officer)
/s/ James W. Goodchild President and Chief Operating December 19, 1997
- -----------------------
JAMES W. GOODCHILD Officer and Director
/s/ David A. Grossman Chief Financial Officer and December 19, 1997
- -----------------------
DAVID A. GROSSMAN Corporate Secretary (Principal
Financial and Accounting Officer)
/s/ Homi M. Davier Director December 19, 1997
- -----------------------
HOMI M. DAVIER
/s/ Paul R. Gregory Director December 19, 1997
- -----------------------
PAUL R. GREGORY
/s/ Adolf af Jochnick Director December 19, 1997
- -----------------------
ADOLF af JOCHNICK
/s/ Jonas af Jochnick Director December 19, 1997
- -----------------------
JONAS af JOCHNICK
/s/ Juris Padegs Director December 19, 1997
- -----------------------
JURIS PADEGS
/s/ Ted Reynolds Director December 19, 1997
- -----------------------
TED REYNOLDS
/s/ Morris A. Sandler Director December 19, 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)- Air Baltic Joint Venture Agreement
10.37(10)- Wet Lease Agreement with Air Baltic
10.38(10)- Articles of Incorporation of LAMCO
10.39(10)- Memorandum of Understanding with TOPflight
10.40(10)- Amendment to Air Baltic Joint Venture Agreement
10.41(8)- Share Purchase Agreement with SAS
10.42(9)- AIRO Catering Services Joint Venture Agreement
10.43(9)- Riga Catering Services Shareholders' Agreement
10.44(10)- Amendment to Articles of Incorporation of LAMCO
10.45(10) Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred Stock,
as amended
10.46(12) Compensatory Plan for Robert Knauss, James Goodchild and
David Grossman
10.47(12) Promissory Note Agreement with ORESA Ventures N.V.
11.1(1)- Computation of Per Share Earnings
16.1(6)- Letter on Change in Certifying Accountant
16.2(11)- Letter on Change in Certifying Accountant
23.1(1)- Consent of Counsel (included in Exhibit 5.1)
23.2(1)- Consent of Arthur Andersen LLP
23.3(1)- Consent of BDO Seidman, LLP
________________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporate herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 333-1210), 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 Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(10) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), and incorporated herein by reference
thereto.
(11) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference thereto.
(12) Previously filed as an exhibit to the Company's Quarterly Report on
Form 10-QSB for the quarter ended September 30, 1997, and incorporated herein
by reference thereto.
Exhibit 5.1
NORMAN T. REYNOLDS
ATTORNEY AT LAW
5005 RIVERWAY, SUITE 160 OF COUNSEL TO
POST OFFICE BOX 131326 THE FIRM OF
HOUSTON, TEXAS 77219-1326 BOWERSOX, HERRON &
TELEPHONE: (713) 651-0244 WILLIAMSON, L.L.P.
TELECOPIER: (713) 355-2250
E MAIL: [email protected]
December 22, 1997 EXHIBIT 5
Baltic International USA, Inc.
1990 Post Oak Boulevard
Suite 1630
Houston, Texas 77056
Re: Baltic International USA, Inc. Form SB-2 Registration Statement
Gentlemen:
I have acted as counsel for Baltic International USA, Inc. (the "Company")
in connection with the registration by the Company of 21,597,528 shares of its
common stock, par value $0.01 per share (the "Securities"), as contemplated by
the Company's Registration Statement on Form SB-2 filed on the date hereof with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended.
In connection therewith, I have examined, among other things, the Articles
of Incorporation and Bylaws of the Company, the corporate proceedings of the
Company with respect to the issuance and registration of the Securities, the
Registration Statement, certificates of public officials, statutes and other
instruments and documents, as a basis for the opinions expressed herein.
Based upon and subject to the foregoing, and upon such other matters as I
have determined to be relevant, I am of the opinion that:
1. The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Texas.
2. All of the Securities, upon issuance and delivery thereof, will be
validly issued, fully paid and nonassessable.
I hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Norman T. Reynolds
Norman T. Reynolds
Exhibit 11.1
Exhibit 11.1
COMPUTATION OF PER SHARE EARNINGS
The table below presents information necessary for the computation of
loss per common share, on both a primary and fully diluted basis, for the nine
months ended September 30, 1997 and 1996 and the years ended December 31, 1996
and 1995.
<TABLE>
<CAPTION>
Nine Months Ended September 30, Year Ended December 31,
------------------------------- -----------------------
1997 1996 1996 1995
<S> <C> <C> <C> <C>
Net loss $ (648,552) $ (771,580) $(1,248,543) $(2,127,624)
Preferred stock dividends (234,782) (92,500) (210,743) (60,125)
---------- ---------- ---------- ----------
Net loss applicable to
common shares and common
stock equivalents $ (883,334) $ (864,080) $(1,459,286) $(2,187,749)
========== ========== ========== ==========
Average number of common
shares outstanding 8,423,048 6,215,284 6,461,561 4,273,858
Common stock equivalents - - - -
---------- ---------- ---------- ----------
Total common shares and
common stock equivalents 8,423,048 6,215,284 6,461,561 4,273,858
========== ========== ========== ==========
Primary and fully diluted
loss common share $ (0.10) $ (0.14) $ (0.23) $ (0.51)
========== ========== ========== ==========
</TABLE>
Common stock equivalents are considered anti-dilutive because of the net
losses incurred by the Company.
Exhibit 23.2
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 15, 1997, on the financial statements of Baltic International USA,
Inc. as of December 31, 1996 and for the year then ended which are included in
this Form SB-2, and to all references to our firm therein.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
December 19, 1997
Exhibit 23.3
Exhibit 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Baltic International USA, Inc.
Houston, Texas
We hereby consent to the incorporation in the Prospectus constituting a part of
the Registration Statement on Form SB-2 of our report dated April 2, 1996
relating to the consolidated financial statements of Baltic International USA,
Inc. appearing in the Company's Annual Report on Form 10-KSB for the year ended
December 31, 1995.
We also consent to the reference to us under the caption "Experts" in such
Prospectus.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
Houston, Texas
December 19, 1997
