U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] for the Fiscal Year Ended: December 31, 1997
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
[NO FEE REQUIRED] for the transition period from ___________ to
___________.
Commission File Number: 0-26588
BALTIC INTERNATIONAL USA, INC.
(Name of small business issuer in its charter)
Texas 76-0336843
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
1990 Post Oak Boulevard, Suite 1630
Houston, Texas 77056
(Address of principal executive offices, including zip code)
(713) 961-9299
(Issuer's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
Warrants
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes [x]
No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. [x]
Issuer's revenues for the year ended December 31, 1997 were $1,136,242.
The aggregate market value of Common Stock held by non-affiliates of the
registrant at March 27, 1998, based upon the last sales price as reported by
Nasdaq, was $3,808,447.
As of March 27, 1998, there were 15,586,785 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
TABLE OF CONTENTS
Page
PART I
Item 1. Description of Business 3
Item 2. Description of Property 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II
Item 5. Market for Common Equity and Related Stockholder
Matters 6
Item 6. Management's Discussion and Analysis or Plan of
Operation 7
Item 7. Financial Statements 10
Item 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 10
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance with Section 16(a) of the
Exchange Act 11
Item 10. Executive Compensation 13
Item 11. Security Ownership of Certain Beneficial Owners
and Management 15
Item 12. Certain Relationships and Related Transactions 15
Item 13. Exhibits and Reports on Form 8-K 16
SIGNATURES
PART I
Item 1. DESCRIPTION OF BUSINESS
Baltic International USA, Inc. (the "Company" or "BIUSA") is a Texas
corporation which provides and has provided capital, management, and technical
services to start-up and established private companies located primarily in
Eastern Europe. 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's current subsidiaries and joint operations include:
Baltic International USA, Inc.
Catering Airlines Distribution Cargo
AIRO Catering Air Baltic American Baltic World Air
Services 46% Corporation 8% Distributing Freight 100%
Riga Catering Baltic Int'l Company 100%
Services 20.68% Airlines 89%
Baltic Catering
Services 50%
Note: Percentages reflect the Company's ownership interest as of December 31,
1997.
In September 1997, the Company elected to focus all new investment and
management services on the in-flight catering operations.
AIRO Catering Services
Management has identified 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 Catering 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.
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 the stock 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.
In March 1998, the Company transferred its remaining direct interest in RCS
of 20.68% to AIRO as part of a capital contribution made by the partners of
AIRO. As part of this capital contribution, TOPflight and LSG made their pro
rata share contributions consisting of cash of $1,100,000 and services with a
value of $197,990.
AIRO currently operates in Riga, Latvia through Riga Catering Services
which was started by the Company, and which caters all carriers serving Riga
International Airport including Scandinavian Airlines System Denmark-Norway-
Sweden ("SAS"), Lufthansa and Air Baltic. AIRO opened a new kitchen in
Tallinn, Estonia in January 1998. AIRO hasfinalized a contract to open an
in-flight catering kitchen in Kiev, Ukraine. The contract provides for a
20-year building lease to AIRO with at least five years exclusivity. This
kitchen is expected to open by mid 1998.
Riga Catering Services
On April 2, 1996, the catering operations of Baltic Catering Services
("BCS") were acquired by RCS, previously owned by TOPflight, in exchange for
shares in RCS. In March 1998, the Company transferred its remaining direct
interest in RCS of 20.68% to AIRO as part of a capital contribution made by the
partners of AIRO. RCS is currently owned 58.5% by AIRO 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 a restaurant in the Riga Airport. The Company
expects to liquidate BCS during 1998.
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 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, Helsinki, Kiev, London,
Minsk, Riga, Stockholm, Tallinn, Vilnius and Warsaw. Additional routes,
including Moscow, are planned for 1998.
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 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.
Baltic International Airlines
The Company currently owns a 89% interest in BIA. BIA currently has no
substantive operations. The Company believes that maintaining BIA's airline
certification, the goodwill of BIA's debtors and the availability of BIA's tax
holiday in Latvia are beneficial to the Company.
American Distributing Company
American Distributing Company ("ADC") is a wholly-owned subsidiary of the
Company. It distributes Millerr, Bartles & Jaymesr, 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 12 person staff in Riga,
Latvia. ADC opened a new office in Vilnius, Lithuania in May 1997.
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. Currently BWAF has cargo market agreements
with Air Baltic and Austrian Airlines.
Government Regulation
Republic of Latvia Law on Foreign Investment
In November 1991, the Republic of Latvia adopted the Law on Foreign
Investment ("Foreign Investment Law"), which was designed to encourage the
participation by foreigners in the establishment of Latvian joint operations.
The Foreign Investment Law generally provides certain preferential tax
advantages to ventures formed under the Foreign Investment Law beginning in
the year in which profits are first generated from the operations of such
ventures. In addition, the Foreign Investment Law permits non-Latvian
entities to own up to a 100% interest in most Latvian business entities,
including airlines.
Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are exempt from profit taxes for a period of two years, and thereafter for the
following two years, profit taxes for such ventures are reduced by 50%.
Ventures having foreign participation in excess of 50% (equal to at least
$1,000,000) are exempt from profit taxes for a period of three years, and
thereafter for the following five years, profit taxes for such ventures are
reduced by 50%. In addition, ventures which are active in certain industries
deemed to be "preferential" by the government of the Republic of Latvia and
having foreign participation of at least 30% (with a minimum investment of at
least $50,000) are entitled to a three-year tax holiday from the payment of
profit taxes, and thereafter for the following two years, profit taxes for
these "preferential" ventures are reduced by 50%.
The business of BIA, and also of Air Baltic, is deemed to be a
preferential industry, entitling it to a three-year profit tax holiday
beginning the first year in which it generates profits and a 50% reduction in
profit taxes for the following two years. To date, Air Baltic and BIA have
not generated any profits in any year.
Republic of Latvia Law on Limited Liability Companies
The formation and operation of joint venture-limited liability companies
within the Republic of Latvia is regulated and governed by the Republic of
Latvia Law on Limited Liability Companies ("Company Law"). A joint
venture-limited liability company is recognized as a separate legal entity
under the Company Law for purposes of transacting business in the Republic of
Latvia, and accordingly, a joint venture-limited liability company can incur
its own obligations and liabilities with respect to its business operations.
Furthermore, the capital shareholders of a joint venture-limited liability
company are afforded limited liability with respect to any acts or obligations
of the joint venture-limited liability company. Accordingly, the Company will
not be liable, because of its status as owner of a joint venture-limited
liability company interest or as owner of any subsidiary registered as a
Latvian limited liability company, for any obligations incurred by its
subsidiaries and joint operations resulting from their respective business
operations.
Political, Economic and Social Climate of Destination Countries
The Company's subsidiaries and joint operations intend to expand
operations to geographic areas which are subject to evolving political,
economic and social climates, including other Baltic States and other
republics of the former Soviet Union. Failure to improve political, economic
or social stability in these regions could have an adverse effect on future
operations and expansion efforts.
Competition
The Company's business ventures face competition from other companies
and individuals who have also recognized the Baltic States and Newly
Independent States as a developing market. 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
businesses that the Company currently operates, or may operate in the future,
presently compete and will compete with other entities, many of which may have
greater financial, marketing and technical resources.
Employees
The Company currently employs 3 persons on a full-time basis in the
Houston office. 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. AIRO employs 35
persons, RCS employs an aggregate of approximately 60 persons, BWAF employs 5
persons and ADC employs 12 persons. None of the employees of the Company and
its subsidiaries and joint operations are represented by a labor organization.
The Company believes its relationships with all of these employees are
satisfactory.
Item 2. DESCRIPTION OF PROPERTY
The Company leases approximately 3,500 square feet of office space in
Houston, Texas for a monthly rental of approximately $3,000. Air Baltic,
BWAF, ADC, BCS and RCS each lease office space at Riga International Airport.
AIRO leases space in Stockholm, Sweden. The Company believes that its
facilities are adequate for its current operations. The facilities of the
Company's other business ventures are satisfactory for current purposes.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is listed on the Nasdaq SmallCap Market under
the symbol "BISA." Public trading of units (consisting of one share of Common
Stock and one warrant) ("Units") on Nasdaq commenced on April 28, 1994. The
Units became separable and public trading of the Common Stock on Nasdaq
commenced on June 27, 1994. The following table sets forth the high and low
sales prices of the Common Stock for the periods indicated:
1997 1996
High Low High Low
First Quarter $0.750 $0.375 $2.875 $1.000
Second Quarter 0.500 0.375 2.750 0.813
Third Quarter 1.031 0.375 1.156 0.563
Fourth Quarter 0.656 0.344 1.188 0.344
On March 27, 1998, the last sales price for the Common Stock was $0.531,
and the Company believes there were approximately 1,000 beneficial holders of
its Common Stock.
The Company has not paid, and does not currently intend to pay, cash
dividends on its Common Stock. The current policy of the Company's Board of
Directors is to retain earnings, if any, to provide funds for operation and
expansion of the Company's business. Such policy will be reviewed by the
Board of Directors of the Company from time to time in light of, among other
things, the Company's earnings and financial position.
In February 1998, the new listing requirements for Nasdaq became
effective. There are several aspects to the new requirements: the Company
must be current on all SEC reports, have an independent auditor, have at least
two outside directors, have an independent audit committee, etc. The Company
meets all of the new rules except for a provision requiring the common stock
to be traded at a bid price above $1.00 for at least 10 days in the most
recent 90 days. The Company has received an extension until May 28, 1998 to
meet this requirement. If this requirement is not met by then, the Company
would be delisted from the Nasdaq Small Cap Market and would then be traded on
the Bulletin Board maintained by the NASD.
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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 September 1997, the Company shifted its focus to concentrate on its
in-flight catering operations.
In February 1996, the Company and TOPflight 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 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.
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; and
commissions due from sales of airline tickets under the agreement between Air
Baltic and the Company. A significant portion of the operational activities
of the Company are reflected in 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 interests
relating to joint operation activities resulted in income of $361,688 for 1997
and a loss of $391,918 for 1996.
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
Years Ended December 31, 1997 and 1996. Revenues for 1997 decreased by
$177,015, or 13%, to $1,136,242 compared to $1,313,257 for 1996. This
decrease is due to decreases in freight revenue and net equity in earnings of
catering operations, partially offset by an increase in food distribution
revenue. 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 increase in food distribution
revenue is due to the sale of beer products to distributors in countries other
than Latvia.
Operating expenses decreased 32% to $1,904,689 for 1997 compared to
$2,812,962 for 1996. This decrease was due to a decrease in costs related to
freight, personnel and consulting and net equity in losses of BIA, partially
offset by an increase in food distribution costs and general and
administrative expenses. The decrease in cost of freight revenue results from
lower freight revenue in 1997 as compared to 1996. The decrease in the net
equity in losses of BIA is due to no reserve being required in 1997 on the
investment in BIA similar to the reserve of $812,385 for 1996.
As a result of the changes in revenues and expenses discussed above, the
operating loss for the Company decreased 49% to $768,447 for 1997 from
$1,499,705 for 1996. The Company had a net loss (including interest expense
and non-recurring gains discussed below) of $798,458 for 1997 compared to a
net loss of $1,248,543 for 1996.
Interest expense increased by $375,713 or 285% to $507,747 for 1997 from
$132,034 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.
Interest income increased to $32,450 for 1997 from $3,800 for 1996.
This increase is due primarily to interest earned on loans to AIRO and the
temporary investment of excess cash from financing activities in 1997 with no
such interest in 1996.
In December 1997, the Company sold 5% of the stock of AIRO to LSG for
certain LSG commitments and $600,000 in cash. A gain of $569,926 was
recognized on this sale.
On January 10, 1996, the Company sold 12% of the common stock of Air
Baltic 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. A
gain of $297,200 was recognized on this sale. The Company retains an 8.02%
interest in Air Baltic.
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 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, 1997
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
<S> <C> <C> <C> <C>
Operating revenues $1,136,242 $1,251,768 $(361,688) $2,026,322
Operating expenses 1,904,689 928,731 - 2,833,420
---------- ---------- --------- ----------
Income (loss) from operations (768,447) 323,037 (361,688) (807,098)
Other income (expense) (30,011) 2,484 - (27,527)
---------- ---------- --------- ----------
Income (loss) before
income taxes (798,458) 325,521 (361,688) (834,625)
Provision for income taxes - (36,167) - (36,167)
---------- ---------- --------- ----------
Net income (loss) $ (798,458) $ 361,688 $(361,688) $ (798,458)
========== ========== ========= ==========
</TABLE>
Year 2000 System Requirements. The Company is performing an analysis of
its systems in order to determine the impact of year 2000 issues. Management
is unable to predict at this time the full impact year 2000 issues will have
on the Company's operations or future financial condition. However, the
Company does not expect that such costs to modify its programs and systems
will be material to its financial condition or results of operations. The
Company does not currently have information concerning the year 2000
compliance of its suppliers and customers. In the event the Company's major
suppliers or customers do not successfully and timely achieve year 2000
compliance, the Company's operations could be adversely affected.
Liquidity and Capital Resources
At December 31, 1997 the Company had working capital of $693,699
compared to a working capital deficit of $2,300,157 at December 31, 1996. The
increase in working capital is due primarily to the refinancing of $2,000,000
of debt which now matures in January 1999. The Company had stockholders'
equity of $3,263,200 at December 31, 1997.
Net cash used by operating activities was $1,136,596 for 1997, compared
to $2,082,722 for 1996. The decrease in cash used by operating activities in
1997 was primarily due to decreases in the net loss and payments for
commitments on guarantees on BIA liabilities as most of these liabilities were
repaid on 1996. Net cash used by investing activities was $93,014 for 1997,
compared to $834,100 for 1996. The decrease in cash used by investing
activities was attributable to the decrease in advances made to BIA partially
offset by the decrease in the proceeds from the sale of assets. Net cash
provided by financing activities was $1,811,357 for the 1997, compared to
$3,161,827 for 1996 due to a decrease in financing requirements.
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, 1997
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
Current assets $1,446,643 $ 363,984 $ (20,081) $1,790,546
Investments in and
advances to joint
operations 4,316,168 - (1,000,641) 3,315,527
Property and other
assets, net 253,333 1,526,562 80,986 1,860,881
---------- ---------- ---------- ----------
Total assets $6,016,144 $1,890,546 $ (939,736) $6,699,954
========== ========== ========== ==========
Current liabilities $ 752,944 $1,547,891 $ (597,081) $1,703,754
Long-term debt 2,000,000 - - 2,000,000
Stockholders' and
partners' equity 3,263,200 342,655 (342,655) 3,263,200
---------- ---------- ---------- ----------
Total liabilities and
equity $6,016,144 $1,890,546 $(939,736) $6,966,954
========== ========== ========== ==========
The Company has financed its growth primarily from the issuance of stock
and borrowings. During 1997 and 1996, the Company borrowed an aggregate
principal amount of $2,540,000 and $2,510,000, respectively, including 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 with a shareholder 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 1997 and 1996, the
Company issued 7,000,000 and 169,149 shares of Common Stock, respectively, for
net proceeds of an aggregate of $2,510,501 and $93,537, respectively, pursuant
to private sales and the exercise of outstanding stock options. Additionally
in 1997 and 1996, the Company issued 623,128 and 410,929 shares of Common
Stock, respectively, for payment of accounts payable of $317,763 and $401,001
respectively. In February and March 1996, the Company issued 50 shares of
Series B Convertible Redeemable Preferred Stock for net proceeds of
$1,090,200.
In connection with the private placements in 1997, 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. 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. In April
1998, the Company obtained a line of credit in the aggregate of $800,000 from
two shareholders to provide additional liquidity. This line of credit matures
on December 31, 1999 and any outstanding balance will bear interest at a rate
of 13%. The Company does not anticipate needing to draw on this line of
credit in 1998.
The Company advanced $15,866 and $2,980,009 to BIA during the years
ended December 31, 1997 and 1996, respectively. 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 Company's Latvian partner in BIA 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 $6.3 million of BIA's
debt to the Company which was previously reserved by the Company. BIA will
assign the promissory note from the Latvian partner to the Company.
Management believes that the Latvian partner's contribution will be made
during 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.
Item 7. FINANCIAL STATEMENTS
The information required hereunder is included in this report as set
forth in the "Index to Financial Statements" on page F-1.
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 30, 1996, BDO Seidman, LLP ("Former Accountant") informed the
Company that it was resigning from its position as the Company's accounting
firm, and on November 8, 1996, the Company approved the engagement of Arthur
Andersen LLP ("Current Accountant") as the Company's independent accountant.
The Former Accountant's report on the Company's financial statements for
1995 and the Current Accountant's report on the Company's financial statements
for 1996 contained a qualified opinion to reflect that incurred losses from
operations and the Company's financial position raise substantial doubt about
the ability of the Company to continue as a going concern. There have been no
disagreements with either the Former Accountant or the Current Accountant on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
The following table gives certain information with respect to the
executive officers and directors of the Company:
Name Age Position
---- --- --------
Robert L. Knauss (3) 67 Chairman of the Board and Chief Executive
Officer, Director - Class III
James W. Goodchild (4) 42 President and Chief Operating Officer 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) 57 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. Goodchild resigned as President and Chief Operating Officer in
March 1998. He remains as a director of the Company.
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 formerly Dean of the Vanderbilt Law School.
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. He has served as a director of
Equus II, 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 been senior credit officer of AMRESCO Builders
Group, Inc. since March 1998. He served as president of the Company from
September 1997 and as chief operating officer of the Company from October
1994 until March 1998. 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 an 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 from March 1991 until
August 1995. Mr. Davier has served as a director and as the Company's
managing director to BIA from June 1991 to August 1995. 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 is a principal of Pennwood Capital Corporation, a venture
capital investment and management firm. He 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. 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.
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. 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.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers and persons who own more than ten
percent of a registered class of the Company's equity securities to file reports
with the Securities and Exchange Commission relating to transactions and
holdings in the Company's common stock. The Company believes that during the
fiscal year ended December 31, 1997 all such filing requirements were satisfied.
Item 10. EXECUTIVE COMPENSATION
The following table sets forth information with respect to the chief
executive officer and the only other executive officer of the Company who
received total annual salary and bonus for the fiscal year ended December 31,
1997 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, 1997 $120,000 $ 0 $0 $51,616 (4) 244,700 (4)
Chief Executive 1996 120,000 0 0 0 0
Officer 1995 120,000 75,000 (2) 0 0 125,000 (5)
James Goodchild, 1997 $120,000 $ 0 $ 0 $30,375 (4) 144,000 (4)
Chief Operating and 1996 120,000 $ 0 13,333 (3) 0 0
Financial Officer 1995 120,000 50,000 (2) 0 0 140,000 (5)
</TABLE>
(1) None of the named executive officers received perquisites or other
benefits valued in excess of 10% of the total of reported annual
salary and bonus.
(2) The bonus for 1995 consists of cash payments of $37,500 and $25,000
and the issuance of 25,000 and 16,667 shares of the Company's common
stock to Messrs. Knauss and Goodchild, respectively.
(3) Other compensation for Mr. Goodchild in 1996 consists of payment of the
exercise price by the Company on options that were exercised.
(4) In August 1997, the Company granted 122,350 and 72,000 shares of the
Company's common stock and 244,700 and 144,000 options to Messrs.
Knauss and Goodchild, respectively, for services to be rendered. Half
of the shares and options were vested in February 1998 and the
remaining half vest in August 1999.
(5) Of these options and warrants, 35,000 and 50,000 stock options were
originally granted in October 1994 to Messrs. Knauss and Goodchild,
respectively, at an exercise price of $2.875 per share. In August
1995, these options were repriced at $1.125 per share.
Stock Options
In September 1992, the Company adopted its 1992 Equity Incentive Plan
("Plan"), which was amended effective March 1995, 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 Annual Report, options to purchase an aggregate of 1,072,366 shares were
outstanding under the Plan.
The following table shows, as to the named executive officers,
information concerning individual grants of stock options and warrants during
1997. These options and warrants for each executive officer are exercisable in
February 1998 and the remaining half are exercisable in August 1999.
<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 244,700 51.33 $0.421875 August 2004
James W. Goodchild 144,000 30.21 $0.421875 August 2004
David A. Grossman 88,000 18.46 $0.421875 August 2004
</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,
1997.
<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, 1997 December 31, 1997
Acquired on Value Exercisable/ Exercisable/
Name Exercise Realized Unexercisable Unexercisable
<S> <C> <C> <C> <C>
Robert L. Knauss 0 $0 165,500/244,700 $0/$0
James W. Goodchild 13,334 0 147,000/144,000 $0/$0
David A. Grossman 0 0 113,000/88,000 $0/$0
</TABLE>
The Company has not established, nor does it provide for, long-term
incentive plans or defined benefit or actuarial plans.
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 27, 1998, certain
information with respect to the beneficial ownership of the Company's Common
Stock by (i) each person known to the Company who beneficially owns more
than 5% of the Company's outstanding Common Stock; (ii) each director; (iii)
each named executive officer; and (iv) all directors and officers as a
group:
Shares Beneficially Owned
Name of Beneficial Owner (1) Number Percent
Jonas af Jochnick 12,510,000 (2) 57.26
Citibank (Switzerland) 1,000,000 6.47
Robert L. Knauss 1,094,288 (3) 6.84
Paul R. Gregory 894,557 (4) 5.60
Homi M. Davier 640,180 (5) 4.06
James W. Goodchild 472,034 (6) 2.98
Juris Padegs 311,252 (7) 1.98
David A. Grossman 131,667 (8) 0.84
Morris A. Sandler 130,000 (9) 0.83
Ted Reynolds 81,000 (10) 0.52
Adolf af Jochnick 10,000 (11) 0.06
All directors and executive officers
as a group (10 persons) 16,274,979 (12) 69.42
(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 and
options 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 422,259 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 183,525 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 72,763 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable. Excludes an
aggregate of 108,000 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 69,000 shares subject to options which are currently
exercisable. Excludes an aggregate of 66,000 shares subject to options
which are not currently exercisable and shares to be issued for services
to be rendered.
(9) Includes 105,000 shares subject to options and warrants which are
currently exercisable.
(10) Includes 31,000 shares subject to options and warrants which are
currently exercisable.
(11) Includes an aggregate of 10,000 shares subject to options which are
currently exercisable.
(12) Includes an aggregate of 7,857,035 shares subject to options, warrants
and Series A Preferred Stock which are currently exercisable. Excludes
an aggregate of 357,525 shares subject to options which are not currently
exercisable and shares to be issued for services to be rendered.
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 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.
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.
In December 1994, Mr. Knauss guaranteed a $50,000 bank loan to the
Company. The balance of the loan is $8,711 at December 31, 1997 and was
repaid in January 1998.
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.
Item 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Identification of Exhibit
2.1(2)- Plan and Agreement of Recapitalization
3.1(a)(2)- Restated Articles of Incorporation
3.1(b)(2)- Amended Articles of Incorporation
3.1(c)(2)- Articles of Correction
3.2(2)- Bylaws
3.3(2)- Statement of Resolution Establishing and Designating a Series
of Shares of the Company, Series A Cumulative Preferred Stock,
$10.00 par value
3.4(5)- Certificate of Elimination of Shares Designated as Series A
Cumulative Preferred Stock
3.5(5)- Certificate of the Designation, Preference, Rights and
Limitations of Convertible Redeemable Series A Preferred Stock
4.1(2)- Common Stock Specimen
10.3(4)- 1992 Equity Incentive Plan, as amended
10.4(2)- Employment Agreement between the Company and Robert L. Knauss
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
10.14(2)- Baltic Catering Limited Liability Company Agreement between
the Company and ARVO, Ltd.
10.34(3)- Memorandum of Understanding between the Company, BIA and SAS
10.35(3)- Loan Agreement with Charter Bank
10.36(6)- Air Baltic Joint Venture Agreement
10.38(8)- Articles of Incorporation of LAMCO
10.40(8)- Amendment to Air Baltic Joint Venture Agreement
10.41(7)- Share Purchase Agreement with SAS
10.42(1)- AIRO Catering Services Joint Venture Agreement
10.43(9)- Riga Catering Services Shareholders' Agreement
10.44(8)- Amendment to Articles of Incorporation of LAMCO
10.45(8)- Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred
Stock, as amended
10.46(11)- Compensatory Plan for Robert Knauss, James Goodchild and
David Grossman
10.47(11)- Promissory Note Agreement with ORESA Ventures N.V.
16.2(10)- Letter on Change in Certifying Accountant
_____________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (33-90030), and incorporated herein by reference thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1995, and incorporated herein by
reference thereto.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 29, 1995, and incorporated herein by reference thereto.
(7) 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.
(8) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-860), and incorporated herein by reference
thereto.
(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 Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference thereto.
(11) 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.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the fourth quarter of 1997.
BALTIC INTERNATIONAL USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent public accountants F-2
Consolidated balance sheets at December 31, 1997 and 1996 F-3
Consolidated statements of operations for the years ended
December 31, 1997 and 1996 F-4
Consolidated statements of stockholders' equity for the years
ended December 31, 1997 and 1996 F-5
Consolidated statements of cash flows for the years ended
December 31, 1997 and 1996 F-7
Notes to consolidated financial statements F-8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Baltic International USA, Inc.
We have audited the accompanying consolidated balance sheets of Baltic
International USA, Inc. as of December 31, 1997 and 1996, and the related
consolidated statements of operations, shareholders' equity and cash flows for
the years 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 audits 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 audits provide a reasonable basis
for our opinion.
As discussed in Note 1 to the consolidated financial statements, the Company
has funded operating cash deficits and investments through financing
activities. During 1997, the Company received net proceeds of $2,510,501 from
the issuance of common stock, and in April 1998, the Company obtained a line of
credit to provide additional liquidity to the Company which management believes,
although not assured, will allow the Company to meet its operating and capital
needs for the next twelve months.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Baltic
International USA, Inc. as of December 31, 1997 and 1996, and the results of
its operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
April 15, 1998
BALTIC INTERNATIONAL USA, INC.
Consolidated Balance Sheets
December 31, December 31,
1997 1996
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 965,992 $ 384,245
Accounts receivable:
Trade 135,109 43,810
Affiliates 138,125 -
Inventory 195,971 47,741
Prepaids and deposits 11,446 166,362
---------- ----------
Total current assets 1,446,643 642,158
---------- ----------
PROPERTY AND EQUIPMENT, net 12,836 18,182
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 4,316,168 3,446,775
OTHER ASSETS 31,649 233,791
GOODWILL, NET 208,848 238,308
---------- ----------
Total assets $ 6,016,144 $ 4,579,214
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 669,233 $ 436,760
Short-term debt, net 83,711 2,285,597
Commitments for guarantees on BIA liabilities - 146,375
Other current liabilities - 73,583
---------- ----------
Total current liabilities 752,944 2,942,315
LONG-TERM DEBT TO A SHAREHOLDER 2,000,000 -
---------- ----------
Total liabilities 752,944 2,942,315
---------- ----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Warrants 1,306,610 -
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, 16 and 34 shares issued and
outstanding 400,000 850,000
Common stock, $.01 par value, 20,000,000
shares authorized, 15,502,792 and
7,302,108 shares issued and 15,460,348
and 7,302,108 shares outstanding 155,028 73,021
Additional paid-in capital 11,687,809 9,905,403
Accumulated deficit (11,495,707) (10,421,525)
Treasury stock, at cost (20,540) -
---------- ----------
Total stockholders' equity 3,263,200 1,636,899
---------- ----------
Total liabilities and stockholders' equity $ 6,016,144 $ 4,579,214
========== ==========
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Operations
Year Ended December 31,
1997 1996
REVENUES:
Freight revenue $ 225,680 $ 557,057
Food distribution 470,874 276,733
General sales agency revenue 78,000 59,000
Net equity in earnings of joint operations 361,688 420,467
----------- -----------
Total operating revenues 1,136,242 1,313,257
----------- -----------
OPERATING EXPENSES:
Cost of revenue:
Freight 155,331 301,665
Food distribution 452,379 213,044
Personnel and consulting 671,515 965,560
Legal and professional 109,729 91,900
Other general and administrative 515,735 428,408
Reserve of investment in BIA - 812,385
----------- -----------
Total operating expenses 1,904,689 2,812,962
----------- -----------
LOSS FROM OPERATIONS (768,447) (1,499,705)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (507,747) (132,034)
Interest income 32,450 3,800
Gain on sale of assets 569,926 297,200
Other income (expense) (124,640) 97,890
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (30,011) 266,856
----------- -----------
LOSS BEFORE INCOME TAXES (798,458) (1,232,849)
INCOME TAX EXPENSE - (15,694)
----------- -----------
NET LOSS $ (798,458) $(1,248,543)
----------- -----------
LESS PREFERRED DIVIDENDS (275,724) (210,743)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS $(1,074,182) $(1,459,286)
=========== ===========
LOSS PER SHARE AMOUNTS:
Basic $ (0.11) $ (0.23)
Diluted $ (0.11) $ (0.23)
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
Preferred Stock
Series A Series B
Warrants Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C>
Balance, January 1,
1996 $ - 123,000 $1,230,000 - $ -
Shares issued:
Common stock
Preferred stock 50 1,250,000
Preferred stock and
accrued dividends
converted to
common stock (16) (400,000)
Debt converted to
common stock
Discount on debt
issued
Deferred
compensation on
options granted
Net loss
Dividends on
preferred stock:
Series A, $1.00
per share
Series B, $2507
per share
---------- -------- ---------- --- ----------
Balance,
December 31, 1996 - 123,000 1,230,000 34 850,000
Common shares and
warrants issued 1,306,610
Preferred stock and
accrued dividends
converted to common
stock (18) (450,000)
Purchase of treasury
shares
Reissuance of
treasury shares
Net loss
Dividends on
preferred stock:
Series A, $1.00
per share
Series B, $6221
per share
---------- -------- ---------- --- ----------
Balance, December 31,
1997 $1,306,610 123,000 $1,230,000 16 $ 400,000
========== ======== ========== === ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
(Continued)
Additional
Common stock paid-in Accumulated Treasury
Shares Amount capital deficit stock Total
<S> <C> >C< <C> <C> <C> <C>
Balance, January 1,
1996 5,758,241 $ 57,582 $ 8,703,883 $ (8,962,239) $ - $ 1,029,226
Shares issued:
Common stock 580,078 5,801 693,436 699,237
Preferred stock (159,800) 1,090,200
Preferred stock and
accrued dividends
converted to
common stock 657,576 6,576 409,958 16,534
Debt converted to
common stock 306,213 3,062 137,605 140,667
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:
Series A, $1.00
per share (123,250) (123,250)
Series B, $2507
per share (87,493) (87,493)
---------- -------- ----------- ------------ --------- -----------
Balance,
December 31, 1996 7,302,108 73,021 9,905,403 (10,421,525) - 1,636,899
Common shares and
warrants issued 7,052,913 70,529 1,256,514 2,633,653
Preferred stock and
accrued dividends
converted to
common stock 1,147,771 11,478 497,597 59,075
Purchase of treasury
shares (292,300) (292,300)
Reissuance of
treasury shares 28,295 271,760 300,055
Net loss (798,458) (798,458)
Dividends on
preferred stock:
Series A, $1.00
per share (123,000) (123,000)
Series B, $6221
per share (152,724) (152,724)
---------- -------- ----------- ------------ --------- -----------
Balance, December 31,
1997 15,502,792 $155,028 $11,687,809 $(11,495,707) $ (20,540) $ 3,263,200
========== ======== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Cash Flows
Year Ended December 31,
1997 1996
Cash flows from operating activities:
Net loss $ (798,458) $ (1,248,543)
Noncash adjustments:
Net equity in (earnings) and losses of:
BIA - 812,385
Other joint operations (361,688) (420,467)
Depreciation and amortization 37,018 35,474
Amortization of debt costs and discount 188,174 42,806
Deferred compensation expense - 66,753
Gain on sale of assets (569,926) (297,200)
Increase/decrease in current assets and
liabilities:
Accounts receivable (124,522) 143,368
Prepaid and other 333,553 (174,733)
Inventory (148,230) (33,476)
Accounts payable and accrued liabilities 382,483 (135,943)
Commitments for guarantees (75,000) (873,146)
----------- -------------
Net cash used by operating activities (1,136,596) (2,082,722)
----------- -------------
Cash flows from investing activities:
Investment in and advances to joint operations (814,078) (3,025,009)
Distributions and repayments from joint
operations 123,276 206,208
Proceeds from sale of assets 600,000 1,700,000
Proceeds from repayment of Air Baltic
subordinated debt - 290,000
Acquisition of property and equipment (2,212) (5,299)
----------- -------------
Net cash used by investing activities (93,014) (834,100)
----------- -------------
Cash flows from financing activities:
Borrowings of debt 2,540,000 2,294,944
Repayment of debt and long-term obligations (2,930,060) (232,229)
Issuance of stock, net of related costs 2,524,467 1,183,737
Purchase of treasury stock................ (292,300) -
Preferred dividends paid (30,750) (84,625)
----------- -------------
Net cash provided by financing activities 1,811,357 3,161,827
----------- -------------
Net increase in cash and cash equivalents 581,747 245,005
Cash and cash equivalents, beginning of period 384,245 139,240
----------- -------------
Cash and cash equivalents, end of period $ 965,992 $ 384,245
=========== =============
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC.
Notes to Consolidated Financial Statements
NOTE 1 - BUSINESS OPERATIONS AND 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, 1997. 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. 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 46% 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 with a shareholder, is due in January 1999 and is secured by an
option agreement that the Company entered into with Scandinavian Airlines
System 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 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. However, there can be no assurance the Company will be
successful to meet its liquidity needs. The historical earnings of the
Company have been directly affected by the losses of BIA. The Company does
not anticipate, nor is it obligated to make, any further advances to BIA.
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 funded operating cash deficits and investments through the
issuance of stock and borrowings. During 1997 and 1996, the Company received
net proceeds of $2,510,501 and $93,537, respectively, relating to the issuance
of 7,000,000 and 169,149 shares of common stock, respectively, pursuant to
private sales and the exercise of outstanding stock options. Additionally in
1997 and 1996, the Company issued 623,128 and 410,929 shares of common stock,
respectively, for payment of accounts payable of $317,763 and $401,001,
respectively. 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.
As discussed in Note 5, in October 1997, the Company refinanced its $2,000,000
loan to a maturity date of January 29, 1999. In April 1998, the Company
obtained a line of credit in the aggregate of $800,000 from two shareholders
to provide additional liquidity. This line of credit matures on December 31,
1999 and any outstanding balance will bear interest at a rate of 13%. No
advances are to made under the line of credit until the $2,000,000 loan to a
shareholder is repaid, and the line of credit is secured by all shares of
stock owned in AIRO. The Company does not anticipate needing to draw on this
line of credit in 1998. Management believes that the refinancing of the debt
and obtaining the additional line of credit along with the Company's equity
financing completed during 1997 discussed in Note 7 and the sale of 5% of AIRO
to LSG Lufthansa Services/Sky Chefs ("LSG") discussed in Note 4 should enable
the Company to fund its capital obligations and meet its liquidity needs for
the next twelve months. However, there can be no assurance that management
will be successful in such efforts.
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. LAMCO is accounted for using the cost method
because the Company owns only 2.6% of LAMCO and it has had no operations since
its inception.
Revenue recognition
Revenues are recognized when earned and expenses are recognized when the goods
and services are acquired or provided.
Inventory
Inventory is stated at the lower of cost (first-in, first out) or market (net
realizable value). Inventory consists of ADC's food and beverage products.
Property, equipment and depreciation
Property and equipment are recorded at cost. Depreciation is computed over
the estimated useful lives of the assets using the straight-line method for
financial reporting purposes and accelerated methods for income tax purposes.
Maintenance and repairs are charged to operations as incurred.
Debt issuance costs
Debt issuance costs are amortized using the interest method until the maturity
date of the related note payable.
Goodwill
Goodwill results from the acquisition of the remaining 50% interest in BWAF
and the acquisition of the Miller distribution rights in Riga, Latvia by ADC.
Goodwill is amortized over ten years.
Long-lived assets
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
The Company adopted SFAS No. 121 on January 1, 1996. SFAS No. 121 requires
that long-lived assets and certain intangibles to be held and used by an
entity be reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The
Company's adoption of SFAS No. 121 did not materially impact the results of
operations.
Income taxes
Deferred income taxes result from temporary differences between the financial
statements and tax basis of assets and liabilities (see Note 6).
Loss per common share
Net loss per common share is computed using the weighted average number of
common shares outstanding. The weighted average number of shares for the
years ended December 31, 1997 and 1996 were 10,189,215 and 6,461,561
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. The Company has adopted this
pronouncement as of December 31, 1997. This statement does not impact the
earnings per share amounts computed for 1997 or 1996, as the Company had net
losses for these periods.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly
liquid investments purchased with original maturities of three months or less
to be cash equivalents.
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Concentration of credit risk
Substantially all of the Company's assets and revenue sources are heavily
concentrated in Latvia and Lithuania. Failure of the Company's subsidiaries
and joint operations to perform up to the terms of its obligations due to
economic or political circumstances would result in a material credit risk to
the Company.
At December 31, 1997 and 1996, the Company's cash in financial institutions
exceeded the federally insured deposits limit by $786,367 and $200,830,
respectively. An investment of $870,000 in a reverse repurchase agreement is
included in cash and cash equivalents at December 31, 1997. The collateral
for this investment consists of a collateralized mortgage obligation with a
market value of $870,000 at December 31, 1997.
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. Any translation
gains or losses are not significant and therefore have not been recorded on the
Company's consolidated balance sheets as of December 31, 1997 and 1996.
New accounting pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting the components of comprehensive income
and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," which replaces existing segment disclosure requirements and
requires reporting certain financial information regarding operating segments on
the basis used internally by management to evaluate segment performance. The
Company will adopt SFAS Nos. 130 and 131 in the first quarter of 1998 and year-
end 1998, respectively. These statements may affect disclosure and presentation
in the financial statements but will have no impact on the Company's
consolidated financial position, liquidity, cash flows or results of operations.
NOTE 3 - CONSOLIDATED SUBSIDIARIES
American Distributing Company
ADC, a wholly owned subsidiary of BIUSA, distributes Miller, Bartles & Jaymes,
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 opened a new office in Vilnius, Lithuania in May 1997.
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:
December 31,
1997 1996
Joint operations accounted for using
cost method:
airBaltic $2,144,212 $1,918,000
BIA 1,131,315 1,186,824
LAMCO 40,000 40,000
--------- ---------
Subtotal 3,315,527 3,144,824
--------- ---------
Joint operations accounted for using
equity method:
BCS 44,298 43,097
AIRO 784,991 110,956
RCS 171,352 147,898
--------- ---------
Subtotal 1,000,641 301,951
--------- ---------
Total $4,316,168 $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 agreed to pay all
aviation-related payables of BIA as of November 27, 1995. The Company has
paid all of these payables as of December 31, 1997.
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 $297,200 was recognized on the sale of the Air
Baltic stock which is included in other income in 1996.
In October 1997, the Company contributed an additional $226,212 of capital to
Air Baltic.
Summarized financial information for Air Baltic is as follows (100%):
December 31,
1997 1996
Current assets $ 7,109,000 $11,372,000
Noncurrent assets 21,576,000 15,986,000
---------- ----------
Total assets $28,685,000 $27,358,000
========== ==========
Current liabilities $11,295,000 $ 8,768,000
Noncurrent liabilities 13,776,000 16,536,000
Equity 3,614,000 2,054,000
---------- ----------
Total liabilities and equity $28,685,000 $27,358,000
========== ==========
Year Ended December 31,
1997 1996
Revenues $36,141,000 $ 24,399,000
Loss from operations $(3,981,000) $(13,325,000)
Net loss $(5,651,000) $(17,245,000)
In accordance with Latvian Law on Foreign Investments, Air Baltic will be
exempt from corporate income tax for its first three years of profitable
operations and will receive a 50 percent tax reduction for the following two
years. To date, Air Baltic has not generated profits in any year.
The Company's share of Air Baltic's accumulated losses is approximately
$2,076,000 as of December 31, 1997. 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, which
allows the Company to put the investment to SAS for $2,144,333.
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 89% interest in BIA.
As discussed in Note 1, BIA 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. In
March 1997, the Company's Latvian partner in BIA 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 $6.3 million of BIA's debt to the
Company which was previously reserved by the Company. BIA will assign the
promissory note from the Latvian partner to the Company. Management believes
that the Latvian partner's contribution will be made during 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. Management believes that the Company's remaining recorded investment
in BIA will be recovered through the contribution required to be made by the
Latvian partner by a contract and liquidation of its remaining assets. The
Company believes that maintaining BIA's airline certification, the goodwill of
BIA's debtors and the availability of BIA's tax holiday in Latvia are beneficial
to the Company.
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, LAMCO. The
Company's initial investment totaled $40,000 for 2.6% of LAMCO. LAMCO is
currently in liquidation and the Company expects to recover all of its
investment of $40,000 in 1998.
Joint operations using equity method -
A condensed summary of the financial position (100% basis) of the combined
joint operations accounted for using the equity method of accounting is as
follows:
December 31,
1997 1996
Current assets $ 920,152 $ 641,263
Noncurrent assets 3,385,511 551,105
---------- ----------
Total assets $ 4,305,663 $ 1,192,368
========== ==========
Current liabilities $ 3,461,788 $ 518,345
Noncurrent liabilities - 195,540
Equity 843,875 478,483
---------- ----------
Total liabilities and equity $ 4,305,663 $ 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:
Year Ended December 31,
1997 1996
Combined 100% Basis:
Operating revenues $ 3,063,014 $ 2,815,525
Income from operations $ 863,358 $ 1,098,275
Net income $ 985,624 $ 950,062
Company Percentage Interest:
Operating revenues $ 1,251,768 $ 1,240,176
Income from operations $ 323,037 $ 482,003
Net income $ 361,688 $ 420,467
AIRO Catering Services and Riga Catering Services
In February 1996, the Company formed 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, 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. During 1997, LSG purchased 51% of TOPflight. 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. 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 the stock 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.
At December 31, 1997, the Company had advances aggregating $577,000 to AIRO.
These loans bear interest at rates of 8% to 10% per year. At December 31,
1997, the Company had accrued interest receivable of $20,081 related to these
loans.
Summarized unaudited financial information for AIRO is as follows (100%):
December 31,
1997 1996
Current assets $ 106,615 $ 47,838
Noncurrent assets 5,787,149 2,727,799
---------- ----------
Total assets $ 5,893,764 $ 2,775,637
========== ==========
Current liabilities $ 2,144,172 $ 117,738
Noncurrent liabilities 723,046 -
Equity 3,026,546 2,657,899
---------- ----------
Total liabilities and equity $ 5,893,764 $ 2,775,637
========== ==========
Year Ended Period From
December 31, May 1, 1996 to
1997 December 31, 1996
Revenues $ 416,066 $ 284,607
Income from operations $ 78,379 $ 271,742
Net income $ 3,379 $ 272,094
On April 2, 1996, the catering operations of BCS were acquired by RCS,
previously owned by TOPflight, in exchange for shares in RCS. In April 1997,
the Company transferred 2.82% of its interest in RCS to AIRO as part of a
capital contribution. At December 31, 1997, RCS was owned 37.82% by AIRO,
20.68% by the Company and 41.5% by the principals of the Company's partner in
BCS. In March 1998, the Company transferred its remaining direct interest in
RCS to AIRO as part of a capital contribution.
In 1997, RCS declared dividends payable to its shareholders aggregating $508,475
that were unpaid as of December 31, 1997. The Company's share of these
dividends was $105,153 and is included in accounts receivable from affiliates on
the consolidated balance sheet as of December 31, 1997.
Summarized financial information for RCS is as follows (100%):
December 31,
1997 1996
Current assets $ 770,181 $ 468,989
Noncurrent assets 404,279 427,836
---------- ----------
Total assets $ 1,174,460 $ 896,825
========== ==========
Current liabilities $ 572,982 $ 296,483
Noncurrent liabilities - 195,540
Equity 601,478 404,802
---------- ----------
Total liabilities and equity $ 1,174,460 $ 896,825
========== ==========
Year Ended Period From
December 31, May 1, 1996 to
1997 December 31, 1996
Revenues $ 2,835,465 $ 1,937,422
Income from operations $ 1,092,314 $ 813,164
Net income $ 1,108,769 $ 813,164
In accordance with Latvian Law on Foreign Investments, RCS is exempt from
corporate income tax for its first three years of profitable operations and
will receive a 50 percent tax reduction for the following three years. The
first year of the tax holiday for RCS was 1996.
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 a restaurant in the Riga Airport. The Company expects
to liquidate BCS during 1998.
December 31,
1997 1996
Current assets $ 43,356 $ 124,436
Noncurrent assets 31,408 65,882
---------- ----------
Total assets $ 74,764 $ 190,318
========== ==========
Current liabilities $ 21,588 $ 104,124
Equity 53,176 86,194
---------- ----------
Total liabilities and equity $ 74,764 $ 190,318
========== ==========
Year Ended December 31,
1997 1996
Revenues $ 227,549 $ 878,103
Income from operations $ 15,712 $ 336,500
Net income $ 6,856 $ 33,225
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").
Subsequent to the investment, the Latvian Economic Court temporarily halted
the privatization process and 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 - DEBT
Debt consists of the following:
December 31,
1997 1996
Note payable to a shareholder, 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,
January 1999 $ 2,000,000 $ -
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,
repaid in October 1997 - 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 10.5%, due upon maturity, principal payable
July 1996, guaranteed by an officer of the
Company, repaid in January 1998 8,711 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, originally due March 31, 1996 and
currently due on demand 75,000 75,000
---------- ----------
2,083,711 2,473,771
Less discount on loan financing - (188,174)
---------- ----------
Total debt, net 2,083,711 2,285,597
Less short-term debt, net (83,711) (2,285,597)
---------- ----------
Long-term debt, net $ 2,000,000 $ -
========== ==========
The Company is in the process of renegotiating the maturity of the
subordinated bridge loans of $75,000 which matured prior to December 31,
1997. Management believes that it will be able to extend the maturity of
these loans on terms similar to the previous loans. However, there can be no
assurance the Company will be successful in such efforts.
On April 5, 1996, the Company entered into a convertible note agreement in
connection with a $250,000 loan to the Company ("Convertible Note"). The
holder of the Convertible Note may at any time on or after July 5, 1996
convert the Convertible Note to shares of the Company's common stock at a
conversion price equal to the lesser of $1.50 or 70% of the closing bid
price per share of common stock on the trading date immediately preceding
the date of conversion. On July 11, 1996, the holder of the Convertible
Note converted principal of $134,000 and accrued interest to 306,213 shares
of common stock. 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 with third
parties 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 with a shareholder 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 on the loan.
In April 1998, the Company obtained a line of credit in the aggregate of
$800,000 from two shareholders to provide additional liquidity. This line of
credit matures on December 31, 1999 and any outstanding balance will bear
interest at a rate of 13%. No advances are to made under the line of credit
until the $2,000,000 loan to a shareholder is repaid, and the line of credit
is secured by all shares of stock owned in AIRO. The Company does not
anticipate needing to draw on this line of credit in 1998.
NOTE 6 - INCOME TAXES
The components of net deferred tax assets consisted of the following:
December 31,
1997 1996
Deferred tax assets:
Net operating loss carryforward $ 2,646,739 $ 2,069,455
Reserve on investment 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 3,967,159 3,666,086
---------- ----------
Deferred tax liabilities:
Unremitted earnings of joint operations 259,021 229,791
Other 26,708 32,017
---------- ----------
Total deferred tax liabilities 285,729 261,808
---------- ----------
Net deferred tax assets before valuation
Allowance 3,681,430 3,404,278
Valuation allowance (3,681,430) (3,404,278)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
Provisions for income taxes in the statements of operations were as follows:
Year ended December 31,
1997 1996
Current expense:
U.S. $ - $ -
Foreign - 15,694
Deferred expense - -
---------- ----------
Total expense $ - $ 15,694
========== ==========
Differences between the effective income tax rate and the statutory federal
income tax rate were primarily the result of net operating losses for which
valuation reserves have been fully provided.
As of December 31, 1997, the Company had net operating loss carryforwards of
approximately $7,700,000 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.
During 1997, the Company acquired an aggregate of 625,993 shares of its common
stock at a total cost of $292,300 through private transactions. The Company
reissued 583,549 of these shares to satisfy $300,055 of accounts payable. At
December 31, 1997, the Company has 42,444 treasury shares.
NOTE 8 - OPTIONS
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, and $66,753 for
the years ended December 31, 1997 and 1996, respectively.
The Company follows the provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation" which allows the Company to continue to apply the
provisions of APB No. 25 to determine compensation expense. Had compensation
expense for the Plan been determined using a stock-based, fair value method as
allowed by SFAS No. 123, the Company's net loss and loss per common share
would have been increased to the following pro forma amounts:
Year ended December 31,
1997 1996
Net loss As Reported $ (798,458) $(1,248,543)
Pro Forma (892,969) (1,474,865)
Loss per common share As Reported (0.11) (0.23)
Pro forma (0.11) (0.26)
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.
At December 31, 1997, the Company had 1,072,366 shares of common stock
reserved for issuance upon exercise of outstanding options, and 427,634
options were available for future grant under the Plan. A summary of changes
in outstanding options is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C>
Shares under option, beginning
of period 589,000 $ 1.18 653,616 $ 1.10
Changes during the period:
Granted 521,700 0.42 160,000 0.67
Canceled (25,000) 1.53 (55,467) 0.61
Exercised (13,334) 0.50 (169,149) 0.58
--------- --------
Shares under option, end of
period 1,072,366 $ 0.81 589,000 $ 1.18
========= ========
Options exercisable, end of
period 595,666 $ 1.12 589,000 $ 1.18
========= ========
</TABLE>
The exercise price of the options outstanding at December 31, 1997 range from
$0.40 to $1.38. The weighted average contractual life of the options
outstanding at December 31, 1997 was 4.0 years. The weighted-average grant-
date fair value of options granted during 1997 was $0.37 and during 1996 was
$1.17. 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 and 1996: risk-free interest rate
of 6.5% and, 6.5%, respectively; expected dividend yield of 0% and 0%,
respectively; expected lives of 6 years and 5 years, respectively; and
expected volatility of 128% and 138%, respectively.
NOTE 9 - WARRANTS
During 1997, the Company issued 7,705,000 warrants in connection with the
issuance of 7,000,000 shares of common stock pursuant to private sales. The
Company allocated a portion of the net proceeds received from the issuances to
the warrants of $1,306,610. This allocation was calculated using fair values
of the warrants granted using the Black-Scholes option pricing model.
At December 31, 1997, the Company had 10,035,845 shares of common stock
reserved for issuance upon exercise of outstanding warrants. A summary of
changes in outstanding warrants is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price
<S> <C> <C> <C> <C>
Shares under warrant,
beginning of period 1,891,595 $ 2.58 1,267,970 $ 3.38
Changes during the period:
Granted 8,144,250 0.64 623,625 0.96
Canceled - - - -
Exercised - - - -
---------- ---------
Shares under warrant, end of
period 10,035,845 $ 1.01 1,891,595 $ 2.58
========== =========
Warrants exercisable, end of
period 10,035,845 $ 1.01 1,811,595 $ 2.63
========== =========
</TABLE>
The exercise price of the warrants outstanding at December 31, 1997 range from
$0.44 to $9.80. The weighted average contractual life of the warrants
outstanding at December 31, 1997 was 4.1 years. The weighted-average grant-
date fair value of warrants granted during 1997 was $0.40 and during 1996 was
$1.22.
NOTE 10 - PREFERRED STOCK
Effective June 30, 1995, the Company created its Convertible Redeemable Series
A Preferred Stock ("Series A Preferred Stock"), 500,000 shares authorized $10
par value, and issued 123,000 shares thereof upon conversion of $1,230,000 in
aggregate principal amount of long-term indebtedness. The Series A Preferred
Stock: (i) is redeemable only at the option of the Company and only during the
thirty day period beginning on December 31 and June 30 of each year that the
Series A Preferred Stock is outstanding; (ii) is convertible at any time by
the holders thereof at the initial conversion price of $2 per share; (iii)
carries a liquidation preference of $10 per share; (iv) is non-voting; and (v)
accrues cumulative cash dividends per share at an annual rate equal to 10% of
the stated value per share, payable in equal quarterly installments. The
voting rights of the holders of the Company's common stock will be diluted
upon conversion to the Series A Preferred Stock and the holders of the Series
A Preferred Stock will have preferential dividend and liquidation rights over
the holders of common stock. Furthermore, when and if the Company becomes
profitable, the issuance of the shares of Series A Preferred Stock will have a
dilutive effect on the per share value of the common stock. The conversion
price of the Series A Preferred Stock is adjustable for certain issuances of
securities at less than 90% of the conversion price. At December 31, 1997,
the conversion price was $0.92 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 years ended December 31, 1997 and 1996, shareholders converted an
aggregate of 18 and 16 shares of Series B Preferred Stock into 1,147,771 and
657,576 shares of the Company's common stock, respectively.
NOTE 11 - LOSS PER SHARE
Supplemental disclosures for loss per share are as follows:
Year ended December 31,
1997 1996
Basic
Net loss to be used to compute basic loss
per share:
Net loss $ (798,458) $(1,248,543)
Less preferred dividends (275,724) (210,743)
---------- ----------
Net loss attributable to common shareholders $(1,074,182) $(1,459,286)
========== ==========
Weighted average number of shares:
Average common shares outstanding 10,189,215 6,461,561
========== ==========
Basic loss per common share $ (0.11) $ (0.23)
========== ==========
Diluted
Net loss to be used to compute basic loss
per share:
Net loss $ (798,458) $(1,248,543)
Less preferred dividends (275,724) (210,743)
---------- ----------
Net loss attributable to common
shareholders $(1,074,182) $(1,459,286)
========== ==========
Weighted average number of shares:
Average common shares outstanding 10,189,215 6,461,561
========== ==========
Diluted loss per common share $ (0.11) $ (0.23)
========== ==========
NOTE 12 - RELATED PARTY TRANSACTIONS
The following is a summary of material related party transactions which have
occurred during 1997 and 1996, other than those disclosed elsewhere in the
notes to the accompanying consolidated financial statements.
The Company earns general sales agency revenue by operating the North American
sales and marketing office of Air Baltic. The Company earned $78,000 and
$59,000 of such revenue for the years ended December 31, 1997 and 1996,
respectively.
BWAF is dependent upon Air Baltic for cargo transportation. Air Baltic
purchases goods and services from RCS.
NOTE 13 - 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 $41,238 and $35,447 for 1997 and 1996, respectively. Future minimum lease
payments under noncancelable operating leases are as follows:
1998 $ 31,907
1999 3,027
2000 3,027
2001 1,513
-----------
Total $ 39,474
===========
In December 1995, the Company guaranteed certain liabilities of BIA and
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. At
December 31, 1997 and 1996, the Company had $0 and $146,375 remaining to be
paid on these liabilities.
The Company is from time to time party to litigation in the ordinary course of
business. There are currently no pending legal proceedings that, in
management's opinion, would have a material adverse effect on the Company's
operating results or financial condition.
NOTE 14 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Supplemental disclosure of noncash transactions are as follows:
Year ended December 31,
1997 1996
Conversion of accounts payable and accrued
dividends to equity $ 376,838 $ 417,535
Conversion of notes payable to equity - 140,667
Conversion of preferred stock to common stock 450,000 400,000
Dividends declared 244,974 89,584
Discount on debt for warrants - 9,987
Deferred compensation on options exercised and
canceled - 204,699
Transfer of RCS shares to AIRO 28,434 -
Supplemental disclosure of interest paid $ 62,650 $ 44,459
Supplemental disclosure of income taxes paid $ - $ -
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on the 14th day of April,
1998.
BALTIC INTERNATIONAL USA, INC.
/s/ Robert L. Knauss
ROBERT L. KNAUSS, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Exchange Act, this report has been
signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated:
Signature Title Date
/s/ Robert L. Knauss Chairman of the Board and Chief April 14, 1998
ROBERT L. KNAUSS Executive Officer (Principal
Executive Officer)
/s/ David A. Grossman Chief Financial Officer and April 14, 1998
DAVID A. GROSSMAN Corporate Secretary (Principal
Financial and Accounting Officer)
/s/ Homi M. Davier Director April 14,1998
HOMI M. DAVIER
/s/ James W. Goodchild Director April 14, 1998
JAMES W. GOODCHILD
/s/ Paul R. Gregory Director April 14, 1998
PAUL R. GREGORY
/s/Adolf af Jochnick Director April 14, 1998
ADOLF af JOCHNICK
/s/ Jonas af Jochnick Director April 14, 1998
JONAS af JOCHNICK
/s/ Juris Padegs Director April 14, 1998
JURIS PADEGS
/s/ Ted Reynolds Director April 14, 1998
TED REYNOLDS
/s/ Morris A. Sandler Director April 14, 1998
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
10.3(4)- 1992 Equity Incentive Plan, as amended
10.4(2)- Employment Agreement between the Company and Robert L. Knauss
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
10.14(2)- Baltic Catering Limited Liability Company Agreement between
the Company and ARVO, Ltd.
10.34(3)- Memorandum of Understanding between the Company, BIA and SAS
10.35(3)- Loan Agreement with Charter Bank
10.36(6)- Air Baltic Joint Venture Agreement
10.38(8)- Articles of Incorporation of LAMCO
10.40(8)- Amendment to Air Baltic Joint Venture Agreement
10.41(7)- Share Purchase Agreement with SAS
10.42(1)- AIRO Catering Services Joint Venture Agreement
10.43(9)- Riga Catering Services Shareholders' Agreement
10.44(8)- Amendment to Articles of Incorporation of LAMCO
10.45(8)- Statement of the Designation, Preferences, Rights and
Limitations of Series B Convertible Redeemable Preferred
Stock, as amended
10.46(11)- Compensatory Plan for Robert Knauss, James Goodchild and
David Grossman
10.47(11)- Promissory Note Agreement with ORESA Ventures N.V.
16.2(10)- Letter on Change in Certifying Accountant
_________________________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (33-90030), and incorporated herein by reference thereto.
(5) Previously filed as an exhibit to the Company's Quarterly Report on Form
10-QSB for the quarter ended June 30, 1995, and incorporated herein by
reference thereto.
(6) Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 29, 1995, and incorporated herein by reference thereto.
(7) 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.
(8) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (File No. 333-860), and incorporated herein by reference
thereto.
(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 Current Report on Form
8-K dated August 30, 1996, and incorporated herein by reference thereto.
(11) 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 10.42
SHAREHOLDERS AGREEMENT
AMONG
LSG LUFTHANSA SERVICE EUROPA/AFRIKA GMBH
TOP FLIGHT CATERING AB
AND
BALTIC INTERNATIONAL USA, INC.
December 2, 1997
Hogan & Hartson L.L.P.
21 Garlick Hill
London EC4V 2AU
England
TABLE OF CONTENTS
1. DEFINITIONS 2
2. COMPLIANCE 3
2.1. Compliance Actions 3
2.2. Conflict with Memorandum or Articles 4
3. CORPORATE ORGANIZATION AND PROCEDURES 4
3.1. General 4
3.2. Board of Directors 4
3.2.1. Number and Composition. 4
3.2.2. Removal and Replacement of Directors. 4
3.2.3. Meetings 5
3.2.4. Non-Voting Observers 5
3.3. Certain Shareholder Rights 5
4. COMPANY BUSINESS, MANAGEMENT AND OPERATIONS 6
4.1. Business of the Company 6
4.2. Shareholder Expertise 6
4.3. LSG Lufthansa Service/Sky Chefs Network 6
4.4. Management and Operation of the Company 7
4.5. BIUSA Assistance to Managing Director 7
4.6. Annual Budget 7
4.6.1. Preparation of Annual Budgets 7
4.6.2. Operations Consistent with Annual Budget 7
4.7. Accounting 8
4.8. Audits by Shareholders 8
4.9. Key Personnel 8
4.10. Dividends 8
5. CERTAIN CAPITAL CONTRIBUTIONS 9
5.1. Valuation of Riga Shares 9
5.2. Contribution of Riga Shares and Cash by Shareholders 9
6. NON-COMPETE 9
6.1. Existing Company Locations 9
6.2. Territory 10
7. LSG OPTION TO PURCHASE CERTAIN SHARES FROM BIUSA 10
7.1. Option 10
7.2. Option Exercise 11
7.3. BIUSA Actions 11
8. PRE-EMPTIVE RIGHTS; SHARE ISSUANCES 11
8.1. Rights Notice 11
8.2. Acceptance and Issuance of Shares to Shareholders 12
8.3. Issuance of Shares to Third Parties 12
9. RESTRICTIONS ON TRANSFER OF SHARES 12
9.1. General Prohibition on Transfer 12
9.2. Transfer to Affiliate 13
9.3. Transfer by Right of First Refusal 13
9.3.1. Third Party Offer 14
9.3.2. Offer Period 14
9.3.3. Acceptance 14
9.3.4. Third Party Sale 14
9.3.5. Good Title 15
9.4. Regulatory Compliance 15
9.5. Pledge of Shares 15
9.6. Insolvency and Involuntary Transfers 16
9.7. Specified Value 16
10. TERM 16
10.1. Effectiveness 16
10.2. Termination 17
10.3. Continuing Rights and Obligations 17
11. CONFIDENTIALITY 17
12. MISCELLANEOUS 18
12.1. Assignment 18
12.2. Entire Agreement; Amendment 18
12.3. Severability 18
12.4. Waiver 18
12.5. Time of Essence 19
12.6. Limitation on Benefit 19
12.7. Binding Effect 19
12.8. Governing Law 19
12.9. Arbitration 19
12.10. Notices 20
12.11. Headings; References 21
12.12. Execution in Counterparts 21
Annex A Initial Directors and Non-Voting Observers
Annex B 1998 Annual Budget
SHAREHOLDERS AGREEMENT
THIS SHAREHOLDERS AGREEMENT is entered into on the 2nd day of December,
1997 among:
LSG LUFTHANSA SERVICE EUROPA/AFRIKA GMBH, a private company
organized and existing under the laws of the Federal Republic of
Germany, with principal offices at Am Holzweg 26, D-65830 Kriftel,
Federal Republic of Germany ("LSG");
BALTIC INTERNATIONAL USA, INC., a corporation organized and
existing under the laws of the State of Texas, USA, with principal
offices at 1990 Post Oak Boulevard, Suite 1630, Houston, Texas
77056, USA ("BIUSA");
and
TOP FLIGHT CATERING AB, a Swedish limited liability company
organised and existing under the laws of Sweden, with corporate
registration number 556457-7525, and with an address at Box 216,
190 47 Stockholm Arlanda, Sweden 12, 103 87 ("TOPflight").
WHEREAS, LSG, BIUSA and TOPflight constitute all of the shareholders of
AIRO Catering Services, Ltd., an international business company organized
under the laws of the British Virgin Islands, having a registration number
175406 and a registered office at the offices of ATC Trustees (BVI)
Limited, 2nd Floor, Abbott Building, P.O. Box 933, Road Town, Tortola,
British Virgin Islands (the "Company");
WHEREAS, the Company has an authorized share capital of US$10,000,000
which is made up of one class and one series of shares divided into
1,000,000 shares of US$10.00 par value each (such shares, together with any
subsequently authorized shares of the Company, being referred to herein as
the "Shares"), of which 234,081 Shares are currently issued and outstanding
and held as follows:
BIUSA: 107,377 Shares
TOPflight: 115,000 Shares
LSG: 11,704 Shares
WHEREAS, LSG purchased its 11,704 Shares from BIUSA on the date hereof
pursuant to a Share Purchase Agreement between LSG and BIUSA dated the date
hereof;
WHEREAS, the parties hereto desire to enter into this Agreement to govern
certain aspects of the relationship of the Shareholders, to set certain
restrictions on the transfer and ownership of Shares and to provide for
certain other matters in respect of the Company and the Shares;
WHEREAS, the Shareholders desire that this Agreement supersede and replace the
Joint Venture Agreement entered into between BIUSA and TOPflight on February
5, 1996.
NOW THEREFORE, in consideration of the foregoing and of the mutual covenants
and agreements hereinafter set forth, the parties hereto agree as follows:
1. DEFINITIONS
In this Agreement, the following words shall have the following meanings
except where the context otherwise requires:
"Affiliate" means (a) any entity which directly or indirectly, through
one or more intermediaries, Controls, is Controlled by, or is under
common Control with such entity; and (b) with respect to LSG: Sky Chefs,
Inc. and any of its Affiliates. For the avoidance of doubt, as of the
date hereof LSG does not Control, is not Controlled by and is not under
common Control with Sky Chefs, Inc.
"Annual Budget" means the consolidated budget and business plan for the
Company and its Subsidiaries as may be established and amended by the
Board from time to time in respect of a financial year of the Company
and the Subsidiaries.
"Articles" means the articles of association of the Company, as may be
amended from time to time.
"Board" means the board of directors of the Company.
"Control" means the possession, direct or indirect, of the power to
direct the management and policies of an entity, whether through the
ownership of voting securities, by agreement or otherwise.
"Directors" means duly elected directors of the Company.
"Key BIUSA Shareholders" means the following persons, who, on the date
hereof, hold the numbers of issued and outstanding shares of common
stock of BIUSA as are set out opposite their names:
Common Shares
Robert L. Knauss 610,854
Paul R. Gregory 515,369
James W. Goodchild 153,271
"Memorandum" means the memorandum of association of the Company as may
be amended from time to time.
"Riga Catering Services" means Riga Catering Services Ltd., a company
organised under the laws of Latvia with a share capital of $US100,000
divided into 100,000 shares of $US 1.00 par value each, of which 37,820
are held by the Company, 20,680 are held by BIUSA, 20,750 are held by
Alexander Vasilenko and 20,750 are held by Victor Arkulinsky.
"Shareholder" means LSG, BIUSA and TOPflight (for so long as they are
shareholders of the Company) and, as applicable, such other shareholders
of the Company as may exist from time to time.
"Shares" means any and all authorized shares of the share capital of the
Company.
"Subsidiaries" means Riga Catering Services and such other companies in
which the Company directly or indirectly holds a majority equity
interest and through which the Company carries on its business.
"Territory" means the states of the former Soviet Union (including
Latvia, Lithuania and Estonia and the Commonwealth of Independent
States) and Albania, Bulgaria, Croatia, Poland, Romania, Serbia, the
Slovak Republic and Slovenia.
2. COMPLIANCE
2.1. Compliance Actions
The Shareholders shall take or cause to be taken all such actions
(including, but not limited to, voting shares, holding shareholder
general meetings and board of directors meetings, approving
resolutions, amending memoranda and articles of association, and
executing and filing documents, both in respect of the Company and
the Subsidiaries) as may be necessary or appropriate to implement
and ensure compliance with all provisions of this Agreement, and
to fully effectuate the purposes, terms and conditions of this
Agreement.
2.2. Conflict with Memorandum or Articles
In the event of any conflict between the provisions of this
Agreement and the Memorandum and Articles, then the provisions of
this Agreement shall control and the Shareholders shall cause the
Memorandum or Articles, as appropriate, to be amended to conform
to the provisions of this Agreement.
3. CORPORATE ORGANIZATION AND PROCEDURES
3.1. General
The corporate organization and procedures of the Company shall be
as set out in the Memorandum and Articles, as supplemented by the
provisions of this Agreement.
3.2. Board of Directors
3.2.1. Number and Composition.
The Board shall consist of five Directors, two of whom shall
be designated by BIUSA, two of whom shall be designated by
TOPflight, and one of whom shall be designated by LSG. The
initial Directors designated by the parties are as specified
in Annex A attached hereto.
3.2.2. Removal and Replacement of Directors.
Any Director designated by a Shareholder shall be removed
upon written request of the designating Shareholder. If a
Shareholder shall cease to be a shareholder of the Company,
such Shareholder shall cause the Director(s) designated by
it to resign concurrently with such Shareholder ceasing to
be a shareholder of the Company. If a Director designated
by a Shareholder shall cease to be a Director for any
reason, the remaining Directors or the Shareholders shall
fill the vacancy thereby created by electing as soon as
reasonably possible, an individual designated by such
Shareholder. The Shareholders shall use reasonable efforts
to prevent any action from being taken by the Board during
the pendency of any vacancy due to death, resignation or
removal of a Director unless the Shareholder entitled to
have an individual designated by it to fill such vacancy
shall have failed for a period of at least 10 days after
becoming aware of such vacancy to designate a replacement.
3.2.3. Meetings
The Board shall meet at least twice in each financial year
of the Company unless otherwise waived by all the Directors,
and special meetings may be held at the request of any
Director. Meetings may take place, in accordance with the
Articles, at such location, or by telephone facilities, as a
majority of the Directors shall determine.
3.2.4. Non-Voting Observers
LSG and TOPflight shall have the right to designate, in the
aggregate, from time to time, up to three non-voting
observers to the Board who will have the same rights as the
Directors, other than the right to vote on matters to be
decided by the Board, including but not limited to the right
to receive notice of all meetings of the Board and the right
to receive the same information and documentation as is
provided to the Directors. The initial non-voting
observers designated by LSG and TOPflight are as specified
in Annex A attached hereto.
3.3. Certain Shareholder Rights
The following actions shall not be taken without the prior written
consent of all the Shareholders:
(a) amendment of the Memorandum or Articles of Association;
(b) dissolution or liquidation of the Company, except as may be
required by applicable law;
(c) merger of the Company with another company;
(d) sale or other disposition of all or substantially all of the
business or assets of the Company or of any of the
Subsidiaries;
(e) acquisition or commencement by the Company of a new line of
business that is not related to food service or food
products; and
(f) amendment of this Agreement.
4. COMPANY BUSINESS, MANAGEMENT AND OPERATIONS
4.1. Business of the Company
The business of the Company shall be the provision of in-flight
catering services at such locations within the Territory as the
Board may agree from time to time, including Riga, Latvia; Kiev,
Ukraine; and Talinn, Estonia. The Company shall provide such
services directly or, as may be determined by the Board,
indirectly through Subsidiaries, including Subsidiaries formed
under the national law of the countries in which such services are
provided.
4.2. Shareholder Expertise
The Company has been founded on the basis that each Shareholder
will contribute to the success of the Company by making available
its expertise to the business of the Company.
4.3. LSG Lufthansa Service/Sky Chefs Network
For so long as LSG is a shareholder of the Company, the Company
shall be part of the worldwide network of providers of inflight
catering services that are affiliated with LSG and that currently
operate under the tradename of LSG Lufthansa Service/Sky Chefs.
As part of such network, the Company shall be guided by, and seek
to adhere to, the standards and policies of such network in the
operation of the Company's business -- including, but not limited
to, quality control standards (as they may relate to, among other
things, hygiene, sanitation and food service), financial and
operational reporting procedures, and use of the tradename and
logo of LSG Lufthansa Service/Sky Chefs -- as any of such policies
and standards may be revised from time to time. LSG shall keep
the Company timely informed of the foregoing standards and
policies and any revisions thereof. For the avoidance of doubt,
in the event LSG ceases to be a shareholder of the Company, the
Company shall forthwith cease to use the tradename and logo of LSG
Lufthansa Service/Sky Chefs or any similar name or logo, unless
LSG otherwise consents to such use. Further, in the event LSG
determines that certain locations at which the Company provides
services do not meet LSG's standards, for whatever reason, LSG
shall have the absolute right to require that such location cease
to use the tradename and logo of LSG Lufthansa Service/Sky Chefs
or any similar name or logo.
4.4. Management and Operation of the Company
The Board shall manage the business and affairs of the Company in
accordance with this Agreement. A Managing Director of the Company, who
shall be employed by the Company, shall be proposed by BIUSA and shall
be subject to the Board's approval. The Managing Director shall be
responsible for operation of the day-to-day business of the Company in
accordance with the Annual Budget and such policies as may be
established by the Board. The Managing Director shall report to the
Board all material development in respect of the Company's business on a
monthly basis, or more frequently as appropriate. The Current Managing
Director is as specified Annex A. To the extent the Board requests the
significant services of one or more Shareholders in respect of the
operations of the Company, such Shareholders shall be compensated by the
Company for such services on a fair market value basis.
4.5. BIUSA Assistance to Managing Director
BIUSA undertakes to advise the Managing Director in the
negotiations and development of new inflight catering facilities
in the Territory and in the oversight of the planned expansion and
development of the Company, including in the identification of
third party financing and the financial management of the Company.
4.6. Annual Budget
4.6.1. Preparation of Annual Budgets
Prior to the beginning of each financial year of the
Company, the Board shall cause to be prepared an Annual
Budget with respect to such financial year for review and
approval by the Board. In the event that the Board shall
have failed, for whatever reason, to have approved the
Annual Budget for a particular financial year by the
commencement of such financial year, then the business of
the Company shall be carried out in accordance with the
Annual Budget applicable to the last preceding year,
excluding for such purpose, however, expenditures,
borrowings and other transactions reflected therein not in
the ordinary course of business. The 1998 Annual Budget is
attached hereto as Annex B.
4.6.2. Operations Consistent with Annual Budget
The Company shall carry out its business in a manner
consistent with the terms of the applicable Annual Budget.
The Board shall review the Annual Budget at each regular
meeting of the Board and may amend the Annual Budget at any
such meeting if and to the extent agreed by the Board.
4.7. Accounting
The Company shall maintain complete and accurate accounting
records which shall be audited annually and prepared on a
consistent basis in accordance with generally accepted accounting
principles. Arthur Andersen shall be the Company's auditor for
the year ending 31 December 1997.
4.8. Audits by Shareholders
Each Shareholder shall have the right to conduct, at its own
expense, its own audits of the Company's records, finances and
operations and the Company shall provide all reasonable assistance
to the Shareholders for such purpose.
4.9. Key Personnel
Employment by the Company of key personnel shall be subject to the
prior approval of the Board.
4.10. Dividends
The Board shall determine the extent to which the Company and the
Subsidiaries will declare and pay dividends out of earnings
available for such purpose; provided, however:
(i) any Shareholder shall have the right, by written notice to
the other Shareholders, to request that the Company declare a
dividend of at least 50% of the net after tax earnings of the
Company then available for such purpose (or that the
Shareholders take such action as may be appropriate to cause
one or more Subsidiaries to declare such a dividend in respect
of such Subsidiaries), and if the Board determines that
sufficient cash is available and that such earnings and cash
are not otherwise required to meet the expected near term
business needs of the Company or the Subsidiaries, as the case
may be (including, without limitation, needs for operations,
capital expenditures or expansion), then the Company shall
declare such a dividend (or the Shareholders shall take such
appropriate action in respect of the declaration by the
Subsidiaries of such dividends) within 30 days of the
Shareholder notice; and
(ii) Until February 28, 1998, the Shareholders shall take such
action as may be appropriate to cause Riga Catering Services to
declare a dividend of 100% of its net after tax earnings
available for such purpose.
5. CERTAIN CAPITAL CONTRIBUTIONS
5.1. Valuation of Riga Shares
Promptly following execution of this Agreement, the Shareholders
shall attempt collectively to determine a value for all of the
shares held by BIUSA in Riga Catering Services (the "Riga
Shares").
5.2. Contribution of Riga Shares and Cash by Shareholders
Following determination of such value for the Riga Shares (the
"Riga Share Value"), and subject to the following sentence, the
Shareholders intend that BIUSA contribute the Riga Shares to the
Company as a capital contribution in an amount equal to the Riga
Share Value and that, concurrently with such capital contribution
by BIUSA, LSG and TOPflight make capital contributions to the
Company in cash, based on their percentage shareholdings in the
Company, in an amount sufficient to retain such percentage
shareholdings following such contributions by the Shareholders.
The obligation of LSG and TOPflight to make such capital
contributions is subject to the approval of the Boards of
Directors of LSG and TOPflight and to their ability to obtain
necessary financing for such contributions, and BIUSA's obligation
to contribute the Riga Shares is subject to LSG and TOPflight
concurrently making the foregoing cash contributions.
6. NON-COMPETE
6.1. Existing Company Locations
No Shareholder, nor any Affiliate thereof, shall compete, directly
or indirectly, with the Company's business of providing inflight
catering services at those locations where the Company is then
conducting such business; provided, however, that (i) Sky Chefs,
Inc. and its Affiliates are excepted from the foregoing
restriction (although LSG shall vote against any proposed actions
of Sky Chefs, Inc. to enter into competition with the Company at
such locations, to the extent that LSG is in a position to do so)
and, (ii) without limiting the generality of the foregoing, the
Moscow inflight catering facility currently owned by an Affiliate
of Sky Chefs, Inc. is excepted from the foregoing restriction.
For the avoidance of doubt, the foregoing restriction shall not
apply to a former Shareholder that no longer holds any Shares.
6.2. Territory
For a period of four years from the date hereof, no Shareholder
nor any Affiliate thereof, shall provide inflight catering
services in the Territory except through the Company; provided,
however, that (i) Sky Chefs, Inc. and its Affiliates are excepted
from the foregoing restriction (although LSG shall vote against
any proposed actions of Sky Chefs, Inc. to compete with the
Company in the Territory, to the extent that LSG is in a position
to do so) and (ii) without limiting the generality of the
foregoing, the Moscow inflight catering facility currently owned
by an Affiliate of Sky Chefs, Inc. is excepted from the foregoing
restriction. For the avoidance of doubt, the foregoing
restriction shall not apply to a former Shareholder that no longer
holds any Shares. In the event that any of the Key BIUSA
Shareholders Transfers (as such term is defined in Clause 8.1) in
excess of 50% of his shares of common stock in BIUSA (as set out
in Clause 1), then neither LSG nor TOPflight shall be bound by the
foregoing restriction. In the event that any of the Shareholders
are unable or otherwise unwilling to provide the capital
contributions or other financing to the Company that the Board
determines is required for the Company to commence inflight
catering operations in a particular location, then the other
Shareholders shall not be bound by the foregoing restriction in
respect of such particular location. Prior to the expiration of
such four year period, the Shareholders shall consider whether the
foregoing restriction should be extended for an additional four
year period.
7. LSG OPTION TO PURCHASE CERTAIN SHARES FROM BIUSA
7.1. Option
In the event the Shareholders agree in writing to extend the non-
compete restrictions set out in Clause 6.2 for an additional four-
year period pursuant to the last sentence of Clause 6.2, then LSG
shall have the right, but not the obligation (the "Option"), to
purchase from BIUSA 6% of the total issued and outstanding Shares
of the Company at the date of such Shareholders' agreement (the
"Option Shares") for a total purchase price equal to the product
of (a) five times the Company's annualized, pre-tax earnings and
pre-intercompany charges, excluding non-recurring and unusual
items, as based on the financial quarter of the Company
immediately preceding LSG's exercise of the Option, multiplied by
(b) 6%.
7.2. Option Exercise
LSG may exercise the Option by delivering written notice of
exercise to BIUSA within 30 days after the agreement referred
to in the first sentence of Clause 7.1. Within 10 days
following BIUSA's receipt of such notice, BIUSA shall deliver
to LSG certificates representing the Option Shares and
concurrently with LSG's receipt of the Option Shares, LSG shall
deliver to BIUSA by cheque or wire transfer the amount of the
purchase price for the Option Shares. BIUSA's delivery of the
Option Shares to LSG shall constitute a representation and
warranty by the BIUSA to LSG that BIUSA has good and marketable
title to the Option Shares, free and clear of any lien, charge,
pledge, encumbrance, security interest or adverse claim, except
for restrictions pursuant to this Agreement. In addition,
BIUSA shall deliver to LSG all documents, instruments and
releases and shall do all acts and things as LSG may reasonably
request, whether before or after closing of the purchase of the
Option Shares, to vest title to the Option Shares in LSG at the
closing of such purchase.
7.3. BIUSA Actions
BIUSA shall at all times continue to hold sufficient Shares to
enable LSG to fully exercise the Option and shall take all such
actions as may be necessary or appropriate to enable LSG to
acquire the Option Shares and otherwise to preserve LSG's rights
pursuant to the Option. BIUSA shall not take any actions that are
inconsistent with LSG's rights pursuant to the Option.
8. PRE-EMPTIVE RIGHTS; SHARE ISSUANCES
Except as otherwise provided in Clause 5.2, the Company shall not issue
any additional Shares unless such additional Shares shall have first
been offered to all the Shareholders pro rata in accordance with their
respective holdings of Shares (a "Rights Offer") in accordance with the
following procedures:
8.1. Rights Notice
To effect a Rights Offer, the Board shall cause to be delivered to
the Shareholders a notice (the "Rights Notice") specifying the
total number of Shares being offered, the number of Shares being
offered to each Shareholder, the subscription price for each Share
and the date by which such offer, if not accepted, will be deemed
to have been declined (such date to be not less than six months
from the date the notice is given)(the "Acceptance Period").
8.2. Acceptance and Issuance of Shares to Shareholders
In order to accept the offer to subscribe for Shares pursuant to
the Rights Notice, a Shareholder shall give notice to the Board
before expiration of the Acceptance Period, specifying the number
of Shares for which it subscribes pursuant to the offer made to it
in the Rights Notice. A Shareholder that fails to give such
notice to the Company within the Acceptance Period shall be deemed
to have declined the offer to subscribe for Shares. If any of the
Shareholders has failed within the Acceptance Period to accept
subscriptions for all of the Shares offered to it, then the
Company shall offer such remaining Shares to the other
Shareholders pro rata in accordance with their respective holdings
of Shares, which offer shall remain open for acceptance for a
period of 30 days. Thereafter, the Company shall issue to the
accepting Shareholders, in consideration of their payment of the
subscription price, the number of Shares for which such
Shareholders have agreed to subscribe.
8.3. Issuance of Shares to Third Parties
If fewer than all of the Shares offered to the Shareholders
pursuant to the Rights Offer are purchased by the Shareholders,
then during the four months following the earlier of (a)
expiration of the Acceptance Period and (b) the acceptance or
rejection by all of the Shareholders of all of the Shares subject
to the Rights Offer, the Company shall be entitled to issue to
persons other than the Shareholders any Shares for which the
Shareholders did not subscribe, provided that such Shares shall be
issued on economic terms no less favourable to the Company than
those upon which such Shares were offered to the Shareholders in
accordance with the Rights Offer. If the Company does not issue
such Shares within such four month period, the foregoing pre-
emptive rights shall again apply in respect of unissued Shares.
Except as provided for in this Clause 8, no Shareholder shall be
entitled as of right to subscribe for, purchase or receive any
part of any issue of Shares or securities of the Company now or
hereafter authorized. The provisions of this Clause 8 shall
apply, mutatis mutandis, to securities that by their terms or by
agreement are convertible into, exchangeable for or carry the
right to purchase Shares.
9. RESTRICTIONS ON TRANSFER OF SHARES
9.1. General Prohibition on Transfer
No Shareholder shall, without the prior written consent of the
other Shareholders, Transfer any Shares (or any interest therein)
now or hereafter held or acquired by such Shareholder, to any
person except as provided by this Agreement. For purposes of this
Clause 9, a "Transfer" shall mean any direct or indirect sale,
gift, mortgage, pledge or other creation of a security interest or
encumbrance, exchange, assignment or other disposition, including
a disposition under judicial order, legal process, execution,
attachment, enforcement of an encumbrance, or transfer to a
trustee in bankruptcy, and shall include the effective
accomplishment of any of the foregoing through a series of related
transactions (including an indirect Transfer through the sale of
an Affiliate that is a Shareholder) the primary intention of which
is to avoid the restrictions in this Clause 9.1. A purported
Transfer of any Shares or any interest therein in violation of
this Agreement shall not be valid and the Company shall not
register any such Shares on the share register of the Company, nor
shall any voting rights attaching to or relating to such Shares be
exercised by the purported transferee, nor shall any purported
exercise of such voting rights by the purported transferee be
valid or effective, nor shall any dividend or distribution be paid
or made on such Shares.
9.2. Transfer to Affiliate
A Shareholder may Transfer all or any part of its interest in its
Shares to an Affiliate, provided that
(a) such Shareholder gives the other Shareholders and the
Company at least 10 days prior written notice of such
Transfer; and
(b) the transferee Affiliate agrees to be bound by the
provisions of this Agreement and executes a counterpart of
this Agreement assuming the rights and obligations of a
Shareholder hereunder. In the event that LSG Transfers
less than all of its interests in its Shares to an
Affiliate, then LSG and the transferee Affiliate each shall
hold the rights and obligations of a Shareholder hereunder
except that LSG shall retain its right to nominate
Directors;
(c) the transferring Shareholder guarantees the obligations of
the Affiliate transferee hereunder, except in the case of a
transfer by LSG of up to 50% of its Shares to Sky Chefs,
Inc. or an Affiliate of Sky Chefs, Inc.
9.3. Transfer by Right of First Refusal
A Shareholder may Transfer all (but not less than all) of its
interest in all (but not less than all) of its Shares in
accordance with the following procedures:
9.3.1. Third Party Offer
If a Shareholder (the "Transferor") has received a bona fide
offer from a third party (a "Third Party Offer") for the
purchase of the Transferor's Shares for cash consideration
and the Transferor desires to accept the Third Party Offer,
the Transferor shall, prior to transferring its Shares to
such third party, make to the other Shareholders (the
"Offerees") an offer in writing to sell to the Offerees, pro
rata based on their respective holdings of Shares, the
Shares proposed to be transferred by the Transferor (the
"Offer"). Attached to the Offer shall be a statement of the
Transferor's intention to transfer the Shares to the third
party, subject to the Offerees' right of first refusal, and
all particulars of the proposed transfer including a copy of
the Third Party Offer.
9.3.2. Offer Period
The Offerees shall have 30 days after delivery of the Offer
(the "Offer Period") to notify the Transferor whether or not
they intend to purchase all the Transferor's Shares. If one
of the Offerees does not accept the Offer within the Offer
Period, the Offer Period shall be deemed extended by 10 days
and the other Offeree shall be entitled to purchase the
Transferor's Shares that had been offered to the non-
accepting Offeree by giving notice to the Transferor within
such 10 day period.
9.3.3. Acceptance
If the Offerees accept the Offer in full, the Transferor
shall sell, and the Offerees shall purchase, the
Transferor's Shares at the price and on the terms set forth
in the Third Party Offer, and such sale and purchase shall
be completed within 20 days after the end of the Offer
Period.
9.3.4. Third Party Sale
If the Offerees have not accepted the Offer pursuant to
Clause 9.3.2 within the Offer Period, the Transferor shall
be entitled, any time within 60 days after the expiration of
such Offer Period to sell in a bona fide sale and on the
terms and conditions contained in the Third Party Offer all
(but not less than all) of the Transferor's interest in all
(but not less than all) of the Transferor's Shares to the
third party that made the Third Party Offer.
9.3.5. Good Title
The acceptance by the Transferor of payment from the
Offerees for the Transferor's Shares shall constitute a
representation and warranty by the Transferor that the
Transferor has good and marketable title to the Transferor's
Shares, free and clear of any lien, charge, pledge,
encumbrance, security interest or adverse claim, except for
restrictions pursuant to this Agreement. In addition, the
Transferor shall deliver to the Offerees all documents,
instruments and releases and shall do all acts and things as
the Offerees may reasonably request, whether before or after
closing of the Transfer, to vest title to the Transferor's
Shares in the Offerees at the closing of such transfer.
9.4. Regulatory Compliance
Notwithstanding any other provision of this Agreement, it shall be
a condition precedent to the closing of any Transfer of Shares
pursuant to this Agreement that such Transfer shall comply in all
respects with all applicable laws and that all consents or
approvals of governmental, airport, licensing or other regulatory
authorities with jurisdiction over the Company, its Shares, its
assets or its business reasonably necessary to effect the Transfer
of Shares and to permit the effective operation of the Company's
business in the ordinary course following such Transfer shall have
been received. If, in the reasonable opinion of the Board, such a
consent or approval is required to effect such Transfer, then the
closing of such Transfer shall be postponed until such consent is
obtained, subject to a maximum postponement of 90 days. The
transferring Shareholder shall be responsible for obtaining all
necessary consents or approvals and the Company and the
transferring Shareholder shall cooperate with the transferee of
the Shares in such endeavour. If such consent or approval cannot
be obtained within such 90 day period, than the agreement to
effect the Transfer shall be null and void and no party thereto
will have any further rights or obligations thereunder.
9.5. Pledge of Shares
A Shareholder may pledge up to 50% of the Shares it holds on the
condition that the pledge agreement in respect of such pledge
provides that (a) in the event the pledgee is entitled to
foreclose on the pledged Shares, such pledgee shall give the other
Shareholders a right to acquire each of such pledged Shares for
the Specified Value, as defined in Clause 9.7 and (b) the Company
consents to such pledge agreement, which consent shall not be
unreasonably withheld or delayed. In addition, if the
Shareholders unanimously agree, all the Shareholders may pledge
their Shares for the purpose of obtaining third party financing
for the Company.
9.6. Insolvency and Involuntary Transfers
If a Shareholder should enter into liquidation, either voluntary
or compulsory, or become insolvent, or enter into corporate
reorganization proceedings or receivership or bankruptcy, or
otherwise face an involuntary Transfer of such Shareholder's
Shares, then such Shareholder shall send written notice thereof to
the Company and the other Shareholders disclosing in full to them
the nature and details of such involuntary Transfer. Such notice
shall constitute an Offer and the provisions of Clause 9.3 shall
govern to the extent applicable, except that the Acceptance Period
shall run for a period of 90 days from the later of such
involuntary Transfer or the sending of such notice, and the
purchase price for each of such shares shall be an amount equal to
the Specified Value as defined in Clause 9.7 and shall be payable
in cash.
9.7. Specified Value
The term "Specified Value" as used in Clauses 9.5 and 9.6 shall
mean an amount equal to the adjusted book value of one Share,
determined by the Company's accountants as follows: the book
value of one Share shall be determined in accordance with
generally accepted accounting principles using the accrual method
of accounting applied on a basis consistent with the preceding
period, including, but not limited to, accounts receivable, less
an allowance for uncollectable items. The adjusted book value
shall be an amount equal to such book value increased by the
excess, or decreased by the deficit, of the fair market value of
the inventory, leasehold and leasehold improvements and real
property, if any, of the Company over, or below in the case of a
deficit, the book value (i.e., cost less accumulated depreciation
and amortization) of such assets; provided, however, that goodwill
shall not be taken into account. The determination of the
Specified Value shall be made as of the date of the pledge
foreclosure (under Clause 9.6) or other involuntary Transfer
(under Clause 9.7), unless such event is within two months before
or after the end of a financial year of the Company, in which case
the determination shall be made as of the last day of such
financial year.
10. TERM
10.1. Effectiveness
This Agreement shall come into force and effect as of the date
hereof as set forth on the first page of this Agreement and shall
supersede the Joint Venture Agreement dated February 6, 1996
between BIUSA and TOPflight, which agreement shall be deemed
terminated as of the date hereof.
10.2. Termination
All rights and obligations of a Shareholder arising under this
Agreement shall terminate (except as otherwise specified herein)
on the earliest of:
(a) the date on which such Shareholder ceases to be the holder
of any Shares;
(b) the date on which this Agreement is terminated by written
agreement of all the Shareholders;
(c) the date on which the Company is dissolved in accordance
with applicable law.
10.3. Continuing Rights and Obligations
A termination of this Agreement shall not affect or prejudice any
rights or obligations which have accrued or arisen under this
Agreement prior to the time of termination and such rights and
obligations shall survive termination of this Agreement.
11. CONFIDENTIALITY
The parties hereto shall at all times keep confidential the contents of
this Agreement and the transactions contemplated hereby. Each party
hereto shall also keep confidential, and procure that any person
Controlling, Controlled by or under common Control with such party,
shall keep confidential, all trade secrets and other confidential
information of any other party hereto made available to it in connection
with this Agreement or otherwise in connection with the business of the
Company, and shall not use or disclose any such trade secrets or other
confidential information except if and to the extent that such use or
disclosure is necessary for the conduct of the Company's business. The
restrictions of this Clause 11 shall not apply to information (a) that
is or becomes generally available to the public other than as a result
of unauthorized disclosure; (b) that was available to the receiving
party on a nonconfidential basis prior to receipt from the providing
party or is received thereafter from a third party without restriction
and without breach of obligation; or (c) that is disclosed pursuant to
the requirement of a court or government agency with applicable
jurisdiction (including, as applicable, the U.S. Securities and Exchange
Commission), provided that, if reasonably possible, the disclosing party
gives the providing party 10 days prior written notice of such
disclosure. The obligations of this Clause 11 shall survive termination
of this Agreement.
12. MISCELLANEOUS
12.1. Assignment
No party hereto shall assign this Agreement, in whole or in
part, whether by operation of law or otherwise, unless such
party shall have obtained the prior written consent of all the
other parties, except to the extent such assignment arises out
of the transfer by a Shareholder to an Affiliate of such
Shareholder in accordance with Clause 9.2.
12.2. Entire Agreement; Amendment
This Agreement, including the Annexes hereto and other writings
referred to herein or delivered pursuant hereto, constitutes the
entire agreement among the parties hereto with respect to the
transactions contemplated herein, and it supersedes all prior oral
or written agreements, commitments or understandings with respect
to the matters provided for herein (including, without limitation,
the Joint Venture Agreement between BIUSA and TOPflight (under the
name "TOPflight AB") dated February 5, 1996 and the Memorandum of
Understanding between LSG and BIUSA dated July 16, 1997). No
amendment, modification or discharge of this Agreement shall be
valid or binding unless set forth in writing and duly executed by
the party against whom enforcement of the amendment, modification,
or discharge is sought.
12.3. Severability
If any part of any provision of this Agreement or any other
agreement or document given pursuant to or in connection with this
Agreement shall be invalid or unenforceable in any respect, such
part shall be ineffective to the extent of such invalidity or
unenforceability only, without in any way affecting the remaining
parts of such provision or the remaining provisions of this
Agreement.
12.4. Waiver
No delay or failure on the part of any party hereto in exercising
any right, power or privilege under this Agreement or under any
other instruments given in connection with or pursuant to this
Agreement shall impair any such right, power or privilege or be
construed as a waiver of any default or any acquiescence therein.
No single or partial exercise of any such right, power or
privilege shall preclude the further exercise of such right, power
or privilege, or the exercise of any other right, power or
privilege. No waiver shall be valid against any party hereto
unless made in writing and signed by the party against whom
enforcement of such waiver is sought and then only to the extent
expressly specified therein.
12.5. Time of Essence
Time is of the essence in this Agreement.
12.6. Limitation on Benefit
It is the explicit intention of the parties hereto that no person
or entity other than the parties hereto is or shall be entitled to
bring any action to enforce any provision of this Agreement
against any of the parties hereto, and the covenants, undertakings
and agreements set forth in this Agreement shall be solely for the
benefit of, and shall be enforceable only by, the parties hereto
or their respective successors, administrators, legal
representatives and permitted assigns.
12.7. Binding Effect
This Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their respective successors,
administrators, legal representatives and permitted assigns.
12.8. Governing Law
This Agreement, the rights and obligations of the parties hereto,
and any claims or disputes relating thereto, shall be governed by
and construed in accordance with the laws of the British Virgin
Islands.
12.9. Arbitration
The parties hereto shall attempt to settle promptly and amicably
by negotiation and consultation any disputes, controversies and
claims between or among them or the Company arising hereunder.
However, in the event the parties hereto are unable to reach a
satisfactory resolution thereof, any such dispute, controversy or
claim shall be referred to and finally resolved by arbitration
under the Rules of the Arbitration Institute of the Stockholm
Chamber of Commerce. The arbitration tribunal shall consist of
three arbitrators who are nationals of member states of the
European Union (other than Denmark and Sweden) to be selected in
accordance with such Rules. The place of arbitration shall be
Stockholm, Sweden. The language of the arbitration shall be
English.
12.10. Notices
All notices, demands, requests, or other communications which may
be or are required to be given, served, or sent by any party to
any other party pursuant to this Agreement shall be in writing and
shall be hand-delivered, sent by overnight courier, or mailed by
first-class registered or certified post, return receipt
requested, postage prepaid, or transmitted by telegram, fax or
telex, addressed as follows:
(i) If to LSG:
LSG Lufthansa Service Europe/Afrika GmbH
Am Holzweg 26
D-65830 Kriftel
Federal Republic of Germany
Attention: Gerhard Schmidt
Fax: 49 6192 974 198
with a copy (which shall not constitute notice) to:
Hogan & Hartson L.L.P.
21 Garlick Hill
London EC4V 2AU
England
Attention: Daniel H Maccoby
Fax: 44 171 329-0299
(ii) If to BIUSA:
1990 Post Oak Blvd.
Suite 1630
Houston, Texas 77056
USA
Attention:
Fax: 1 713 961 9298
with a copy (which shall not constitute notice) to:
(iii) If to TOPflight:
TOP Flight Catering AB
Box 216
190 47 Stockholm Arlanda
Sweden
Attention: Morten Andreasen
Fax: 46 8 797 7922
with a copy (which shall not constitute notice) to:
Each party may designate by notice in writing a new address to
which any notice, demand, request or communication may thereafter
be so given, served or sent. Each notice, demand, request, or
communication which shall be transmitted in the manner described
above, shall be deemed sufficiently given, served, sent, received
or delivered for all purposes at such time as it is delivered to
the addressee (with the return receipt, the delivery receipt, or
the answerback being deemed conclusive, but not exclusive,
evidence of such delivery) or at such time as delivery is refused
by the addressee upon presentation.
12.11. Headings; References
The headings contained in this Agreement are inserted for
convenience of reference only, shall not be deemed to be a part of
this Agreement for any purpose, and shall not in any way define or
affect the meaning, construction or scope of any of the provisions
hereof. All references to Clauses and Annexes in this Agreement
shall, unless otherwise specified, be references to Clauses and
Annexes of this Agreement.
12.12. Execution in Counterparts
To facilitate execution, this Agreement may be executed in as many
counterparts as may be required; and it shall not be necessary
that the signatures of, or on behalf of, each party, or that the
signatures of all persons required to bind any party, appear on
each counterpart; but it shall be sufficient that the signature
of, or on behalf of, each party, or that the signatures of the
persons required to bind any party, appear on one or more of the
counterparts. All counterparts shall collectively constitute a
single agreement. It shall not be necessary in making proof of
this Agreement to produce or account for more than a number of
counterparts containing the respective signatures of, or on behalf
of, all of the parties hereto.
IN WITNESS WHEREOF, the undersigned have caused this Agreement to be duly
executed on their behalf, on the day and year first hereinabove set forth.
LSG LUFTHANSA SERVICE
EUROPA/AFRIKA GMBH
By /s/ Gerhardt Schmidt
----------------------------------
BALTIC INTERNATIONAL USA, INC.
By /s/ James W. Goodchild
----------------------------------
TOP FLIGHT CATERING AB
By /s/ Morten Andreasen_______
----------------------------------
/s/ Gerhardt Schmidt
----------------------------------
ANNEX A
INITIAL DIRECTORS and NON-VOTING OBSERVERS
Directors Designated by BIUSA
1. Jonas af Jochnick
2. James W. Goodchild
Directors Designated by TOPflight
1. Morten Andreasen
2. Leonard Gustafson
Director Designated by LSG
1. Gerhardt Schmidt
Non-Voting Observers Designated by LSG and TOPflight
1. Lars Monie
2. Bo Frolen
ANNEX B
1998 ANNUAL BUDGET
AIRO Catering Services Inc.
Budget 1998 (1000 USD)
Lufthansa 560
Other National and International Airlines 6344
Other revenues 242
Net sales 7146
Cost of sales 2458
Outside services 16
Airport fee 140
Gross profit 4532
Labor cost 1422
Building cost/rental 161
Maintenance 45
Services 64
Misc., supplies/utilities 362
Other controllables 203
Management fee 161
Gross operating profit 2114
Depreciation 168
Interest 174
Net profit 1772
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 965,992
<SECURITIES> 0
<RECEIVABLES> 273,234
<ALLOWANCES> 0
<INVENTORY> 195,971
<CURRENT-ASSETS> 1,446,643
<PP&E> 12,836
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,016,144
<CURRENT-LIABILITIES> 752,944
<BONDS> 0
0
1,630,000
<COMMON> 155,028
<OTHER-SE> 1,478,172
<TOTAL-LIABILITY-AND-EQUITY> 6,016,144
<SALES> 774,554
<TOTAL-REVENUES> 1,136,242
<CGS> 607,710
<TOTAL-COSTS> 1,904,689
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507,747
<INCOME-PRETAX> (798,458)
<INCOME-TAX> 0
<INCOME-CONTINUING> (798,458)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (798,458)
<EPS-PRIMARY> (0.11)
<EPS-DILUTED> (0.11)
</TABLE>
