U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended September 30, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File Number: 0-26558
BALTIC INTERNATIONAL USA, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 76-0336843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5151 San Felipe, Suite 1661, Houston, Texas 77056
(Address of principal executive offices)
(713) 961-9299
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Number of shares outstanding of each of the issuer's classes of common stock as
of November 13, 1998: 15,586,785 shares.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
<PAGE> 2
BALTIC INTERNATIONAL USA, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Condensed Balance Sheets -
September 30, 1998 and December 31, 1997 3
Condensed Statements of Operations -
Three Months Ended September 30, 1998 and 1997
and Nine Months Ended September 30, 1998 and 1997 4
Condensed Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults Upon Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Balance Sheets
September 30, December 31,
1998 1997
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 173,557 $ 965,992
Accounts receivable 196,452 273,234
Inventory 117,672 195,971
Prepaids and deposits 12,579 11,446
----------- -----------
Total current assets 500,260 1,446,643
----------- -----------
PROPERTY AND EQUIPMENT, net 29,758 12,836
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 4,390,752 4,316,168
OTHER ASSETS 31,277 31,649
GOODWILL, NET - 208,848
----------- -----------
Total assets $ 4,952,047 $ 6,016,144
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 713,950 $ 669,233
Short-term debt, net 2,050,000 83,711
----------- -----------
Total current liabilities 2,763,950 752,944
----------- -----------
LONG-TERM DEBT TO A SHAREHOLDER - 2,000,000
----------- -----------
Total liabilities 2,763,950 2,752,944
----------- -----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Warrants 1,306,610 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,
14 and 16 shares issued and outstanding 350,000 400,000
Common stock, $.01 par value, 40,000,000 shares
authorized, 15,629,229 and 15,502,792 shares
issued and 15,586,785 and 15,460,348 shares
outstanding 156,292 155,028
Additional paid-in capital 11,717,776 11,687,809
Accumulated deficit (12,552,041) (11,495,707)
Treasury stock, at cost (20,540) (20,540)
----------- -----------
Total shareholders' equity 2,188,097 3,263,200
----------- -----------
Total liabilities and shareholders' equity $ 4,952,047 $ 6,016,144
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 4
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
REVENUES:
Food distribution $ 116,767 $ 123,019 $ 400,758 $ 263,549
General sales agency revenue 19,500 19,500 58,500 58,500
Net equity in earnings of
joint operations (575) 110,663 38,576 354,337
------- ------- --------- -------
Total operating revenues 135,692 253,182 497,834 676,386
------- ------- --------- -------
OPERATING EXPENSES:
Cost of revenue 124,723 76,924 386,737 178,054
General and administrative 166,940 339,126 680,391 800,344
------- ------- --------- -------
Total operating expenses 291,663 416,050 1,067,128 978,398
------- ------- --------- -------
LOSS FROM OPERATIONS (155,971) (162,868) (569,294) (302,012)
------- ------- --------- -------
OTHER INCOME (EXPENSE):
Interest expense (66,250) (133,148) (199,313) (408,381)
Interest income 16,207 3,273 56,683 3,278
Other income (expense) 77 (3,571) (425) 66,992
------- ------- --------- -------
Total other income (expense) (49,966) (133,446) (143,055) (338,111)
------- ------- --------- -------
LOSS BEFORE INCOME TAXES AND
DISCONTINUED OPERATIONS (205,937) (296,314) (712,349) (640,123)
INCOME TAX EXPENSE - - - -
------- ------- --------- -------
LOSS FROM CONTINUING OPERATIONS (205,937) (296,314) (712,349) (640,123)
DISCONTINUED OPERATIONS (206,823) (8,772) (224,441) (8,429)
------- ------- --------- -------
NET LOSS $ (412,760) $ (305,086) $ (936,790) $ (648,552)
------- ------- --------- -------
LESS PREFERRED DIVIDENDS (39,572) (67,778) (119,544) (234,782)
------- ------- --------- -------
NET LOSS ATTRIBUTABLE TO COMMON
SHAREHOLDERS $ (452,332) $ (372,864) $(1,056,334) $ (883,334)
======= ======= ========= =======
PER SHARE AMOUNTS:
Basic and Diluted:
Continuing operations $ (0.02) $ (0.04) $ (0.05) $ (0.10)
Discontinued operations $ (0.01) $ - $ (0.02) $ -
Total $ (0.03) $ (0.04) $ (0.07) $ (0.10)
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE> 5
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
For the Nine Months
Ended September 30,
1998 1997
Cash flows from operating activities:
Net loss $ (936,790) $ (648,552)
Noncash adjustments:
Net equity in earnings of
joint operations (38,576) (354,337)
Gain on sale of assets - (62,510)
Other 211,399 188,174
Changes in current assets and liabilities 202,631 (32,466)
------- ---------
Net cash used by operating activities (561,336) (909,691)
------- ---------
Cash flows from investing activities:
Investment in and advances to joint
operations (24,338) (375,866)
Distributions and repayments from joint
operations 8,673 110,957
Acquisition of property and equipment (19,473) (2,212)
------- ---------
Net cash used by investing activities (35,138) (267,121)
------- ---------
Cash flows from financing activities:
New borrowings - 55,000
Repayment of debt and long-term obligations (33,711) (431,971)
Issuance of stock, net of related costs - 2,725,394
Purchase of preferred stock (59,761) -
Purchase of treasury stock - (292,300)
Payment of dividends (102 489) -
------- ---------
Net cash provided by financing activities (195,961) 2,056,123
------- ---------
Net decrease in cash and cash equivalents (792,435) 879,311
Cash and cash equivalents,
beginning of period 965,992 384,245
------- ---------
Cash and cash equivalents, end of period $173,557 $1,263,556
======= =========
See accompanying notes to condensed consolidated financial statements.
<PAGE> 6
BALTIC INTERNATIONAL USA, INC.
Notes to Condensed Consolidated Financial Statements
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared by Baltic International USA, Inc. (the "Company") and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial results for the nine months ended September 30, 1998
and 1997, pursuant to the rules and regulations of the Securities and Exchange
Commission. All adjustments and provisions included in these consolidated
statements are of a normal recurring nature.
The information contained herein is condensed from that which would appear
in the annual financial statements; accordingly, the financial statements
included herein should be reviewed in conjunction with the financial statements
and related notes thereto contained in the Annual Report on Form 10-KSB filed
by the Company with the Securities and Exchange Commission for the fiscal year
ended December 31, 1997. Accounting measurement at interim dates inherently
involve greater reliance on estimates than at year end. The results of
operations for the interim period presented are not necessarily indicative of
the results which can be expected for the entire year.
NOTE 2 - OPERATIONS AND FINANCIAL CONDITION
The Company was organized to identify, form and participate in aviation-
related and other business ventures in Eastern Europe. The Company currently
owns an 8.02% interest in airBaltic Corporation SIA ("airBaltic"), the national
airline of Latvia. The Company will expand its catering operations through its
46% interest in AIRO Catering Services ("AIRO"). In March 1998, the Company
transferred its remaining interest in Riga Catering Services ("RCS") to AIRO as
part of a capital contribution. In January 1998, AIRO opened a in-flight
catering kitchen in Tallinn, Estonia, and in May 1998, AIRO opened its third
kitchen in Kiev, Ukraine. The Company served as a cargo marketing and sales
company to airBaltic and other airlines through its wholly owned subsidiary,
Baltic World Air Freight ("BWAF"). The operations of BWAF were discontinued in
August 1998. American Distributing Company ("ADC"), a wholly owned subsidiary,
began operations on December 1, 1995 as a beverage and food distribution
company.
The Company also owns 89% of Baltic International Airlines ("BIA"), a
joint venture registered in the Republic of Latvia. The routes and passenger
service operations of BIA were transferred to airBaltic effective October 1,
1995, and BIA has not conducted any substantive business operations since that
date. The Company made significant investment in and advances to BIA which has
incurred losses of approximately $12,700,000 from inception through September
30, 1998.
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. 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 be 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 the
shares of stock owned in AIRO. The Company does not anticipate needing to draw
on this line of credit in 1998.
NOTE 3 - DISCONTINUED OPERATIONS
In August 1998, the Company ceased the operations of BWAF. The
consolidated statements reflect the operating results of the discontinued
operations separately from continuing operations. The unamortized goodwill
resulting from the acquisition of the remaining 50% interest in BWAF was
written off in the third quarter of 1998. Amounts for prior periods have been
restated. Operating results for the discontinued operations were:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Operating revenues $ 4,590 $ 48,599 $ 99,061 $ 160,654
=========== =========== =========== ===========
Loss from operations $ (30,057) $ (8,772) $ (47,675) $ (8,429)
=========== =========== =========== ===========
Net loss $ (30,057) $ (8,772) $ (47,675) $ (8,429)
=========== =========== =========== ===========
</TABLE>
<PAGE> 7
At September 30, 1998, BWAF had current assets aggregating $32,511, noncurrent
assets of $6,292 and current liabilities of $156,379 which are included in the
Company's consolidated financial statements. As the operations of BWAF were
ceased, the Company has not recorded a gain or loss from the disposal of the
operation.
NOTE 4 - NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting the components
of comprehensive income. The Company adopted SFAS No. 130 as of January 1,
1998. However, the Company has no items of other comprehensive income in any
period presented in the accompanying consolidated financial statements.
Therefore, a separate statement of comprehensive income has not been presented.
In June 1997, the FASB issued SFAS No. 131,"Disclosures About Segments of
an Enterprise and Related Information", which requires that segment reporting
for public reporting purposes be conformed to the segment reporting used by
management for internal purposes. Additionally, it adds a requirement for the
presentation of certain segment data on a quarterly basis starting in 1999.
Management is currently evaluating the impact of this standard on the Company's
future financial reporting.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for Internal Use" which provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. In April 1998,
the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities"
which
requires at adoption the Company to write-off any unamortized start-up costs as
a cumulative change in accounting principle and, going forward, expense all
start-up activity costs as they are incurred. The Company is required to and
will adopt SOP 98-1 and SOP 98-5 in the first quarter of 1999 and believes that
adoption will not have a significant effect on its consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. Changes in
the
derivative's fair value will be accounted for based upon their intended use and
designation. Since the Company's holdings in such instruments is minimal,
adoption of this standard is not expected to have a material effect on the
consolidated financial statements. The Company is required to adopt SFAS No.
133 not later than the first quarter of fiscal 2000.
NOTE 5 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS
The investment in and advances to joint operations are as follows:
September 30, December 31,
1998 1997
Joint operations accounted for using
cost method:
airBaltic $2,144,212 $2,144,212
BIA 1,155,653 1,131,315
LAMCO 31,327 40,000
--------- ---------
Subtotal 3,331,192 3,315,527
--------- ---------
Joint operations accounted for using
equity method:
BCS 44,298 44,298
AIRO 1,015,262 784,991
RCS - 171,352
--------- ---------
Subtotal 1,059,560 1,000,641
--------- ---------
Total $4,390,752 $4,316,168
========= =========
At September 30, 1998 and 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 September 30, 1998 and December 31, 1997, the Company had accrued
interest receivable of $61,789 and $20,081, respectively, related to these
loans.
<PAGE> 8
A condensed summary of the financial position (100% basis) of the
combined joint operations accounted for using the equity method of
accounting is as follows:
September 30, December 31,
1998 1997
Current assets $ 875,753 $ 920,152
Noncurrent assets 6,838,516 3,385,511
---------- ----------
Total assets $ 7,714,269 $ 4,305,663
========== ==========
Current liabilities $ 2,360,334 $ 3,461,788
Minority interest 360,214 -
Equity 4,993,721 843,875
---------- ----------
Total liabilities and equity $ 7,714,269 $ 4,305,663
========== ==========
A summary of the results of operations of the combined joint
operations accounted for using the equity method of accounting is as
follows:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Combined 100% Basis:
Operating revenues $ 1,571,277 $ 876,351 $ 3,902,785 $ 2,267,316
=========== =========== =========== ===========
Income from operations $ 150,835 $ 275,391 $ 553,257 $ 695,738
=========== =========== =========== ===========
Net income (loss) $ (42,899) $ 287,874 $ (26,330) $ 901,860
=========== =========== =========== ===========
Company Percentage Interest:
Operating revenues $ 722,810 $ 356,250 $ 1,796,402 $ 934,925
=========== =========== =========== ===========
Income from operations $ 88,290 $ 105,666 $ 304,432 $ 270,883
=========== =========== =========== ===========
Net income (loss) $ (575) $ 110,663 $ 38,576 $ 354,337
=========== =========== =========== ===========
</TABLE>
NOTE 6 - LOSS PER COMMON SHARE
The computations of loss per common share are computed using 15,586,785
and 10,023,196 weighted average shares of common stock for the three months
ended September 30, 1998 and 1997, respectively, and 15,561,754 and 8,423,048
weighted average shares of common stock for the nine months ended September 30,
1998 and 1997, respectively. Stock warrants and options are considered to be
dilutive for earnings per share purposes if the average market price during the
three and nine month periods ending on the balance sheet date exceeds the
exercise price and the Company had earnings for the period.
<PAGE> 9
BALTIC INTERNATIONAL USA, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussions contain forward-looking information. Readers
are cautioned that such information involves risks and uncertainties, including
those created by general market conditions, competition and the possibility of
events may occur which limit the ability of the Company to maintain or improve
its operating results or execute its primary growth strategy. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate, and there can
therefore be no assurance that the forward-looking statements included herein
will prove to be accurate. The inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
The Company's revenues are derived from its equity in the net income of
its joint operations and from revenue generated by BWAF and ADC.
Quarter Ended September 30, 1998 and 1997
For the quarter ended September 30, 1998, the Company had revenues of
$135,692 compared with $253,182 for the quarter ended September 30, 1997. The
46% decrease is due to the decrease in net equity in earnings of catering
operations. The decrease in net equity in earnings of joint operations is
principally due to the additional general and administrative costs at AIRO in
1998 for the infrastructure of AIRO which did not exist in the third quarter of
1997. AIRO built up its infrastructure during 1998 to have its manpower in
place for the expansion of new kitchens, including the kitchen in Tallinn,
Estonia opened in January 1998 and the kitchen in Kiev, Ukraine opened in May
1998. Additionally, the Company transferred its remaining interest in RCS to
AIRO in the first quarter of 1998 as part of a capital contribution. As part
of this contribution, the Company's partners in AIRO made their pro rata share
contributions consisting of cash of $1,000,000 and services with a value of
$197,990. This transfer resulted in the Company's proportionate share of RCS
decreasing to approximately 27% for 1998 from 41% for 1997, but increased the
overall value of AIRO and maintained the Company's 46% interest in AIRO.
The number of meals sold by AIRO's in-flight kitchens increased by 91% to
206,137 meals sold in the third quarter of 1998 from 107,844 meals sold in the
third quarter of 1997. This increase is due to the opening of the Tallinn
kitchen in January 1998 and the Kiev kitchen in May 1998 and a 12% increase in
meals sold in Riga.
The Company's operating expenses for the quarter ended September 30, 1998
were $291,663 compared to $416,050 for the same quarter in 1997. This decrease
is principally due to the decrease in general and administrative expenses to
$166,940 in 1998 from $339,126 in the same quarter of 1997 resulting from the
Company's continued efforts to reduce its expenses.
Interest expense decreased to $66,250 in the third quarter of 1998 from
$133,148 in 1997, reflecting the decreased amortization of debt costs and
discount for borrowings.
In August 1998, the Company discontinued the operations of BWAF. The
unamortized goodwill resulting from the acquisition of the remaining 50%
interest in BWAF was written off in the third quarter of 1998.
Nine months Ended September 30, 1998 and 1997
For the nine months ended September 30, 1998, the Company had revenues of
$497,834 compared with $676,386 for the nine months ended September 30, 1997.
The decrease in year-to-date revenues was due to a decrease in the net equity
in earnings of catering operations resulting from the additional general and
administrative costs in AIRO in 1998 for the infrastructure of AIRO which did
not exist in the first nine months of 1997 and the reversal in 1997 of a
reserve recorded on the final determination of RCS' income tax status for 1996.
The tax determination was received in 1997 in favor of RCS. The decrease was
partially offset by the increase in food distribution revenue resulting from
the Company focusing the operations of ADC on beer distribution and adding
additional beers to its products for distribution. ADC is now the largest beer
importer in Latvia.
<PAGE> 10
The number of meals sold by AIRO's in-flight kitchens increased by 84% to
503,952 meals sold in the first nine months of 1998 from 274,105 meals sold in
the first nine months of 1997. This increase is due to the openings of the
Tallinn kitchen in January 1998 and the Kiev kitchen in May 1998 and a 14%
increase in meals sold in Riga.
The Company's operating expenses for the nine months ended September 30,
1998 were $1,067,128 compared to $978,398 for 1997. The increase is due to the
increase in cost of revenue as a result of higher food distribution revenue.
This increase was partially offset by the decrease in general and
administrative expenses.
Interest expense decreased to $199,313 for the first nine months of 1998
from $408,381 in 1997, reflecting the decreased interest costs and amortization
of debt costs and discount for borrowings.
In August 1998, the Company discontinued the operation of BWAF as
discussed above.
The Company recorded a gain of $62,510 on the transfer of 2.82% of RCS to
AIRO during the second quarter of 1997.
The Company's consolidated financial statements included elsewhere herein
present the Company's share of the joint operations using the equity method of
accounting in accordance with generally accepted accounting principles. The
Company's interests in airBaltic, BIA and LAMCO are accounted for using the
cost method. The following table presents a pro forma condensed combined
statement of operations of the Company assuming its proportionate share of the
joint operations accounted for using the equity method is combined with the
Company. Management believes this presentation is informative of the Company's
results of operations given that a significant portion of the Company's
business is conducted through the joint operations.
<TABLE>
<CAPTION>
Pro Forma Condensed Combined Statement of Operations
For the Nine Months Ended September 30, 1998
Proportionate
Share of Pro Forma
Company Joint Combined
(As reported) Operations Eliminations Company
<S> <C> <C> <C> <C>
Operating revenues $ 497,834 $1,796,402 $ (38,576) $2,255,660
Operating expenses 1,067,128 1,491,970 - 2,559,098
---------- ---------- --------- ----------
Income (loss) from operations (569,294) 304,432 (38,576) (303,438)
Other income (expense) (143,055) (32,883) - (175,938)
---------- ---------- --------- ----------
Income (loss) before minority
interest, income taxes and
discontinued operations (712,349) 271,549 (38,576) (479,376)
Minority interest - (189,901) - (189,901)
Provision for income taxes - (43,072) - (43,072)
---------- ---------- --------- ----------
Income (loss) from continuing
operations (712,349) 38,576 (38,576) (712,349)
Discontinued operations (224,441) - - (224,441)
---------- ---------- --------- ----------
Net income (loss) $ (936,790) $ 38,576 $ (38,576) $ (936,790)
========== ========== ========= ==========
</TABLE>
Liquidity and Capital Resources
The Company had $173,557 in cash at September 30, 1998, compared to
$965,992 at December 31, 1997.
At September 30, 1998, the Company had a working capital deficit of
$2,263,690 as compared to working capital of $693,699 at December 31, 1997.
The decrease in the working capital deficit is due primarily to a decrease in
cash of $792,435 and an increase in short-term debt of $1,966,289.
Net cash used in operating activities for the nine months ended
September 30, 1998 was $561,336 as compared to $909,691 for the same period of
1997. Such decrease was primarily due to the higher payments of outstanding
liabilities made in 1997 as compared to 1998. Net cash used by investing
activities was $35,138 for the nine months ended September 30, 1998 compared to
$267,121 for the nine months ended September 30, 1997. The decrease was due
primarily to the decrease in advances to AIRO. Net cash used by financing
activities was $195,961 for the nine months ended September 30, 1998 compared
to net cash provided by financing activities of
<PAGE> 11
$2,056,123 for the nine months ended September 30, 1997. The decrease was
primarily due to the net proceeds of $2,725,394 raised from the issuance of
common stock during 1997 with no such financing activities in 1998. Also
during 1997, the Company purchased treasury stock at an aggregate cost of
$297,300 and no such purchases were made in 1998. During the first nine months
of 1998, the Company purchased two shares of its Series B Convertible
Redeemable Preferred Stock from a shareholder for an aggregate $70,000
including accrued dividends and paid dividends of $92,250 to the shareholders
of the Convertible Redeemable Series A Preferred Stock with no such payments
in the first nine months of 1997.
The Company requires substantial capital to pursue its operating
strategies. To date, the Company has relied upon net cash provided by
financing activities to fund its capital requirements. There can be no
assurance that the Company's business interests will generate sufficient cash
in future periods to satisfy its capital requirements. 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 be 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 the
shares of stock owned in AIRO. The Company does not anticipate needing to draw
on this line of credit in 1998.
The Company's consolidated balance sheet included elsewhere herein
presents the Company's share of the joint operations using the equity method of
accounting in accordance with generally accepted accounting principles. The
Company's interests in airBaltic, BIA and LAMCO are accounted for using the
cost method. The following table presents a pro forma condensed combined
balance sheet of the Company assuming its proportionate share of the joint
operations accounted for using the equity method is combined with the Company.
Management believes this presentation is informative of the Company's financial
condition since the majority of the Company's underlying investment in its
joint operations consists of net current assets.
Pro Forma Condensed Combined Balance Sheet
As of September 30, 1998
Proportionate
Share of Pro Forma
Company Joint Combined
(As reported) Operations Eliminations Company
Current assets $ 500,260 $ 403,499 $ (61,789) $ 841,970
Investments in and
advances to joint
operations 4,390,752 - (1,059,560) 3,331,192
Property and other
assets, net 61,035 3,138,124 (1,810,256) 1,388,903
---------- ---------- ---------- ----------
Total assets $4,952,047 $3,541,633 $(2,931,605) $5,562,065
========== ========== ========== ==========
Current liabilities $2,763,950 $1,083,577 $ (638,789) $3,208,738
Minority interest - 165,230 - 165,230
Stockholders' and
partners' equity 2,188,097 2,292,816 (2,292,816) 2,188,097
---------- ---------- ---------- ----------
Total liabilities and
equity $4,952,047 $3,541,623 $(2,931,605) $5,562,065
========== ========== ========== ==========
The common shares of the Company began to trade on the OTC Bulletin Board
under the symbol BISA on September 9, 1998. The Company's common shares were
previously traded on the Nasdaq SmallCap Market.
Year 2000 System Requirements. The Company is performing an analysis of
its systems in order to determine the impact of year 2000 issues and to provide
a basis for contingency plans. Management is unable to predict at this time
the full impact year 2000 issues will have on the Company's operations or
future financial conditions. However, the Company does not believe that costs
to modify its programs and systems will be significant. 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.
<PAGE> 12
BALTIC INTERNATIONAL USA, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings, None
Item 2. Changes in Securities, None
Item 3. Defaults Upon Senior Securities, None
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of shareholders on September 22,
1998. At the meeting, shareholders voted on the election of three
Class I directors for terms described in the Proxy Statement and the
ratification of the selection of Arthur Andersen LLP as independent
auditors of the Company for the fiscal year ending December 31, 1998.
The vote as to the election of the Class I directors was as follows:
Nominee For Withheld
Homi M. Davier 13,324,933 26,553
Paul R. Gregory 13,327,433 24,053
David A. Grossman 13,327,433 24,053
The directors whose term of office continued after the meeting are as
follows:
Name Term Expires
Class II:
James W. Goodchild 1999
Adolf af Jochnick 1999
Ted Reynolds 1999
Class III:
Jonas af Jochnick 2000
Robert L. Knauss 2000
Juris Padegs 2000
The vote for the reappointment of Arthur Andersen LLP as independent
auditors of the Company was 13,339,273 for, 12,213 against and 0
abstained.
Item 5. Other Information, None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits, None
(b) No reports on Form 8-K were filed during the quarter ended
September 30, 1998.
<PAGE> 13
BALTIC INTERNATIONAL USA, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALTIC INTERNATIONAL USA, INC.
--------------------------------------
(Registrant)
Date: November 16, 1998 By: /s/ Robert L. Knauss
--------------------------------
Robert L. Knauss,
Chairman of the Board and
Chief Executive Officer
Date: November 16, 1998 By: /s/ David A. Grossman
--------------------------------
David A. Grossman,
Chief Financial Officer and
Corporate Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 173,557 173,557
<SECURITIES> 0 0
<RECEIVABLES> 196,452 196,452
<ALLOWANCES> 0 0
<INVENTORY> 117,672 117,672
<CURRENT-ASSETS> 500,260 500,260
<PP&E> 29,758 29,758
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 4,952,047 4,952,047
<CURRENT-LIABILITIES> 2,763,950 2,763,950
<BONDS> 0 0
0 0
1,580,000 1,580,000
<COMMON> 156,292 156,292
<OTHER-SE> 451,805 451,805
<TOTAL-LIABILITY-AND-EQUITY> 4,952,047 4,952,047
<SALES> 136,267 459,258
<TOTAL-REVENUES> 135,692 497,834
<CGS> 124,723 386,737
<TOTAL-COSTS> 291,663 1,067,128
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 66,250 199,313
<INCOME-PRETAX> (205,937) (712,349)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (205,937) (712,349)
<DISCONTINUED> (206,823) (224,441)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (412,760) (936,790)
<EPS-PRIMARY> (0.03) (0.07)
<EPS-DILUTED> (0.03) (0.07)
</TABLE>
