As filed with the Securities and Exchange Commission on June 1, 1998
Registration No. _______
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BALTIC INTERNATIONAL USA, INC.
(Exact name of Registrant as specified in its charter)
TEXAS 4511 76-0336843
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of incorporation or Classification Code Number) Identification
organization) Number)
1990 Post Oak Blvd., Suite 1630 Robert L. Knauss
Houston, Texas 77056-3813 Baltic International USA, Inc.
(713) 961-9299 1990 Post Oak Blvd., Suite 1630
(Address, including zip code, and Houston, Texas 77056-3813
telephone number, including (713) 961-9299
area code, of registrant's (Name, address, including zip code,
principal executive offices) and telephone number, including
area code, of agent for service)
COPY TO:
Norman T. Reynolds, Esq.
Looper, Reed, Mark & McGraw Incorporated
1300 Post Oak Blvd., Suite 2000
Houston, Texas 77056
Phone (713) 651-0244
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [x]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Each Class of Amount Offering Aggregate Amount of
Securities To Be Being Price Per Offering Registration
Registered (1) Registered Share (2) Price (2) Fee
<S> <C> <C> <C> <C>
Shares Underlying Public Warrants 399,975 $6.000 $2,399,850 - (3)
Shares Underlying Public Options 769,700 0.689 530,702 - (4)
Shares to be Issued 119,175 0.422 50,277 17
Common Stock to be Resold (5):
Shares Outstanding 9,174,825 0.391 (6) 3,587,357 1,237
Shares Underlying Preferred
Stock 1,336,958 0.920 1,230,000 -
Shares Underlying Resale
Warrants 9,515,870 0.695 6,609,226 2,279
Shares Underlying Resale
Options 302,666 1.000 302,583 104
TOTAL 21,619,169 - $14,709,995 $3,637 (7)
</TABLE>
(1) This Registration Statement also serves as the post-effective amendment
No. 1 to the Registration Statement No. 333-860 in which 399,975 shares
underlying Public Options, 2,431,488 shares outstanding, 615,000 shares
underlying Preferred Stock, 845,620 shares underlying resale warrants and
302,666 shares underlying resale options were registered effective
June 13, 1996.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457.
(3) The shares underlying Public Warrants were registered effective April 26,
1994 under registration statement 33-74654-D. A filing fee of $951.73
was previously paid.
(4) The shares underlying Public Options were registered effective March 6,
1995 and December 2, 1997 under registration statements 33-90030 and 333-
1210, respectively. Filing fees of $1,299 were previously paid.
(5) Common Stock to be Resold includes shares of Common Stock underlying
certain outstanding securities which are exercisable for or convertible
into shares of Common Stock which have not yet been exercised or converted.
(6) Based on the average of the high and low price per share of Common Stock
as reported by Nasdaq on May 28, 1998.
(7) A filing fee of $2,000.00 was previously paid for the registration of
shares under Registration Statement 333-860 discussed in (1) above.
Use of a combined prospectus is permitted pursuant to Rule 429(a), and this
Prospectus shall be deemed to constitute compliance with the undertakings set
forth in registration statements 33-74654-D and 33-90030.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
BALTIC INTERNATIONAL USA, INC.
Cross-Reference Sheet
showing location in the Prospectus of
Information Required by Items of Form SB-2
Form SB-2 Item Number and Caption Location In Prospectus
1. Front of Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus Inside Front Cover Page;
Outside Back Cover Page
3. Summary Information and Risk Factors Prospectus Summary; Risk
Factors; The Company
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Outside Front Cover Page;
Risk Factors
6. Dilution *
7. Selling Security-Holders Plan of Distribution and
Selling Shareholders
8. Plan of Distribution Plan of Distribution and
Selling Shareholders
9. Legal Proceedings *
10. Directors, Executive Officers, Promoters
and Control Persons The Company; Management -
Executive Officers and
Directors
11. Security Ownership of Certain Beneficial
Owners and Management Principal Shareholders
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel *
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities *
15. Organization Within Last Five Years The Company
16. Description of Business Business
17. Management's Discussion and Analysis
or Plan of Operation Management's Discussion and
Analysis of Financial
Condition and Results of
Operations
18. Description of Property Business
19. Certain Relationships and Related
Transactions Management - Certain
Transactions
20. Market for Common Equity and Related
Stockholder Matters Risk Factors; Price Range
of Common Stock and
Dividend Policy;
Description of Securities
21. Executive Compensation Management - Executive
Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with
Accountants on Accounting and Financial
Disclosure *
_____________________________
(*) None or Not Applicable
SUBJECT TO COMPLETION, DATED JUNE 1, 1998
Baltic International USA, Inc.
Issuance of 1,288,850 Shares of Common Stock
Resale of 20,330,319 Shares of Common Stock
This Prospectus relates to the issuance by Baltic International USA, Inc.
("Company") to related and unrelated parties of an aggregate of 1,288,850
shares of the Company's Common Stock, $.01 par value ("Common Stock"). Of the
1,288,850 shares to be issued by the Company, (i) 769,700 shares are to be
issued upon the exercise of outstanding public options ("Public Options") which
are exercisable at prices ranging from $0.40625 to $1.375 per share which
expire on various dates from December 2000 to December 2001, and (ii) 119,175
shares to be issued by the Company for services to be rendered which vest in
August 1999, (iii) 399,975 shares are to be issued upon the exercise of
outstanding public warrants ("Public Warrants") which are exercisable for $6.00
per share and expire on April 26, 2000. The Public Warrants may be redeemed by
the Company at $.05 per Public Warrant, on not less than 30 days' nor more than
60 days' written notice, if the average of the last sales price of the Common
Stock for a period of 30 consecutive trading days equals or exceeds $10.00 per
share, subject to adjustment, provided that such notice is mailed not later
than 20 days after the end of such period. This Prospectus also relates to the
resale of 20,330,319 shares of Common Stock which may be sold by the holders
thereof ("Selling Shareholders") from time to time as market conditions permit
in the market, or otherwise, at prices and terms then prevailing or at prices
related to the then current market price, or in negotiated transactions. The
shares to be resold include (i) 9,174,825 shares issued and outstanding; (ii)
9,515,870 shares underlying outstanding warrants ("Resale Warrants")
exercisable at prices ranging from $0.4375 to $2.40 per share which expire on
various dates from August 1998 to September 2002; (iii) 302,666 shares
underlying outstanding options ("Resale Options") exercisable at prices ranging
from $0.50 to $1.125 per share which expire on various dates from September
1999 to October 1999; and (iv) 1,336,958 shares underlying outstanding shares
of the Company's Convertible Redeemable Series A Preferred Stock ("Series A
Preferred Stock") convertible at a current conversion price of $0.92 per share.
See "Management-Stock Options," "-Certain Transactions," "Description of
Securities" and "Plan of Distribution and Selling Shareholders." Shares
offered by the Selling Shareholders may be sold in unsolicited ordinary
brokerage transactions or privately negotiated transactions between the Selling
Shareholders and purchasers without a broker-dealer. A current prospectus must
be in effect at the time of the sale of the shares of Common Stock to which
this Prospectus relates. Each Selling Stockholder or dealer effecting a
transaction in the registered securities, whether or not participating in a
distribution, is required to deliver a current prospectus upon such sale. The
shares to be issued by the Company upon exercise of the Public Options and
Public Warrants are being offered on a "best-efforts, no minimum" basis. The
Company will retain all proceeds from the exercise of the Public Options and
Public Warrants, regardless of the number exercised. Such proceeds
(approximately $2.7 million) will be used for working capital and general
corporate purposes. The Company will not receive any proceeds from the resale
of Common Stock by the Selling Stockholders. The Company's Common Stock is
traded on the Nasdaq SmallCap Market under the symbol "BISA." On May 29,
1998, the last sales price of the Common Stock as reported by Nasdaq was
$0.406.
___________________________
THE SECURITIES OFFERED HEREBY ARE SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK AND SHOULD NOT BE PURCHASED BY
ANYONE WHO CANNOT AFFORD THE LOSS OF HIS ENTIRE INVESTMENT.
SEE "RISK FACTORS" ON PAGE 6.
___________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is , 1998
TABLE OF CONTENTS
Page
Available Information 2
Prospectus Summary 3
Risk Factors 6
Use of Proceeds 11
Price Range of Common Stock and Dividend Policy 11
Capitalization 12
Management's Discussion and Analysis of Financial Condition
and Results of Operations 13
Business 19
Management 24
Principal Shareholders 31
Description of Securities 32
Plan of Distribution and Selling Shareholders 36
Legal Matters 41
Experts 41
Index to Financial Statements F-1
No person is authorized to give any information or to make any
representation other than those contained in this Prospectus, and if given or
made, such information or representation must not be relied upon as having
been authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby, or an offer to sell or a solicitation of an offer
to buy any securities offered hereby to or from any person in any jurisdiction
in which such offer or solicitation would be unlawful. Neither the delivery
of this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the business or
affairs of the Company since the date hereof or that the information in this
Prospectus is correct as of any time subsequent to the date as of which such
information is furnished.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended ("Exchange Act"), and, in accordance
therewith, files periodic reports, proxy materials and other information with
the Securities and Exchange Commission ("Commission"). Such reports, proxy
materials and other information are available for inspection at, and copies of
such materials may be obtained upon payment of the fees prescribed therefor by
the Commission from the Commission at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
as well as the following regional offices: 7 World Trade Center, New York, New
York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
The Company has filed a registration statement on Form SB-2 ("Registration
Statement") under the Securities Act of 1933, as amended ("Securities Act")
with respect to the securities being registered. This Prospectus does not
contain all the information set forth in the Registration Statement and the
exhibits and schedules thereto, to which reference is hereby made. Copies of
the Registration Statement and its exhibits are on file at the offices of the
Commission and may be obtained upon payment of the fees prescribed by the
Commission or may be examined, without charge, at the public reference
facilities of the Commission.
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified
in its entirety by, the more detailed information appearing elsewhere in this
Prospectus. Investors should carefully consider the information set forth
under the caption "Risk Factors." Unless otherwise indicated, all monetary
amounts have been expressed in U.S. dollars.
The Company
Baltic International USA, Inc. (the "Company") is a Texas corporation
which provides and has provided capital, management, and technical services to
start-up and established private companies located primarily in Eastern Europe.
In most instances, the Company is directly involved in management, and in all
instances assists in allocation of capital either directly from BIUSA or
through the investment of third parties. BIUSA has not taken significant
profits, or management fees from these investments. Value is being created to
a point where the Company's subsidiaries and joint operations become
independent through a separate third party financing or sale to a third party.
The Company provides freight marketing services through Baltic World Air
Freight ("BWAF"), a wholly owned Latvian limited liability company based in
Riga. The Company provides food distribution services through American
Distributing Company ("ADC"), a wholly owned Latvian limited liability company.
In 1992, the Company developed Baltic International Airlines ("BIA") - the
first independent airline in the former Soviet Union. In October 1995, BIUSA
sold the scheduled passenger service operations of its 49% interest in BIA, to
the newly created national airline of Latvia, Air Baltic Corporation ("Air
Baltic"). Air Baltic is owned 51.07% by the Republic of Latvia, 28.51% by
Scandinavian Airlines System ("SAS"), 8.02% by the Company, 6.2% by SwedFund
International AB and 6.2% by Investeringsfonden. SAS is the operator of this
airline.
In February 1996, the Company formed AIRO Catering Services ("AIRO") with
TOPflight Catering AB ("TOPflight"). TOPflight operates kitchens in Malmo,
Gothenburg and Stockholm, Sweden. In this joint operation, the Company
contributed its management and operational expertise, its partial interest in
Riga Catering Services ("RCS"), market knowledge, knowledge of the regional
customer base and labor force for a 51% interest, while TOPflight contributed
its technical experience in building in-flight kitchens and its partial interest
in RCS for a 49% interest. AIRO currently operates RCS in Riga, which was
started by BIUSA, and caters all carriers which serve Riga International Airport
including SAS, Lufthansa and Air Baltic. AIRO opened an in-flight catering
kitchen in Tallinn, Estonia in January 1998 and a kitchen in Kiev, Ukraine in
May 1998. AIRO has a 20-year building lease in Kiev with at least five years
exclusivity. AIRO is in discussion with relevant airport authorities to open
additional kitchens during 1998.
In April 1997, LSG Lufthansa Services/Sky Chefs ("LSG") purchased a 51%
interest in TOPflight. In December 1997, the Company entered into a share
purchase and shareholder agreement with LSG. The primary purpose of the
agreement is to identify AIRO as the vehicle for the development of new LSG in
- -flight kitchens in Eastern Europe and the Republics of the former Soviet Union.
Under the agreement, the Company sold 5% of its 51% ownership of AIRO to LSG in
return for the LSG commitments and $600,000 in cash. Following the share
purchase, the Company controls 46% of AIRO and LSG controls 54%. The agreement
provides that the Company will remain as the day-to-day operating partner of
AIRO, and AIRO will become part of the worldwide network of LSG in all aspects
consistent with other LSG in-flight catering operations.
On April 2, 1996, the catering operations of Baltic Catering Services
("BCS") were acquired by Riga Catering Services ("RCS"), previously owned by
TOPflight, in exchange for shares in RCS. RCS is currently owned 37.82% by
AIRO, 20.68% by the Company and 41.5% by the principals of the Company's partner
in BCS. The business of BCS after the transfer of the catering business to RCS
is primarily the operation of the restaurant in the Riga Airport. BCS is owned
50% by the Company and 50% by ARVO, Ltd., a Latvian limited liability company.
The Company currently owns a 89% interest in BIA. BIA currently has no
substantive operations. The Company believes that maintaining BIA's airline
certification and maintaining the goodwill of BIA's debtors is beneficial to
BIUSA.
The Company has a 2.6% interest in Lithuanian Aircraft Maintenance
Corporation ("LAMCO"), which was formed as a venture with the Lithuanian
government. LAMCO is currently in liquidation and the Company expects to
recover all of its investment of $40,000 in 1998.
The Company has decided to focus its management and capital on the
development of AIRO. Management believes, however, that an opportunity exists
to utilize its expertise in order to establish business opportunities in the
region of Eastern Europe and the Commonwealth of Independent States ("CIS"), and
the Company is regularly afforded business opportunities in this region.
Management will utilize its discretion in determining which ventures, if any, to
pursue.
Members of the Company's Board of Directors have substantial experience in
business dealings with officials, practices and customs in the former Soviet
Union and Asia. Robert Knauss and Paul Gregory have served as consultants and
advisors to the former Soviet Union and Russian government; Juris Padegs has
been involved in international investments for over 25 years; and Homi Davier
has participated in the start-up and management of the national aviation
company of Oman and the Middle Eastern operations of the national aviation
company of Bangladesh, and has extensive experience in the travel agency
industry.
The Company was incorporated in Texas in March 1991. Unless otherwise
indicated, references to the Company include its interests in AIRO, Air Baltic,
BCS, BIA, ADC and BWAF. The offices of the Company are located at 1990 Post
Oak Boulevard, Suite 1630, Houston, Texas 77056-3813 and its telephone number
is (713) 961-9299.
The Company's current subsidiaries and joint operations include:
Baltic International USA, Inc.
Catering Airlines Distribution Cargo
AIRO Catering Air Baltic American Baltic World Air
Services 46% Corporation 8% Distributing Freight 100%
Baltic Catering Baltic Int'l Company 100%
Services 50% Airlines 89%
Note: Percentages reflect the Company's ownership interest as of May 29, 1998.
The Offering
Common Stock Outstanding
Prior to Offering 15,586,785 (1)
Common Stock to be Issued 1,288,850 (2)
Common Stock to be Resold 20,330,319 (3) See "Plan of Distribution
and Selling Shareholders."
Use of Proceeds Working capital. See "Use of Proceeds."
Nasdaq Symbol BISA
_____________________
(1) Does not include (i) 1,072,366 shares issuable upon exercise of
outstanding Resale Options and Public Options; (ii) 10,035,845 shares
underlying the Resale Warrants, Public Warrants and Representative's
Warrants; (iii) 119,175 shares to be issued for services to be rendered in
the future; (iv) 1,336,958 shares underlying outstanding shares of Series A
Preferred Stock; and (v) 1,043,451 shares underlying outstanding shares of
Series B Preferred Stock. See "Management -Stock Options" and "Description
of Securities."
(2) Includes (i) 769,700 shares to be issued upon exercise of the Public
Options (ii) 119,175 shares to be issued for services to be rendered in the
future, and (iii) 399,975 shares to be issued upon exercise of the Public
Warrants. See "Plan of Distribution and Selling Shareholders."
(3) Includes (i) 9,174,825 shares issued and outstanding; (ii) 9,515,870
shares underlying currently exercisable Resale Warrants; (iii) 302,666
shares underlying currently exercisable Resale Options; and (iv) 1,336,958
shares underlying outstanding shares of convertible Series A Preferred
Stock.
Summary Financial Data
Three Months Ended Year Ended December 31,
Statement of Operations Data: March 31, 1998 1997 1996
-------------- ---- ----
Revenues $ 167,898 $ 1,136,242 $ 1,313,257
Loss before income taxes (275,657) (798,458) (1,232,849)
Net loss (275,657) (798,458) (1,248,543)
Net loss per common share - basic (0.02) (0.11) (0.23)
Net loss per common share - diluted (0.02) (0.11) (0.23)
March 31, December 31,
Balance Sheet Data: 1998 1997
---- ----
Working capital (deficit) $(1,669,296) $ 693,699
Total assets 5,618,695 6,016,144
Total long-term liabilities - 2,000,000
Stockholders' equity 2,958,100 3,263,200
RISK FACTORS
An investment in the Company involves certain risks. Prospective
investors should carefully review the following factors together with the other
information contained in this Prospectus prior to making an investment
decision.
History of Operating Losses; Profitability Uncertain
From its inception in 1991 through March 31, 1998, the Company has
incurred operating losses on an annual basis. For the years ended December 31,
1997 and 1996, the Company had revenues of $1,136,242 and $1,313,257,
respectively, with net losses of $798,458 and $1,248,543, respectively. BIA's
losses have historically directly affected the Company's results of operations.
The Company recorded losses relating to BIA of $612,385 for the years ended
December 31, 1996. However, BIA has had no operations since September 1995 and
the Company has recorded no losses relating to BIA in 1997. For the three
months ended March 31, 1998, the Company had revenues of $167,898 with a net
loss of $275,657. The Company believes that its results of operations have
been and will continue to be affected by various factors, including market
acceptance of the Company's business ventures, regional, economic and political
factors and the need for additional capital. There can be no assurance that
the Company, or any of its business operations, including Air Baltic, will
experience profitability in the future, if at all. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Capital Requirements; Limited Sources of Liquidity
The Company requires substantial capital to pursue its operating strategy.
At March 31, 1998, the Company had a working capital deficit of $1,669,296 and
its debt to equity ratio was 90%. To date, the Company has relied on net cash
provided by financing activities to fund its capital requirements. Financing
activities, primarily through the issuance of stock and debt, provided the
Company with $1,811,357 and $3,161,827 of cash during 1997 and 1996,
respectively, and $74,461 of cash used for the three months ended March 31,
1998. In November 1996, the Company entered into a promissory note in
connection with a $2,000,000 loan to the Company. In August and September
1997, the Company raised additional net equity of $2,510,501. Operating
activities used net cash of $1,136,596 and 2,082,722 during 1997 and 1996,
respectively. Furthermore, the Company used $93,014 and $834,100 of cash in
investing activities during 1997 and 1996, respectively. Through March 31,
1998, the Company has advanced an aggregate of approximately $13 million to
BIA. As of March 31, 1998, the Company had recorded an investment to Air
Baltic of $2,144,212. The Company will be dependent upon Air Baltic generating
sufficient cash flow and profitability from operations, of which there can be
no assurance, in order to maintain the Company's collectibility of the
investment. The Company has no obligation to make further capital
contributions to Air Baltic. Air Baltic may make capital calls of its
shareholders including the Company. The Company has no obligations under any
such capital calls and may take a dilution in its ownership of Air Baltic or at
the Company's option may make additional contributions to maintain or increase
its ownership percentage. The Company's influence over and participation in
the management of Air Baltic is nominal.
The Company's operations have been and are expected to continue to be
insufficient as a source of funds to meet the Company's capital requirements
and other liquidity needs. In August and September 1997, the Company raised
additional net equity of $2,510,501 in exchange for a private placement of
7,000,000 shares of Common Stock. In connection with these private placements,
the Company issued warrants to purchase 6,800,000 shares of the Common Stock at
an exercise price of $0.65 per share, which warrants are currently exercisable
and expire in August 2002. In connection with the subscription agreements for
private placements for 6,250,000 of these shares sold, the shareholders have
declared their intentions not to offer for resale the shares for at least 24
months from the date of purchase. Management believes that the Company will be
able to achieve a satisfactory level of liquidity to meets its business plan
and capital needs for the next 12 months. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Dispute Resolution Under Joint Venture Agreements; Lack of United States
Jurisdiction
The Air Baltic joint venture agreement provides that disputes that cannot
be resolved between the parties be submitted to binding arbitration under the
rules of the Arbitration Institute of the Stockholm Chamber of Commerce in
Stockholm, Sweden. The Air Baltic Joint Venture Agreement is governed by
Swedish law, except where Latvian law is mandatory. Therefore, any such
dispute would not be resolved in the courts of the United States. As
substantially all of the assets of Air Baltic are located outside of the United
States, the Company may have difficulty in enforcing a judgment against Air
Baltic. Moreover, investors in the Company may have difficulty prosecuting a
claim, or enforcing any judgment, against the Company due to these factors.
Default Under Joint Venture Agreements
The Air Baltic Joint Venture Agreement provides that in the event of a
default of the terms and provisions of the Air Baltic Joint Venture Agreement
by any of the parties thereto, the nondefaulting parties have the right to
continue the business of Air Baltic. The nondefaulting parties may do so by
paying any defaulting party the nominal value ($100 per share) of the
defaulting party's percentage share ownership in hard currency. The Company
owns 1,918 shares of Air Baltic; and therefore, the Company would receive
$1,918,000 if it were to default. The Air Baltic Joint Venture Agreement
provides for a 30-day cure period in the event of a default; provided, however,
that the cure period for a default caused by failure to make subordinated debt
financing available is 10 days.
Government Factors and Licensing
The Company currently operates in Latvia and intends to expand its
operations to the other Baltic States and the Newly Independent States, a
region that is in the early stages of developing a market economy. New laws
are being enacted but many remain untested. Although the Company believes that
the Republic of Latvia has advanced in the area of commercial law, Latvian laws
and courts are not well tested in contract enforcement. While Latvia's law on
foreign investment provides guarantees against nationalization and
expropriation, there is little or no judicial precedent in this area.
Additionally, the Latvian law on foreign investment currently allows free
repatriation of funds and includes certain tax holiday provisions; however, no
assurances can be given that these provisions will not be modified or repealed
in the future.
Unfavorable Operating Costs or Political Developments
The Company's business strategy is to identify aviation-related business
opportunities in Latvia, the other Baltic States and Newly Independent States.
This strategy is based on the Company's view that this region has a low cost
work force, and generally lower costs to conduct business as compared to such
costs in Western Europe and in the United States. In the event that inflation
or other factors were to increase the cost of doing business in Latvia, the
other Baltic States and the Newly Independent States, or if a change in the
political or economic climate occurred, many perceived business opportunities
based on cost advantage may not be available. Political stability in Latvia,
the other Baltic States and the Newly Independent States remains dependent, in
part, on political events in neighboring republics. Without significant armed
forces for self-defense, the Baltic States and the Newly Independent States
remain dependent on support from Europe and the United States, and the
development of pro-Democracy and pro-Western political forces in Russia and
neighboring regions. Although Russian troops were withdrawn from Latvia in
August 1994, the proximity of Russian armed forces represents a political risk.
It is presumed that Russian political influence will remain strong in the
Baltic States and the Newly Independent States in which the Company intends to
operate. Accordingly, unforeseeable and uncontrollable costs and political
factors could adversely affect the Company's operations and ability to
implement its business strategy.
Dependence on Key Personnel; Management of Foreign Operations; Management of
Growth
The success of the Company is dependent upon, among other things, the
expertise of Messrs. Knauss, Chief Executive Officer, and David Grossman, Chief
Financial Officer. The loss of the services of Messrs. Knauss or Grossman
would have an adverse effect on the Company's operations. In order to manage
the Company's business operations, management must continue to improve and
expand the level of expertise of its personnel and must attract, train and
manage qualified managers and employees to oversee and manage the foreign
operations. Management of foreign operations is subject to political and
socioeconomic factors different from operating a business in the United States.
Accordingly, if the Company is unable to manage the foreign operations of its
business interests effectively, operating results will be adversely affected.
Additionally, the success of the Company's business strategy is dependent, in
part, on the ability of the Company and of its joint operations to acquire the
equipment, personnel and financing necessary to support the Company's
operations and growth. There can be no assurance that the Company or its joint
operations will be able to successfully finance equipment acquisitions on
favorable terms, attract and train qualified personnel, obtain additional
financing, or manage a larger operation. See "Management."
Exchange Risk
The Company operates its current ventures in convertible currencies. The
Latvian currency ("Lat") is currently freely convertible, but there can be no
assurance that other governments will not place restrictions on currency
conversion. If this were to occur, the Company's earnings would be subject to
exchange rate risk on those sales that occur in the local market. If the
Company expands into other Baltic States or the Newly Independent States with
less stable currencies, exchange rate risks could be greater. In Western
markets in which the Company operates, the exchange rate risk would be that of
exchange rate fluctuations among major currencies (such as the United States
dollar to the German mark). There can be no assurance that currency exchange
rates will not fluctuate, or that adverse currency restrictions will not be
imposed in the future.
Competition
The Company's operations encounter varying degrees of competition from
diverse markets. Air Baltic competes on the basis of price, quality of service
and convenience. Many of the airlines against which Air Baltic competes
against, have longer operating histories, greater name recognition, greater
financial resources, more extensive facilities and equipment, and better
marketing resources than those available to Air Baltic. Many scheduled
carriers compete for customers in a variety of ways, including wholesaling to
tour operators, discounting seats on scheduled flights, promotions to travel
agents, prepackaging tours for sale to retail customers and selling discounted,
excursion airfare only products to the public. As a result, Air Baltic is
required to compete for customers against the lowest revenue generating seats
of the scheduled airlines. During periods of dramatic fare cuts by scheduled
airlines, Air Baltic may be forced to respond with reduced fares, which could
have a material adverse effect on its operating results. Air Baltic competes
with private carriers on certain of its routes. Competition may also be
affected by governmental actions including licensing, bilateral agreements and
other regulatory actions. There can be no assurance that competitive
conditions will not have an adverse effect on Air Baltic's operations.
BWAF will experience competition from other cargo and marketing sales
companies which are establishing a presence in the Baltic States and
surrounding region including the cargo marketing divisions of airlines which
are expanding service within current markets in which BWAF is working or
targeting for expansion. However, BWAF has no specific knowledge of the plans
of the activities of other potential competitors into the existing or future
planned markets of BWAF.
The operations of AIRO may also experience competitive pressures.
However, currently and during the early years of the development of AIRO, it is
targeting to develop operations in markets in which there is currently no
direct competition. As AIRO's activities and the markets in which AIRO has
developed operations mature, AIRO can expect competition from other in-flight
catering companies. The Company has no knowledge of any plans of the other
companies involved in in-flight catering services in the existing and planned
markets of AIRO.
ADC competes directly with other similar companies in the distribution of
its products. However, ADC retains specific licenses to exclusively distribute
the products which it sells and the competition is directed between a choice of
different brands of similar products. ADC expects the competition in food and
consumer goods distribution to continue to increase. However, the Company and
ADC have no knowledge of the specific plans of any of the distributing
companies in the region. See "Business-Competition."
Conflicts of Interests; Difficulty in Evaluating Financial Statements
The management of the Company also has management responsibilities for the
day-to-day affairs of AIRO, BWAF, ADC, BCS and BIA. Additionally, these
companies have or will enter into contracts and business relationships with
each other and with other third parties. An inherent conflict of interest
exists due to the interests of the Company through its ownership of BWAF and
ADC and, as joint operation partner-operator of BIA, BCS, AIRO and Air Baltic
when such ventures and other companies of the Company enter into business
relationships with each other. A potential for pecuniary gain to management of
the Company and for the compromise of management's fiduciary duties exists in
any related party transaction. No independent determination has been made as
to the fairness and reasonableness of any related party transaction and no
guidelines have been established to resolve any conflicts of interest. It
should be assumed that all agreements and arrangements between and among the
ventures are not negotiated on an arm's length basis; however, all agreements
and arrangements by and between the ventures and third parties are negotiated
at arm's length and are approved by management of the respective parties and
those relating to Air Baltic are approved by the Board of Directors of Air
Baltic. The Company's joint operation partners handle contract negotiations
between the joint operations. In dealings between and among the Company and
its subsidiaries and joint operations, management of the Company will seek to
have potential conflicting matters approved by its independent directors, or
will seek the advice of independent counsel. Management may be faced with the
issue of whether to bring opportunities to the attention of the Company for its
participation or to other affiliated firms.
The Company is a joint operation partner in a group of affiliated
companies and has extensive transactions and relationships with members of the
group. Therefore, the Company's financial statements may be difficult to
evaluate. See Financial Statements.
No Dividend History
The Company has never paid cash dividends on its Common Stock and
presently intends to retain any earnings to finance the expansion of its
business. See "Price Range of Common Stock and Dividend Policy."
Need to Maintain a Current Prospectus
The Company must maintain a current prospectus in order for the Selling
Shareholders to sell the shares of Common Stock to which this Prospectus
relates. In the event the Company is unable to maintain a current prospectus
due to lack of sufficient financial resources or for other reasons, the Selling
Shareholders will be unable to resell their shares in any public market.
Shares Reserved for Issuance
The Company has 13,216,401 shares of Common Stock reserved for issuance
upon the exercise of the outstanding Public Warrants, Resale Warrants, Public
Options, Resale Options and Representative's Warrants, as well as upon the
conversion of the Series A Preferred Stock and the Series B Preferred Stock.
These securities are convertible or exercisable at prices that range from
$0.40625 to $9.80 per share and expire on various dates extending to August
2004. The shares to be issued upon exercise of the Public Options and Public
Warrants are being offered by the Company on a "best efforts - no minimum"
basis, and the Company will retain all proceeds from the exercise of the Public
Options and Public Warrants regardless of the amount exercised. There can be
no assurance that any of these securities will be converted or exercised, or
that the Company will receive any proceeds from the conversion or exercise
thereof. The exercise or conversion of these securities, and the resale of the
underlying shares, could have a dilutive effect on the prevailing market price
of the Common Stock. See "Management-Stock Options" and "Description of
Securities."
USE OF PROCEEDS
Assuming exercise of all of the Public Options and Public Warrants, the
Company will receive aggregate proceeds of approximately $2,900,000 prior to
deducting estimated offering expenses of approximately $220,000. The Company
will use the proceeds, if any, for working capital and will have broad
discretion in the application of such proceeds. As there are no commitments
from the holders of the Public Options and Public Warrants to exercise such
securities, there can be no assurance that the Public Options and Public
Warrants will be exercised. The Company will receive no proceeds from the
resale of shares by the Selling Stockholders. See "Plan of Distribution and
Selling Stockholders."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock is listed on the Nasdaq Small-Cap Market under
the symbol "BISA." Public trading of units (consisting of one share of Common
Stock and one Public Warrant) ("Units") on Nasdaq commenced on April 28, 1994.
The Units separated and public trading of the Common Stock and Public Warrants
on Nasdaq commenced on June 27, 1994. The following table sets forth the high
and low last sales prices of the Common Stock for the periods indicated:
1998 1997 1996
--------------- --------------- --------------
High Low High Low High Low
---- --- ---- --- ---- ---
First Quarter $0.594 $0.219 $0.750 $0.375 $2.875 $1.000
Second Quarter N/A N/A 0.500 0.375 2.750 0.813
Third Quarter N/A N/A 1.031 0.375 1.156 0.563
Fourth Quarter N/A N/A 0.656 0.344 1.188 0.344
On May 29, 1998, the last sales price for the Common Stock was $0.406,
and the Company believes there were approximately 1,000 beneficial holders of
its Common Stock.
The Company has not paid, and the Company does not currently intend to pay
cash dividends on its Common Stock. The current policy of the Company's Board
of Directors is to retain earnings, if any, to provide funds for operation and
expansion of the Company's business. Such policy will be reviewed by the Board
of Directors of the Company from time to time in light of, among other things,
the Company's earnings and financial position.
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 expects to be
notified by Nasdaq that it would be delisted from the Nasdaq Small Cap Market
and would then be traded on the Bulletin Board maintained by the NASD.
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998. This table should be read in conjunction with the Company's
financial statements and notes thereto that are included elsewhere in this
Prospectus.
March 31, 1998 (1)
(unaudited)
Shareholders' 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
Series B, convertible, $10 par value, $25,000
stated value, 70 shares authorized, 15 shares
issued and outstanding 375,000
Common stock, $.01 par value, 40,000,000
shares authorized, 15,629,229 shares issued
and 15,586,785 shares outstanding 156,292
Additional paid-in capital 11,722,564
Accumulated deficit (11,811,826)
Treasury stock, at cost (20,540)
------------
Total shareholders' equity $ 2,958,100
============
_________________________
(1) Does not give effect to the issuance of (i) 9,515,870 shares of Common
Stock upon exercise of the Resale Warrants; (ii) 399,975 shares upon
exercise of the Public Warrants; (iii) 302,666 shares upon exercise of
outstanding Resale Options; (iv) 769,700 shares upon exercise of
outstanding Public Options; (v) 119,175 shares to be issued for services to
be rendered in the future; and (vi) 1,336,958 shares upon conversion of the
Series A Preferred Stock.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussions contain forward-looking information. Readers
are cautioned that such information involves risks and uncertainties, including
those created by general market conditions, competition and the possibility of
events may occur which limit the ability of the Company to maintain or improve
its operating results or execute its primary growth strategy. Although the
Company believes that the assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could be inaccurate, and there can
therefore be no assurance that the forward-looking statements included herein
will prove to be accurate. The inclusion of such information should not be
regarded as a representation by the Company or any other person that the
objectives and plans of the Company will be achieved.
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere herein.
General
In 1996 and 1997, the Company continued its strategy of making investments
in businesses in the Baltic States and further developing its existing
activities in such region. In 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 sold 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
Three months Ended March 31, 1998 and 1997. For the quarter ended March
31, 1998, the Company had revenues of $167,898 compared with $292,700 for the
quarter ended March 31, 1997. The 43% decrease is due to a decrease in the net
equity in earnings of catering operations due to the reversal in 1997 of a
reserve recorded on the final determination of RCS' income tax status for 1996
and the additional general and administrative costs at AIRO in 1998 for the
infrastructure of AIRO which did not exist in the first quarter of 1997. The
tax determination was received in 1997 in favor of RCS. AIRO built up its
infrastructure during the first quarter of 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 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 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 64% to
120,802 meals sold in the first quarter of 1998 from 73,483 meals sold in the
first quarter of 1997. This increase is due to the opening of the Tallinn
kitchen in January 1998 and a 9% increase in meals sold in Riga.
The Company's operating expenses for the quarter ended March 31, 1998 were
$397,500 compared to $370,611 for the same quarter in 1997. The increase is
primarily due to an increase in general and administrative expenses. This
increase was due primarily to increased professional fees and costs associated
with the Vilnius office of ADC which was started in May 1997, offset partially
by reductions in other general and administrative expenses, principally
management salaries and consulting costs. The increase of professional fees is
the result of accounting fees incurred during the first quarter of 1998 and
most of these fees were incurred in the second quarter instead of the first
quarter of 1997. Personnel and consulting costs decreased from 1997 to 1998,
offseting these increases.
Interest expense decreased to $66,813 in the first quarter of 1998 from
$133,252 in 1997, reflecting the decreased amortization of debt costs and
discount for borrowings incurred during the fourth quarter of 1996. This
interest expense is related to debt used for a capital contribution to
Air Baltic and the expansion of the Company's activities.
The Company had a net loss of $275,657 for the quarter ended March 31, 1998
compared to a net loss of $207,238 for the quarter ended March 31, 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 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 Three Months Ended March 31, 1998
(unaudited)
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
------------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Operating revenues $ 167,898 $ 447,550 $ (42,530) $ 572,918
Operating expenses 397,500 341,763 - 739,263
---------- ---------- --------- ----------
Income (loss) from operations (229,602) 105,787 (42,530) (166,345)
Other income (expense) (46,055) - - (46,055)
---------- ---------- --------- ----------
Income (loss) before
income taxes (275,657) 105,787 (42,530) (212,400)
Minority interest - (52,328) - (52,328)
Provision for income taxes - (10,929) - (10,929)
---------- ---------- --------- ----------
Net income (loss) $ (275,657) $ 42,530 $ (42,530) $ (275,657)
========== ========== ========= ==========
</TABLE>
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 March 31, 1998, the Company had a working capital deficit of $1,669,296
as compared to working capital of $693,699 at December 31, 1997. The
decrease in the working capital is due primarily to an decrease in cash of
$290,748, a decrease in accounts receivable of $110,222 and an increase in
short term debt of $1,991,289.
Net cash used in operating activities for the three months ended March 31,
1998 was $211,369 as compared to $236,800 for the same period of 1997. Such
decrease was primarily due to the improved results from operations other than
the joint operations. Net cash used by investing activities was $4,918 for the
three months ended March 31, 1998 compared to $1,974 used by investing
activities for the three months ended March 31, 1997. Net cash used by
financing activities was $74,461 for the three months ended March 31, 1998
compared to net cash provided by $6,667 for the three months ended March 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 in 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 March 31, 1998
(unaudited)
Proportionate
Share of Pro forma
Company Joint Combined
(As reported) Operations Eliminations Company
------------- ---------- ------------ -------
Current assets $ 991,299 $ 346,177 $ (33,831) $1,303,645
Investments in and
advances to joint
operations 4,380,048 - (1,063,514) 3,316,534
Property and other
assets, net 247,348 2,566,730 (2,169,899) 644,179
---------- ---------- ---------- ----------
Total assets $5,618,695 $2,912,907 $(3,267,244) $5,264,358
========== ========== ========== ==========
Current liabilities $2,660,595 $ 164,601 $ (543,169) $2,282,027
Minority interest - 24,231 - 24,231
Stockholders' and
partners' equity 2,958,100 2,724,075 (2,724,075) 2,958,100
---------- ---------- ---------- ----------
Total liabilities and
equity $5,618,695 $2,912,907 $(3,267,244) $5,264,358
========== ========== ========== ==========
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 accomplish its business plan and meet its
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.
BUSINESS
The Company is a Texas corporation which provides and has provided
capital, management, and technical services to start-up and established private
companies located primarily in 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 has decided to focus its management and capital on the
development of AIRO. Management believes, however, that an opportunity exists
to utilize its expertise in order to establish business opportunities in the
region of Eastern Europe and the CIS, and the Company is regularly afforded
business opportunities in this region. Management will utilize its discretion
in determining which ventures, if any, to pursue.
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%
Baltic Catering Baltic Int'l Company 100%
Services 50% Airlines 89%
Note: Percentages reflect the Company's ownership interest as of May 29, 1998.
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 with 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 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 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 SAS, Lufthansa and Air Baltic. AIRO opened a new
kitchen in Tallinn, Estonia in January 1998 and opened an in-flight catering
kitchen in Kiev, Ukraine in May 1998. AIRO has a 20-year building lease in Kiev
with at least five years exclusivity.
Riga Catering Services
On April 2, 1996, the catering operations of 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 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
ADC is a wholly-owned subsidiary of the Company. It 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, 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 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.
Business Strategy of the Company
The Company was created as a vehicle for identifying, forming, and
participating in aviation-related business ventures in the Baltic States and
the Newly Independent States. The Company's initial business venture was to
form and develop BIA. In connection with developing BIA, the Company formed
related aviation ventures to provide support services through BIA, including a
catering service and a freight marketing company. The Company is entitled to
its pro rata share of profits and losses from the operations of all of its
business ventures.
The Company has decided to focus its management and capital on the
development of AIRO. Management believes, however, that an opportunity exists
to utilize its expertise in order to establish business opportunities in the
region of Eastern Europe and the Commonwealth of Independent States ("CIS"), and
the Company is regularly afforded business opportunities in this region.
Management will utilize its discretion in determining which ventures, if any, to
pursue.
Government Regulation
Republic of Latvia Law on Foreign Investment. In November 1991, the Republic
of Latvia adopted the Law on Foreign Investment ("Foreign Investment Law"),
which was designed to encourage the participation by foreigners in the
establishment of Latvian joint ventures. The Foreign Investment Law generally
provides certain preferential tax advantages to ventures formed under the
Foreign Investment Law beginning in the year in which profits are first
generated from the operations of such ventures. In addition, the Foreign
Investment Law permits non-Latvian entities to own up to a 100% interest in
most Latvian business entities, including airlines.
Pursuant to the Foreign Investment Law, ventures having foreign
participation of at least 30% (with a minimum investment of at least $50,000)
are exempt from profit taxes for a period of two years, and thereafter for the
following two years, profit taxes for such ventures are reduced by 50%.
Ventures having foreign participation in excess of 50% (equal to at least
$1,000,000), are exempt from profit taxes for a period of three years, and
thereafter for the following five years, profit taxes for such ventures are
reduced by 50%. In addition, ventures which are active in certain industries
deemed to be "preferential" by the government of the Republic of Latvia and
having foreign participation of at least 30% (with a minimum investment of at
least $50,000) are entitled to a three-year tax holiday from the payment of
profit taxes, and thereafter for the following two years, profit taxes for
these "preferential" ventures are reduced by 50%.
The businesses of BIA and Air Baltic are deemed to be a preferential
industry, entitling them to a three-year profit tax holiday for the first year
in which they generate profits, and a 50% reduction in profit taxes for the
following two years. To date, BIA and Air Baltic have not generated any
profits in any year. Furthermore, RCS is entitled to a three-year profit tax
holiday from the first year it generates profits which was 1996, and a 50%
reduction in profit taxes for the following two years.
Republic of Latvia Law on Limited Liability Companies. The formation and
operation of joint venture-limited liability companies within the Republic of
Latvia is regulated and governed by the Republic of Latvia Law on Limited
Liability Companies ("Company Law"). A joint venture-limited liability company
is recognized as a separate legal entity under the Company Law for purposes of
transacting business in the Republic of Latvia, and accordingly, a joint
venture-limited liability company can incur its own obligations and liabilities
with respect to its business operations. Furthermore, the capital shareholders
of a joint venture-limited liability company are afforded limited liability
with respect to any acts or obligations of the joint venture-limited liability
company. Accordingly, the Company will not be liable, because of its status as
owner of a joint venture-limited liability company interest or as owner of any
subsidiary registered as a Latvian limited liability company, for any
obligations incurred by Air Baltic, BIA, BCS, BWAF or ADC resulting from their
respective business operations.
Political, Economic and Social Climate of Destination Countries
Air Baltic intends to expand its operations to geographic areas which are
subject to evolving political, economic and social climates, including other
Baltic States and other republics of the former Soviet Union. Failure to
improve political, economic or social stability in these regions could have an
adverse effect on the future operations and expansion efforts of Air Baltic.
Competition
The Company's aviation business ventures face competition from other
companies and individuals who have also recognized the Baltic States and the
Newly Independent States as a developing market. Air Baltic as a passenger
service carrier, faces competition from other airlines, many of which have
longer operating histories, greater name recognition, greater financial
resources, more extensive facilities and equipment, and better marketing
resources. Other aviation-related ventures that the Company currently
operates, or in the future may operate, presently compete and will compete with
other entities, many of which may have greater financial, marketing and
technical resources.
Air Baltic assumed the scheduled passenger service operations of BIA and
Latvian Airlines and is designated as the international air carrier of Latvia.
As such, Air Baltic will experience no competition from other Latvian-owned
airlines. Management believes that competition may develop in the future from
private start-up regional carriers based in Latvia or in nearby states which
may want to provide service between Riga and other destinations. These
competitors may wish to compete directly with Air Baltic on the same routes or
compete for new routes which Air Baltic also desires to serve.
Western airline traffic to Riga has increased since the restoration of
independence in the Baltic States. Riga International Airport is now served by
approximately 10 European carriers on a scheduled basis. Air Baltic can expect
increased competition at its major Western European destinations, and from
carriers which offer interline service from North America to Riga via other
hubs. Air Baltic currently competes with Lufthansa German Airlines on its
Riga-Frankfurt route; with RIAIR on its London-Riga route; and with FinnAir on
its Riga-Helsinki route. Air Baltic experiences no competition on its
Stockholm or Copenhagen routes.
The development strategy for Air Baltic includes expansion to destinations
in the other Baltic States and the Newly Independent States, and other major
metropolitan centers. At present, such markets are either not served with
regularly-scheduled service or are underdeveloped and serviced only
infrequently by carriers such as Lufthansa German Airlines or the national
carrier of the given state. The Company has no specific knowledge of the plans
of Lufthansa German Airlines or any other major airline as it relates to
expansion into markets which Air Baltic may develop in the future.
BWAF will experience competition from other cargo and marketing sales
companies which are establishing a presence in the Baltic States and
surrounding region including the cargo marketing divisions of airlines which
are expanding service within the markets in which BWAF is working or targeting
for expansion. However, BWAF has no specific knowledge of the plans of the
activities of other potential competitors into the existing or future planned
markets of BWAF.
The operations of AIRO may also experience competitive pressures.
However, currently AIRO is targeting to develop operations in markets in which
there is currently no direct competition. As AIRO's activities and the markets
in which AIRO has developed operations mature, AIRO can expect competition from
other in-flight catering companies. The Company has no knowledge of any plans
of the other companies involved in in-flight catering services in the existing
and planned markets of AIRO.
ADC competes directly with other similar companies in the distribution of
its products. However, ADC retains specific licenses to exclusively distribute
the products which it sells and the competition is directed between a choices
of different brands of similar products. ADC expects the competition in food
and consumer goods distribution to continue to increase. However, the Company
and ADC has no knowledge of the specific plans of any of distributing companies
in the region.
Employees
The Company currently employs six persons on a full time basis. The
Company has in the past, and will continue in the future, to employ independent
contractors, and to make extensive use of its outside directors and others as
consultants. Air Baltic currently employs approximately 200 persons on a full
time basis, including pilots, mechanics, cabin crews, airport services and
administrative personnel. AIRO employs approximately 135 persons, BWAF employs
five persons, and ADC employs 15 persons. None of the employees of the Company
and its subsidiaries and joint operations are represented by a labor
organization. The Company believes its relationships with all of these
employees are satisfactory.
Facilities
The Company leases approximately 3,500 square feet of office space in
Houston, Texas for a monthly rental of approximately $3,000. The Company
believes that its facilities are adequate for its current operations. The
facilities of the Company's other business ventures are satisfactory for
current purposes.
MANAGEMENT
Executive Officers and Directors
The following table gives certain information with respect to the
executive officers and directors of the Company:
Name Age Position
---- --- --------
Robert L. Knauss (3) 67 Chairman of the Board and Chief Executive
Officer, Director - Class III
David A. Grossman 34 Chief Financial Officer and Corporate
Secretary
Homi M. Davier (1) 50 Director - Class I
James W. Goodchild (4) 42 Director - Class II
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. 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.
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.
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.
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)
President and Chief 1996 120,000 $ 0 13,333 (3) 0 0
Operating 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.
(6) Mr. Goodchild resigned as President and Chief Operating Officer in March
1998.
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. See "-Stock
Options" and "--Certain Transactions."
Stock Options
In September 1992, the Company adopted its 1992 Equity Incentive Plan
("Plan"), which was amended effective March 1995, December 1995 and
September 1997. The Plan provides for the issuance of incentive stock
options and non-qualified options. An aggregate of 1,500,000 shares of the
Company's Common Stock may be issued pursuant to options granted under the
Plan to employees, non-employee directors and consultants, subject to
evergreen provisions included in the Plan. The Plan is administered by the
compensation committee of the Company's Board of Directors. The
compensation committee has the authority to determine, among other things,
the size, exercise price, and other terms and conditions of awards made
under the Plan. Subject to certain restrictions, the exercise price of
incentive stock options may be no less than 100% of fair market value of a
share of Common Stock on the date of grant. As of the date of this
Prospectus, options to purchase an aggregate of 1,072,366 shares were
outstanding under the Plan. Such options include:
Expiration Date Shares Under Option Price Date Exercisable
--------------- ------------------- ----- ----------------
September 1999 60,666 $0.50 September 1994
October 1999 242,000 1.125 October 1994
December 2000 198,000 1.375 December 1995
September 2001 25,000 0.75 September 1996
December 2001 25,000 0.8125 December 1996
February 2003 238,350 0.421875 February 1998
August 2004 238,350 0.421875 August 1999
December 2002 45,000 0.40625 December 1997
In August 1995, the Board of Directors repriced the options that were
previously exercisable for $2.875 per share to $1.125 per share which was a
price more consistent with current market prices. Such repricing was in
consideration of services rendered in lieu of granting additional options to
the holders. The resale of shares of Common Stock issued upon exercise of
all of the Company's outstanding options is being registered under the Act
pursuant to this Prospectus.
The following table shows, as to the named executive officers, information
concerning individual grants of stock options and warrants during 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 1997 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
1997 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.
Certain 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.
In April 1998, the Company obtained a line of credit in the aggregate
amount of $800,000 from ORESA Ventures N.V. and Celox S.A. 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 ORESA Ventures N.V. is repaid, and the line of credit is
secured by the shares of stock owned in AIRO.
Management believes that all prior related party transactions are on terms
no less favorable to the Company as could be obtained from unaffiliated third
parties. All ongoing and future transactions with such persons, including any
loans to such persons, will be approved by a majority of disinterested,
independent outside members of the Company's Board of Directors.
Limitation on Directors' Liability; Indemnification
Texas law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their shareholders for monetary
damages for breach of directors' fiduciary duty of care. The Articles of
Incorporation of the Company limit the liability of directors of the Company
(in their capacity as directors but not in their capacity as officers) to the
Company or its stockholders to the fullest extent permitted by Texas law.
Specifically, directors of the Company will not be personally liable for
monetary damages for breach of a director's fiduciary duty as a director,
except for liability (i) for any breach of the director's duty of loyalty to
the Company or its stockholders, (ii) for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
under Article 2.41 under the Texas Business Corporation Act, or (iv) for any
transaction from which the director derived an improper personal benefit,
whether or not the benefit resulted from an action taken in the person's
official capacity. Section 2.41 of the Texas Business Corporation Act relates
to directors' liability for unlawful dividends and stock issuances.
The inclusion of this provision in the Articles of Incorporation may have
the effect of reducing the likelihood of derivative litigation against
directors, and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited the Company and its
stockholders. However, such limitation on liabilities does not affect the
standard of conduct with which directors must comply, the availability of
equitable relief or any causes of action based on federal law.
The Company's Articles of Incorporation provide for the indemnification of
its executive officers and directors, and the advancement to them of expenses
in connection with any proceedings and claims, to the fullest extent permitted
by the Texas Business Corporation Act. The Articles of Incorporation include
related provisions meant to facilitate the indemnitees' receipt of such
benefits. These provisions cover, among other things: (i) specification of
the method of determining entitlement to indemnification and the selection of
independent counsel that will in some cases make such determination; (ii)
specification of certain time periods by which certain payments or
determinations must be made and actions must be taken; and (iii) the
establishment of certain presumptions in favor of an indemnitee. Insofar as
indemnification for liabilities arising under the Act may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of the
Commission, such indemnification is against public policy as expressed in the
Act and is therefore unenforceable.
PRINCIPAL SHAREHOLDERS
The following table presents certain information regarding the beneficial
ownership of all shares of Common Stock at May 29, 1998 by (i) each person who
owns beneficially more than five percent of the outstanding shares of Common
Stock, (ii) each director of the Company, (iii) each named executive officer
and (iv) all directors and officers as a group. See "Management-Certain
Transactions."
Shares Beneficially Owned
Name of Beneficial Owner (1) Number Percent
- --------------------------------------------------------------------------
Jonas af Jochnick 12,510,000 (2) 57.26
Citibank (Switzerland) 1,000,000 6.42
Robert L. Knauss 1,100,749 (3) 6.88
Paul R. Gregory 897,304 (4) 5.62
Homi M. Davier 648,027 (5) 4.11
James W. Goodchild 482,976 (6) 3.05
Juris Padegs 332,129 (7) 2.11
David A. Grossman 131,667 (8) 0.84
Morris A. Sandler 130,000 (9) 0.83
Ted Reynolds 114,000 (10) 0.73
Adolf af Jochnick 10,000 (11) 0.06
All directors and executive officers
as a group (10 persons) 16,356,851 (12) 69.75
(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 423,720 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 381,935 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(5) Includes an aggregate of 174,598 shares subject to options, warrants and
Series A Preferred Stock which are currently exercisable.
(6) Includes an aggregate of 273,348 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 134,688 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 7,863,288 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.
DESCRIPTION OF SECURITIES
Under the Company's Articles of Incorporation, the authorized capital
stock of the Company consists of 40,500,000 shares, of which 40,000,000 shares
are Common Stock, 499,930 shares are Series A Preferred Stock, par value $10.00
per share ("Series A Preferred Stock") and 70 shares are Series B Preferred
Stock, par value $10.00 and stated value $25,000 per share ("Series B Preferred
Stock"). As of the date of this Prospectus, the Company had outstanding
15,586,785 shares of Common Stock, 123,000 shares of Series A Preferred Stock
and 14 shares of Series B Preferred Stock. The Company has reserved 1,072,366
shares for issuance upon exercise of outstanding stock options, 10,035,845
shares for issuance upon exercise of outstanding warrants, 1,336,958 shares for
issuance upon conversion of outstanding shares of Series A Preferred Stock and
1,043,451 shares for issuance upon conversion of outstanding shares of Series B
Preferred Stock.
Common Stock
The holders of Common Stock are entitled to one vote per share with
respect to all matters required by law to be submitted to stockholders of the
Company. The holders of Common Stock have the sole right to vote, except as
otherwise provided by law or by the Company's Articles, including provisions
governing any Preferred Stock. The Common Stock does not have any cumulative
voting, preemptive, subscription or conversion rights. Election of directors
and other general shareholder action requires the affirmative vote of a
majority of shares represented at a meeting in which a quorum is represented.
The outstanding shares of Common Stock are, and the shares of Common Stock
offered hereby will be, upon payment therefor, validly issued, fully paid and
non-assessable.
Subject to the rights of any outstanding shares of Preferred Stock, the
holders of Common Stock are entitled to receive dividends when, as and if
declared by the Board of Directors out of funds legally available therefor. In
the event of liquidation, dissolution or winding up of the affairs of the
Company, the holders of Common Stock are entitled to share ratably in all
assets remaining available for distribution to them after payment or provision
for all liabilities and any preferential liquidation rights of any Preferred
Stock then outstanding. The resale of 9,174,825 shares of Common Stock issued
and outstanding is being registered hereby.
Preferred Stock
The Board of Directors is authorized, without action by the holders of the
Common Stock, to provide for the issuance of the Preferred Stock in one or more
series, to establish the number of shares to be included in each series and to
fix the designations, powers, preferences and rights of the shares of each such
series and the qualifications, limitations or restrictions thereof. This
includes, among other things, voting rights, conversion privileges, dividend
rates, redemption rights, sinking fund provisions and liquidation rights which
shall be superior to the Common Stock. The issuance of one or more series of
the Preferred Stock could adversely affect the voting power of the holders of
the Common Stock and could have the effect of discouraging or making more
difficult any attempt by a person or group to attain control of the Company.
Effective June 30, 1995, the Company created its Convertible Redeemable
Series A Preferred Stock (defined herein as "Series A Preferred Stock"), $10 par
value, and issued 118,500 shares thereof upon conversion of $1,185,000 in
aggregate principal amount of long-term indebtedness. In September 1995, the
Company issued an additional 4,500 shares of Series A Preferred Stock upon
conversion of $45,000 in aggregate principal amount of long-term indebtedness.
The Series A Preferred Stock: (i) is redeemable only at the option of the
Company and only during the 30-day period beginning on December 31 and June 30
of each year that the Preferred Stock is outstanding; (ii) is convertible at any
time by the holders thereof at the initial conversion price of $2.00 per share;
(iii) carries a liquidation preference of $10 per share; (iv) is non-voting; and
(v) accrues cumulative cash dividends per share at an annual rate equal to 10%
of the stated value per share, payable in equal quarterly installments. As of
the date of this Prospectus, the conversion price of the Series A Preferred
Stock is $0.92 per share. The resale of 1,336,958 shares of Common Stock
issuable upon conversion of the outstanding shares of Series A Preferred Stock
is being registered hereby.
Effective February 22, 1996, the Company created its Series B Convertible
Redeemable Preferred Stock ("Series B Preferred Stock"). The Company is
authorized to issue 70 shares of Series B Preferred Stock, $25,000 stated value
and $10 par value per share. The Company issued 50 shares thereof for aggregate
net proceeds of $1,093,750 in February and March 1996. The Series B Preferred
Stock: (i) is not entitled to receive dividends; (ii) is convertible at any time
by the holders thereof on or after the 55th day after the date that the shares
were issued at a conversion price equal to the lesser of $2 per share or 82% of
the five-day average closing bid price of the Company's Common Stock; (iii) is
non-voting; (iv) carries a liquidation preference of $25,000 per share plus
interest equal to 10% of the stated value per annum since the issuance date, and
after payment in full of the Series A Preferred Stock; and (v) is redeemable
only at the option of the Company if the conversion price is $0.75 or less per
share. In October 1996, the conversion price was changed to the lessor of $0.55
per share or 82% of the five-day average closing bid price of the Company's
Common Stock.
The voting rights of the holders of Company Common Stock will be diluted
upon conversion of the Preferred Stock and the holders of the Preferred Stock
will have preferential dividend and liquidation rights over the holders of
Common Stock. Furthermore, when and if the Company becomes profitable, the
issuance of shares of Preferred Stock will have a dilutive effect on the per
share value of the Common Stock.
Public Warrants
The Company issued 800,000 Public Warrants in its initial public offering
in April 1994, of which 799,950 are currently outstanding. The Public Warrants
are exercisable to purchase an aggregate of 399,975 shares of Common Stock at a
price of $6.00 per share, and expire on April 26, 2000. The warrant agreement
governing the Public Warrants provides for the right of redemption at $0.05 per
Public Warrant if the high bid price of the Common Stock as reported on Nasdaq
equals or exceeds $10.00 for 30 consecutive trading days. The issuance of
399,975 shares of Common Stock upon exercise of the outstanding Public Warrants
is being registered hereby.
Each holder of a Public Warrant may exercise such Public Warrant by
surrendering the certificate evidencing such Public Warrant, with the form of
election to purchase on the reverse side of such certificate properly completed
and executed, together with payment of the exercise price to the Warrant Agent.
The exercise price will be payable in cash or by certified or official bank
check payable to the Company. Subject to certain limited exceptions, no
adjustments as to any dividends with respect to the shares of Common Stock of
the Company will be made upon any exercise of Public Warrants. If less than all
of the Public Warrants evidenced by a warrant certificate are exercised, a new
certificate will be issued for the remaining number of Public Warrants.
Certificates evidencing the Public Warrants may be exchanged for new
certificates of different denominations by presenting the Public Warrant
certificate at the office of the Warrant Agent.
Warrants
Representative's Warrants. In connection with the Company's initial
public offering in April 1994, the Company issued to the representative of the
group of underwriters of such offering a warrant authorizing its holder to
purchase 120,000 shares of Common Stock at exercise prices between $6.00 and
$9.80 per share, exercisable between April 1995 and April 1999. The holder of
this warrant holds certain registration rights; however, the issuance of the
shares underlying this warrant is not being registered hereby.
Bridge Warrants. In connection with certain financing obtained by the
Company from related and unrelated parties between August 1993 and September
1997, the Company issued bridge warrants to purchase a total of 9,070,370
shares of Common Stock at a price from $0.4375 to $1.1875 per share, subject to
adjustment. These bridge warrants are presently exercisable and terminate as
follows:
Expiration Date Shares Under Warrant Price
--------------- -------------------- -----
August 1998 4,000 $1.00
August 1998 129,996 0.82
February 1999 29,999 0.82
October 1999 148,000 0.82
December 2000 10,000 0.82
March 2001 78,125 2.40
May 2001 25,000 0.75
October 2001 1,000 0.5625
November 2001 500,000 0.75
December 2001 25,000 0.75
February 2002 10,000 0.50
March 2002 10,000 0.53125
April 2002 10,000 0.50
April 2002 267,500 0.75
April 2002 6,750 0.8438
April 2002 6,750 0.9063
April 2002 6,750 1.1875
May 2002 10,000 0.45313
May 2002 4,000 0.50
May 2002 750,000 0.65
June 2002 10,000 0.4375
June 2002 58,750 0.75
July 2002 10,000 0.4375
July 2002 63,750 0.75
August 2002 6,250,000 0.65
August 2002 625,000 0.50
August 2002 10,000 0.6875
September 2002 10,000 0.65625
----------
Total 9,070,370
==========
Employees' and Consultants' Warrants. In 1995, the Company issued
warrants to purchase 100,000 shares of Common Stock at an exercise price of
$1.00 per share, which warrants expire in May 2000. In August 1995, the Company
issued warrants to purchase an aggregate of 90,500 shares of Common Stock at an
exercise price of $1.00 per share, which warrants expire in August 2000. In
November 1995, the Company issued warrants to purchase an aggregate of 15,000
shares of Common Stock at an exercise price of $2.25 per share, which warrants
expire in November 2000. All of the foregoing warrants were issued to
consultants and employees for services rendered and are presently exercisable.
In December 1995, the Company issued warrants to purchase an aggregate of
240,000 shares of Common Stock to employees for services rendered. These
warrants are exercisable for $1.375 per share and expire in December 2000. All
of these warrants are currently exercisable.
The resale of the shares of Common Stock underlying the Bridge Warrants
and Employees' and Consultants' Warrants is being registered hereby pursuant to
registration rights granted to the holders thereof. The Company has agreed to
pay all expenses in connection with such registration, except for underwriting
discounts and commissions and legal fees for counsel to the holders.
Transfer Agent
The Company's transfer agent for the Common Stock, and the Warrant Agent
for the Public Warrants, is Harris Trust & Savings Bank, 700 Louisiana, Suite
3350, Houston, Texas 77002-2729.
PLAN OF DISTRIBUTION AND SELLING SHAREHOLDERS
This Prospectus relates to the issuance of an aggregate of 1,288,850
shares upon exercise of Public Options and Public Warrants and shares to be
issued for services to be rendered in the future. This Prospectus also relates
to the resale of 20,330,319 shares by the Selling Shareholders. The shares
being registered for resale include (i) 9,174,825 shares issued and
outstanding; (ii) 9,515,870 shares to be issued upon exercise of outstanding
Resale Warrants; (iii) 302,666 shares to be issued upon exercise of outstanding
Resale Options; and (iv) 1,336,958 shares to be issued upon conversion of
outstanding shares of Series A Preferred Stock.
The following tables set forth certain information with respect to the
issuance by the Company of shares of Common Stock upon exercise of Public
Options and Public Warrants and shares to be issued for services to be rendered
in the future; as well as the resale of Common Stock by the Selling
Shareholders, including the resale of shares of Common Stock issued and
outstanding, and shares to be issued for services rendered and shares
underlying Resale Warrants, Resale Options and, Series A Preferred Stock. The
Company will not receive any proceeds from the resale of Common Stock by the
Selling Shareholders. However, the Company will receive the exercise price per
share upon exercise of the Public Options and Public Warrants.
Issuance of Common Stock by the Company Upon
Exercise of Public Warrants ("PW") and Public Options ("PO") and
Shares to be Issued for Services to be Rendered in the Future ("IF")
Exercise or
Conversion Number Expiration
Holder Price of Shares Date
- --------------------------------------------------------------------------------
Public Warrant Holders $6.00 399,975 PW April 1998
R. Knauss (1) 0.421875 122,350 PO February 2003
0.421875 122,350 PO August 2004
0.421875 61,175 IF August 1999
J. Goodchild (1) 0.421875 72,000 PO February 2003
0.421875 72,000 PO August 2004
0.421875 36,000 IF August 1999
D. Grossman (1) 0.75 25,000 PO September 2001
0.421875 44,000 PO February 2003
0.421875 44,000 PO August 2004
0.421875 22,000 IF August 1999
H. Davier (1) 1.375 50,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
P. Gregory (1) 1.375 50,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
D. Janacek 1.375 30,000 PO December 2000
J. Padegs (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
M. Sandler (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
T. Reynolds (1) 1.375 15,000 PO December 2000
0.8125 5,000 PO December 2001
0.40625 5,000 PO December 2002
A. Jochnick (1) 0.40625 10,000 PO December 2002
J. Jochnick (1) 0.40625 10,000 PO December 2002
D. Arnett 1.375 10,000 PO December 2000
D. Solon 1.375 10,000 PO December 2000
M. Behrana 1.375 3,000 PO December 2000
(1) These persons are officers and/or directors of the Company. See
"Management-Executive Officers and Directors" and "- Certain
Transactions."
Resale by Selling Shareholders of Shares Currently Outstanding ("S"); and
Shares Underlying Series A Preferred Stock ("P"), Resale Warrants ("W") and
Resale Options ("O") and Shares to be Issued Currently ("IC")
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
- --------------------------------------------------------------------------------
ORESA Ventures N.V. (1) 7,500,000 3,750,000 S 0 0.00
3,750,000 W
Celox S.A. (1) 5,000,000 2,500,000 S 0 0.00
2,500,000 W
Citibank (Switzerland) 1,000,000 1,000,000 S 0 0.00
R. Knauss (1) 978,399 96,354 S 580,675 3.73
135,870 P
130,500 W
35,000 O
P. Gregory (1) 837,304 44,702 S 470,667 3.02
255,435 P
26,500 W
40,000 O
R. Chiste 800,000 400,000 S 0 0.00
400,000 W
Rauscher Pierce & Clark
(Guernsey) Limited 705,000 705,000 W 0 0.00
R. Gibson 671,809 543,478 P 0 0.00
128,331 W
H. Davier (1) 588,027 7,262 S 466,167 2.99
54,348 P
25,250 W
35,000 O
J. Goodchild (1) 410,976 67,429 S 142,199 0.91
54,348 P
97,000 W
50,000 O
Roanne Securities Limited 400,000 200,000 S 0 0.00
200,000 W
Otto Candies, Inc. 340,000 340,000 W 0 0.00
J. Padegs (1) 307,129 14,107 S 183,334 1.18
81,522 P
11,500 W
16,666 O
Eureka Communications, Inc. 306,213 6,213 S 300,000 1.92
R. Nelson 200,000 100,000 S 0 0.00
100,000 W
E. B. Mosher 197,696 108,696 P 68,000 0.44
10,000 W
11,000 O
T.G. Shown Associates, Inc. 174,000 174,000 S 0 0.00
Regal International Capital,
Inc. 151,250 151,250 W 0 0.00
T. Glenister 143,627 63,627 S 0 0.00
60,000 W
20,000 O
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
- --------------------------------------------------------------------------------
M. Sandler (1) 105,000 25,000 S 0 0.00
80,000 W
Nelson Partners 100,000 100,000 W 0 0.00
D. Brown 100,000 50,000 S 0 0.00
50,000 W
N. Alston 100,000 100,000 W 0 0.00
Celcius Limited 100,000 100,000 S 0 0.00
D. Brown 95,000 95,000 S 0 0.00
T. Reynolds (1) 89,000 1,000 W 83,000 0.53
5,000 O
N. Young 80,000 80,000 S 0 0.00
Young Family Trust 66,610 5,000 W 0 0.00
7,262 S
54,348 P
D. Grossman (1) 62,667 38,667 S 24,000 0.15
M. Weisser 53,413 4,500 W 0 0.00
48,913 P
JS Partners 50,000 50,000 S 0 0.00
M. Ostrow 50,000 50,000 S 0 0.00
S. Collector 40,000 18,000 S 0 0.00
22,000 O
Concordia Partners, L.P. 40,000 40,000 W 0 0.00
Celika Storm Management Trust
1996 37,500 37,500 W 0 0.00
Sheffield Corporation 35,500 35,500 W 0 0.00
S. Beracha and/or B.
Beracha 32,500 32,500 W 0 0.00
A. Mann 30,000 20,000 S 10,000 0.06
Profin Enterprises SA 30,000 30,000 W 0 0.00
Bypass Trust Created Under
the 1992 Plant Management
Trust Dtd 3/6/92 25,000 25,000 W 0 0.00
A. Abele 25,000 25,000 S 0 0.00
R. DelVecchio 25,000 25,000 S 0 0.00
A. Meruelo 25,000 25,000 S 0 0.00
J. Moriarty 25,000 25,000 S 0 0.00
Wheaten Partners 25,000 25,000 W 0 0.00
George S. Hawn Properties 25,000 25,000 W 0 0.00
D.A. and A.R. Smith 25,000 25,000 W 0 0.00
J. Copeland 24,000 24,000 S 0 0.00
R. Beracha and/or F. Beracha 23,750 23,750 W 0 0.00
B. Young 23,433 18,333 W 5,100 0.03
Wall Street Financial 21,202 21,202 S 0 0.00
Adriatica de Seguros, C.A. 20,000 20,000 W 0 0.00
K. Lowe 20,000 20,000 S 0 0.00
S. Cole 20,000 20,000 S 0 0.00
D. Boorman 20,000 20,000 S 0 0.00
S. Oliver 20,000 20,000 O 0 0.00
Mosher International 20,000 4,000 W 16,000 0.10
R. Beracha 16,250 16,250 W 0 0.00
D. Solon 15,000 15,000 O 0 0.00
Hawn Interests Ltd.
Partnership 12,500 12,500 W 0 0.00
Shares
Beneficially Shares
Owned Beneficially
Before Amount Owned After
Holder Resale (2) Offered Resale Percentage
- --------------------------------------------------------------------------------
William B. Miller Family
Investments Ltd. 12,500 12,500 W 0 0.00
Daniel A. Pedrotti Family
Investments Ltd. 12,500 12,500 W 0 0.00
Chapman Freeborn 10,000 10,000 W 0 0.00
G. Lejins 10,000 10,000 O 0 0.00
Patrick B. Sands 10,000 10,000 W 0 0.00
M. Beracha 10,000 10,000 W 0 0.00
Inversora HS 2014, C.A. 10,000 10,000 W 0 0.00
A. Santos-Buch 10,000 10,000 S 0 0.00
E. O. Boshell, Jr. 10,000 10,000 W 0 0.00
Perseus Holdings, Ltd. 9,375 9,375 W 0 0.00
C. R. Mueller 8,333 8,333 W 0 0.00
M. Walsh 8,333 8,333 W 0 0.00
M. Behrana 7,000 7,000 O 0 0.00
J. Valhanrat 6,000 6,000 O 0 0.00
D. Janacek 5,800 5,000 O 800 0.01
D. Arnett 5,000 5,000 O 0 0.00
D. Evans 5,000 5,000 W 0 0.00
H. Azadian 5,000 5,000 W 0 0.00
V. Rodricks 5,000 5,000 W 0 0.00
P. Gerard 5,000 5,000 W 0 0.00
D. Mills 5,000 5,000 W 0 0.00
Bailey Lafayette Harrison
Trust B 4,583 4,583 W 0 0.00
Peyton Bunker Sands Trust B 4,583 4,583 W 0 0.00
Julia Elizabeth Sands Trust B 3,056 3,056 W 0 0.00
Haven Starbuck Sands Trust B 3,055 3,055 W 0 0.00
Stark Bunker Sands Trust B 3,055 3,055 W 0 0.00
Jacob Cayce Sands Trust B 3,055 3,055 W 0 0.00
Lydia Lygon Sands Trust B 3,055 3,055 W 0 0.00
John Clayton Sands Trust B 3,055 3,055 W 0 0.00
N. Sethi 2,500 2,500 W 0 0.00
V. K. Sethi 2,500 2,500 W 0 0.00
Caroline Anne Harrison Trust B 2,292 2,292 W 0 0.00
Hassie Elizabeth Harrison
Trust B 2,292 2,292 W 0 0.00
Laurie Francis Harrison Trust B 2,292 2,292 W 0 0.00
Lyda Hunt Caroline Trust-
Patrick B. Sands 2,292 2,292 W 0 0.00
B. Higley 2,000 2,000 S 0 0.00
D. Cameron 2,000 2,000 W 0 0.00
________________________
(1) These shares are beneficially owned by officers and/or directors of the
Company. See "Management-Executive Officers and Directors" and "- Certain
Transactions."
(2) Shares Beneficially Owned Before Resale include shares of Common Stock
by the Company currently outstanding ("S") and shares underlying
exercisable Preferred Stock ("P"), Resale Warrants ("W") and Resale Options
("O").
The 20,330,319 shares offered by the Selling Stockholders may be sold by
the Selling Stockholders from time to time as market conditions permit in the
market, or otherwise at prices and terms then prevailing or at prices related
to the current market price, or in negotiated transactions. The Selling
Shareholders may sell their shares in unsolicited ordinary brokerage
transactions or privately negotiated transactions between the Selling
Shareholders and purchasers without a broker. The 1,288,850 shares to be
issued by the Company upon exercise of the Public Options and Public Warrants
and for services to be rendered in the future are being offered on a "best-
efforts, no minimum" basis.
A current prospectus must be in effect at the time of the sale of the
Common Stock to which this Prospectus relates. Any Selling Stockholder or
dealer effecting a transaction in the registered securities, whether or not
participating in a distribution, is required to deliver a Prospectus.
LEGAL MATTERS
Certain legal matters relating to the issuance and resale of shares hereby
will be passed upon for the Company by Norman T. Reynolds, Esq. of Looper, Reed
Mark & McGraw Incorporated, Houston, Texas. Mr. Norman Reynolds is no relation
to Ted Reynolds, a director of the Company.
EXPERTS
The audited consolidated financial statements and schedules included in
this Prospectus and in the Registration Statement to the extent and for the
periods indicated in their report, have been audited by Arthur Andersen LLP,
independent public accountants, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
BALTIC INTERNATIONAL USA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of independent public accountants F-2
Consolidated balance sheets at March 31, 1998 and December 31, 1997 F-3
Consolidated statements of operations for the three months ended
March 31, 1998 and 1997 and the years ended December 31, 1997
and 1996 F-4
Consolidated statements of shareholders' equity for the three months
ended March 31, 1998 and the years ended December 31, 1997 and 1996 F-5
Consolidated statements of cash flows for the three months ended
March 31, 1998 and 1997 and 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 the related consolidated
statements of operations, shareholders' equity and cash flows for the years
ended December 31, 1997 and 1996. 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 the results of its
operations and its cash flows for the years ended December 31, 1997 and 1996 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Houston, Texas
April 15, 1998
BALTIC INTERNATIONAL USA, INC.
Consolidated Balance Sheets
March 31, December 31,
1998 1997
(unaudited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 675,244 $ 965,992
Accounts receivable:
Trade 122,427 135,109
Affiliates 40,585 138,125
Inventory 143,126 195,971
Prepaids and deposits 9,917 11,446
----------- -----------
Total current assets 991,299 1,446,643
----------- -----------
PROPERTY AND EQUIPMENT, net 15,799 12,836
INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 4,380,048 4,316,168
OTHER ASSETS 30,066 31,649
GOODWILL, NET 201,483 208,848
----------- -----------
Total assets $ 5,618,695 $ 6,016,144
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities $ 585,595 $ 669,233
Short-term debt and current portion of
long-term debt 2,075,000 83,711
----------- -----------
Total current liabilities 2,660,595 752,944
----------- -----------
LONG-TERM DEBT TO A SHAREHOLDER - 2,000,000
----------- -----------
Total liabilities 2,660,595 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,
15 and 16 shares issued and outstanding 375,000 400,000
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 11,722,564 11,687,809
Accumulated deficit (11,811,826) (11,495,707)
Treasury stock, at cost (20,540) (20,540)
----------- -----------
Total shareholders' equity 2,958,100 3,263,200
----------- -----------
Total liabilities and shareholders' equity $ 5,618,695 $ 6,016,144
=========== ===========
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Operations
Three Months Ended March 31, Year Ended December 31,
1998 1997 1997 1996
<S> <C> <C> <C> <C>
REVENUES:
Freight revenue $ 46,771 $ 53,782 $ 225,680 $ 557,057
Food distribution 59,097 61,529 470,874 276,733
General sales agency revenue 19,500 19,500 78,000 59,000
Net equity in earnings of joint operations 42,530 157,889 361,688 420,467
----------- ----------- ----------- -----------
Total operating revenues 167,898 292,700 1,136,242 1,313,257
----------- ----------- ----------- -----------
OPERATING EXPENSES:
Cost of revenue:
Freight 23,770 39,101 155,331 301,665
Food distribution 63,784 37,952 452,379 213,044
Personnel and consulting 132,624 191,663 671,515 965,560
Legal and professional 60,743 - 109,729 91,900
Other general and administrative 116,579 101,895 515,735 428,408
Reserve of investment BIA - - - 812,385
----------- ----------- ----------- -----------
Total operating expenses 397,500 370,611 1,904,689 2,812,962
----------- ----------- ----------- -----------
LOSS FROM OPERATIONS (229,602) (77,911) (768,447) (1,499,705)
----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense (66,813) (133,252) (507,747) (132,034)
Interest income 21,962 4 32,450 3,800
Gain on sale of assets - - 569,926 297,200
Other (1,204) 3,921 (124,640) 97,890
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (46,055) (129,327) (30,011) 266,856
----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (275,657) (207,238) (798,458) (1,232,849)
INCOME TAX EXPENSE - - - (15,694)
----------- ----------- ----------- -----------
NET LOSS $ (275,657) $ (207,238) $ (798,458) $(1,248,543)
----------- ----------- ----------- -----------
LESS PREFERRED DIVIDENDS (40,462) (49,702) (275,724) (210,743)
----------- ----------- ----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.... $ (316,119) $ (256,940) $(1,074,182) $(1,459,286)
=========== =========== =========== ===========
LOSS PER SHARE AMOUNTS:
Basic $ (0.02) $ (0.03) $ (0.11) $ (0.23)
Diluted $ (0.02) $ (0.03) $ (0.11) $ (0.23)
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Shareholders' Equity
Preferred Stock
Series A Series B
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
Common shares issued
Preferred stock redeemed (1) (25,000)
Net loss
Dividends on
preferred stock:
Series A, $0.25
per share
Series B, $625
per share
---------- -------- ---------- --- ----------
Balance, March 31,
1998 (unaudited) $1,306,610 123,000 $1,230,000 15 $ 375,000
========== ======== ========== === ==========
</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
Common shares issued 126,437 1,264 39,728 40,992
Preferred stock redeemed (4,973) (29,973)
Net loss (275,657) (275,657)
Dividends on
preferred stock:
Series A, $0.25 (30,750) (30,750)
per share
Series B, $625
per share (9,712) (9,712)
---------- -------- ----------- ------------ --------- -----------
Balance, March 31,
1998 (unaudited) 15,629,229 $156,292 $11,722,564 $(11,811,826) $ (20,540) $ 2,958,100
========== ======== =========== ============ ========= ===========
</TABLE>
See accompanying notes to consolidated financial statements.
<TABLE>
<CAPTION>
BALTIC INTERNATIONAL USA, INC.
Consolidated Statements of Cash Flows
Three Months Ended
March 31, Year Ended December 31,
------------------ -----------------------
1998 1997 1997 1996
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss $ (275,657) $ (207,238) $ (798,458) $(1,248,543)
Noncash adjustments:
Net equity in (earnings) and
losses of:
BIA - - - 812,385
Other joint operations (42,530) (157,889) (361,688) (420,467)
Depreciation and amortization 8,313 9,343 37,018 35,474
Amortization of debt costs and
discount - 53,764 188,174 42,806
Deferred compensation expense - - - 66,753
Gain on sale of assets - - (569,926) (297,200)
Change in current assets and
liabilities:
Accounts receivable 89,879 (74,399) (124,522) 143,368
Prepaid and other 3,112 10,972 333,553 (174,733)
Inventory 52,845 (23,105) (148,230) (33,476)
Accounts payable and accrued
liabilities (47,331) 151,752 382,483 (135,943)
Commitments for guarantees - - (75,000) (873,146)
-------- ---------- ---------- ----------
Net cash used by operating
activities (211,369) (236,800) (1,136,596) (2,082,722)
-------- ---------- ---------- ----------
Cash flows from investing
activities:
Investment in and advances to
joint operations (1,007) (1,974) (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 (3,911) - (2,212) (5,299)
-------- ---------- ---------- ----------
Net cash used by investing
activities (4,918) (1,974) (93,014) (834,100)
-------- ---------- ---------- ----------
Cash flows from financing
activities:
New borrowings - - 2,540,000 2,294,944
Repayment of debt and long-term
obligations (8,711) - (2,930,060) (232,229)
Issuance of stock, net of
related costs - 6,667 2,524,467 1,183,737
Purchase of treasury stock - - (292,300) -
Purchase of preferred stock (29,973) - - -
Preferred dividends paid (35,777) - (30,750) (84,625)
---------- ---------- ---------- ----------
Net cash provided (used) by
financing activities (74,461) 6,667 1,811,357 3,161,827
---------- ---------- ---------- ----------
Net increase (decrease) in cash
and cash equivalents (290,748) (232,107) 581,747 245,005
Cash and cash equivalents,
beginning of period 965,992 384,245 384,245 139,240
---------- ---------- ---------- ----------
Cash and cash equivalents, end of
period $ 675,244 $ 152,138 $ 965,992 $ 384,245
========== ========== ========== ==========
</TABLE>
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 an 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 March 31, 1998. 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 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 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.
Interim financial information
The accompanying unaudited consolidated financial statements have been prepared
by the Company and include all adjustments which are in the opinion of
management, necessary for a fair presentation of financial results for the
three months ended March 31, 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.
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. 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 March 31, 1998 and December 31, 1997, the Company's cash in financial
institutions exceeded the federally insured deposits limit by $537,412 and
$786,367, respectively. An investment of $630,000 and $870,000 in a reverse
repurchase agreement is included in cash and cash equivalents at March 31, 1998
and December 31, 1997, respectively. 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 March 31, 1998 and December 31,
1997.
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. 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 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 No. 131 at year-end 1998.
This statement 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.
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
the Company at adoption 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.
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:
March 31, December 31,
1998 1997
Joint operations accounted for using
cost method:
Air Baltic $2,144,212 $2,144,212
BIA 1,132,322 1,131,315
LAMCO 40,000 40,000
--------- ---------
Subtotal 3,316,534 3,315,527
--------- ---------
Joint operations accounted for using
equity method:
BCS 44,298 44,298
AIRO 1,019,216 784,991
RCS - 171,352
--------- ---------
Subtotal 1,063,514 1,000,641
--------- ---------
Total $4,380,048 $4,316,168
========= =========
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%):
March 31, 1998 December 31, 1997
Current assets $ 8,442,000 $ 7,109,000
Noncurrent assets 19,256,000 21,576,000
--------------- ---------------
Total assets $ 27,698,000 $ 28,685,000
=============== ===============
Current liabilities $ 9,952,000 $ 11,295,000
Noncurrent liabilities 15,386,000 13,776,000
Equity 2,360,000 3,614,000
--------------- ---------------
Total liabilities and equity $ 27,698,000 $ 28,685,000
=============== ===============
Three Months Ended March 31, Year Ended December 31,
--------------------------- ---------------------------
1998 1997 1997 1996
---- ---- ---- ----
Revenues $ 8,427,000 $ 7,951,000 $ 36,141,000 $ 24,399,000
Loss from operations $ (1,129,000) $ (2,119,000) $ (3,981,000) $(13,325,000)
Net loss $ (1,588,000) $ (2,374,000) $ (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:
March 31, December 31,
1998 1997
Current assets $ 750,787 $ 920,152
Noncurrent assets 5,592,834 3,385,511
---------- ----------
Total assets $ 6,343,621 $ 4,305,663
========== ==========
Current liabilities $ 356,898 $ 3,461,788
Minority interest 52,825 -
Equity 5,933,898 843,875
---------- ----------
Total liabilities and equity $ 6,343,621 $ 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:
Three Months Ended March 31, Year Ended December 31,
1998 1997 1997 1996
---- ---- ---- ----
Combined 100% Basis:
Operating revenues $ 971,190 $ 651,147 $ 3,063,014 $ 2,815,525
Income from operations $ 199,859 $ 197,519 $ 863,358 $ 1,098,275
Net income $ 61,954 $ 381,332 $ 985,624 $ 950,062
Company Percentage Interest:
Operating revenues $ 447,550 $ 261,865 $ 1,251,768 $ 1,240,176
Income from operations $ 105,787 $ 81,882 $ 323,037 $ 482,003
Net income $ 42,530 $ 157,889 $ 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. In addition to the kitchen in Riga, Latvia, AIRO
opened an in-flight catering kitchen in Tallinn, Estonia in January 1998 and a
kitchen in Kiev, Ukraine in May 1998. AIRO is targeting several airports for
future 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 March 31, 1998 and December 31, 1997, the Company had advances aggregating
$577,000 and $577,000, respectively, to AIRO. These loans bear interest at
rates of 8% to 10% per year. At March 31, 1998 and December 31, 1997, the
Company had accrued interest receivable of $33,831 and $20,081, respectively,
related to these loans.
Summarized unaudited financial information for AIRO is as follows (100%):
March 31, 1998 December 31, 1997
-------------- -----------------
Current assets $ 707,431 $ 106,615
Noncurrent assets 5,561,426 5,787,149
---------- ----------
Total assets $ 6,268,857 $ 5,893,764
========== ==========
Current liabilities $ 335,310 $ 2,144,172
Noncurrent liabilities - 723,046
Minority interest 52,825 -
Equity 5,880,722 3,026,546
---------- ----------
Total liabilities and equity $ 6,268,857 $ 5,893,764
========== ==========
<TABLE>
<CAPTION>
Period From
Three Months Ended March 31, Year Ended May 1, 1996 to
1998 1997 December 31, 1997 December 31, 1996
---- ---- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 921,190 $ 68,290 $ 416,066 $ 284,607
Income from operations $ 199,859 $ 68,290 $ 78,379 $ 271,742
Net income $ 61,954 $ 68,290 $ 3,379 $ 272,094
</TABLE>
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
Current assets $ 770,181
Noncurrent assets 404,279
----------
Total assets $ 1,174,460
==========
Current liabilities $ 572,982
Equity 601,478
----------
Total liabilities and equity $ 1,174,460
==========
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.
Summarized financial information for BCS is as follows (100%):
March 31, 1998 December 31, 1997
-------------- -----------------
Current assets $ $ 43,356
Noncurrent assets 31,408
---------- ----------
Total assets $ $ 74,764
========== ==========
Current liabilities $ $ 21,588
Equity 53,176
---------- ----------
Total liabilities and equity $ $ 74,764
========== ==========
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ $ 58,045 $ 227,549 $ 878,103
Income from operations $ $ 2,401 $ 15,712 $ 336,500
Net income $ $ 2,401 $ 6,856 $ 33,225
</TABLE>
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:
March 31, December 31,
1998 1997
---- ----
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 $ 2,000,000
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
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
---------- ----------
Total debt 2,075,000 2,083,711
Less short-term debt and current portion of
long-term debt (2,075,000) (83,711)
---------- ----------
Long-term debt $ - $ 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 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 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:
March 31, December 31,
1998 1997
---- ----
Deferred tax assets:
Net operating loss carryforward $ 2,635,510 $ 2,646,739
Reserve on investment 159,443 159,443
Deferred compensation 89,222 89,222
Investment in and advances to BIA 1,071,755 1,071,755
---------- ----------
Total deferred tax assets 3,955,930 3,967,159
---------- ----------
Deferred tax liabilities:
Unremitted earnings of joint operations 159,186 259,021
Other 23,308 26,708
---------- ----------
Total deferred tax liabilities 182,494 285,729
---------- ----------
Net deferred tax assets before valuation
Allowance 3,773,436 3,681,430
Valuation allowance (3,773,436) (3,681,430)
---------- ----------
Net deferred tax assets $ - $ -
========== ==========
Provisions for income taxes in the statements of operations were as follows:
Three Months Ended March 31, Year Ended December 31,
1998 1997 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 March 31, 1998, the Company had net operating loss carryforwards of
approximately $8,000,000 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:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1998 1997 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net loss Reported $ (275,657) $ (207,238) $ (798,458) $ (1,248,543)
Pro Forma (314,367) (207,238) (892,969) (1,474,865)
Loss per common share Reported (0.02) (0.03) (0.11) (0.23)
Pro forma (0.02) (0.03) (0.11) (0.26)
</TABLE>
The resulting pro forma compensation cost may not be representative of that to
be expected in future years because the method of accounting under SFAS No. 123
has not been applied to options granted prior to January 1, 1995.
At March 31, 1998, 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>
Three Months Ended Year Ended December 31,
March 31, 1998 1997 1996
----------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Shares under option, beginning
of period 1,072,366 $ 0.81 589,000 $ 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 1,072,366 $ 0.81 589,000 $ 1.18
========= ========= ========
Options exercisable, end of
period 834,016 $ 0.92 595,666 $ 1.12 589,000 $ 1.18
========= ========= ========
</TABLE>
The exercise price of the options outstanding at March 31, 1998 range from
$0.40 to $1.38. The weighted average contractual life of the options
outstanding at March 31, 1998 was 3.8 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 March 31, 1998, 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>
Three Months Ended Year Ended December 31,
March 31, 1998 1997 1996
----------------------- --------------------- ---------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
------ --------- ------ --------- ------ ---------
<S> <C> <C> <C> <C> <C> <C>
Shares under warrant,
beginning of period 10,035,845 $ 1.01 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 10,035,845 $ 1.01 1,891,595 $ 2.58
========== ========== =========
Warrants exercisable, end of
period 10,035,845 $ 1.01 10,035,845 $ 1.01 1,811,595 $ 2.63
========== ========== =========
</TABLE>
The exercise price of the warrants outstanding at March 31, 1998 range from
$0.44 to $9.80. The weighted average contractual life of the warrants
outstanding at March 31, 1998 was 3.9 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:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Basic
Net loss to be used to compute basic loss
per share:
Net loss $ (275,657) $ (207,238) $ (798,458) $(1,248,543)
Less preferred dividends (40,462) (49,702) (275,724) (210,743)
---------- ---------- ---------- ----------
Net loss attributable to common shareholders $ (316,119) $ (256,940) $(1,074,182) $(1,459,286)
========== ========== ========== ==========
Weighted average number of shares:
Average common shares outstanding 15,510,857 7,531,659 10,189,215 6,461,561
========== ========== ========== ==========
Basic loss per common share $ (0.02) $ (0.03) $ (0.11) $ (0.23)
========== ========== ========== ==========
Diluted
Net loss to be used to compute diluted loss
per share:
Net loss $ (275,657) $ (207,238) $ (798,458) $(1,248,543)
Less preferred dividends (40,462) (49,702) (275,724) (210,743)
---------- ---------- ---------- ----------
Net loss attributable to common shareholders $ (316,119) $ (256,940) $(1,074,182) $(1,459,286)
========== ========== ========== ==========
Weighted average number of shares:
Average common shares outstanding 15,510,857 7,531,659 10,189,215 6,461,561
========== ========== ========== ==========
Diluted loss per common share $ (0.02) $ (0.03) $ (0.11) $ (0.23)
========== ========== ========== ==========
</TABLE>
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 as of December 31, 1997 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:
<TABLE>
<CAPTION>
Three Months Ended March 31, Year Ended December 31,
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Conversion of accounts
payable and accrued
dividends to equity $ 40,992 $ 20,259 $ 376,838 $ 417,535
Conversion of notes payable
to equity - - - 140,667
Conversion of preferred
stock to common stock - 100,000 450,000 400,000
Dividends declared 40,462 49,702 244,974 89,584
Discount on debt for
warrants - - - 9,987
Deferred compensation on
options exercised and
canceled - - - 204,699
Transfer of RCS shares to
AIRO 191,695 - 28,434 -
Supplemental disclosure of
interest paid $ 3,778 $ 1,875 $ 62,650 $ 44,459
Supplemental disclosure of
income taxes paid $ - $ - $ - $ -
</TABLE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The Restated Articles of Incorporation of the Company ("Restated
Articles") provide for indemnification of Directors and Officers in accordance
with the Texas Business Corporation Act. Article Nine of the Restated Articles
provides as follows:
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Article 2.41 under the Texas Business
Corporation Act, or (iv) for any transaction from which the director derived an
improper personal benefit, whether or not the benefit resulted from an action
taken in the person's official capacity.
Article Eight of the Restated Articles provides as follows:
A. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending, or completed
action, suit or proceedings, whether civil, criminal, administrative, or
investigative (other than an action by or in the right of the Corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement, actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
The termination of any action, suit, or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its equivalent,
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interest of the Corporation, and, with respect to any criminal action
or proceedings, had reasonable cause to believe that his conduct was unlawful.
B. The Corporation shall indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or is or was a director, officer, employee or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection with the defense or
settlement of such action or suit if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
Corporation and except that no indemnification shall be made in respect of any
claim, issue, or matter as to which such person shall have been adjudged to be
liable to the Corporation unless and only to the extent that the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which such court shall deem proper.
C. To the extent that a director, officer, employee or agent of the
Corporation has been successful on the merits or otherwise in defense of any
action, suit or proceedings referred to in A and B, or in defense of any claim,
issue or matter therein, he shall be indemnified against expenses (including
attorney's fees) actually and reasonably incurred by him in connection
therewith.
D. Any indemnification under paragraphs A and B of this Article Eight
(unless ordered by a court) shall be made by the Corporation only as authorized
in the specific case upon a determination that indemnification of the director,
officer, employee or agent is proper in the circumstances because he has met
the applicable standard of conduct set forth in paragraphs A and B. Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a quorum is not obtainable, or, even if obtainable,
a quorum of disinterested directors so directs, by independent legal counsel in
a written opinion, or (3) by a majority of the stockholders.
E. Expenses incurred in defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding as authorized by the Board of Directors upon
receipt of an undertaking by or on behalf of the director, officer, employee or
agent to repay such amount if it shall ultimately be determined that he is not
entitled to be indemnified by the Corporation as authorized in this Article
Eight.
F. The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Article shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
G. The Corporation shall have the power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any liability
asserted against him and incurred by him in any such capacity, or arising out
of his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of this Article
Eight.
H. For purposes of this Article Eight, references to the "Corporation"
shall include, in addition to the resulting Corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and
employees or agents, so that any person who is or was a director, officer,
employee or agent of such constituent corporation, or is or was serving at the
request of such constituent corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under the provisions of this
Article Eight with respect to the resulting or surviving corporation as he
would have with respect to such constituent corporation if its separate
existence had continued.
I. For purposes of this Article Eight, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to an employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article Eight.
J. The indemnification and advancement of expenses provided by, or
granted pursuant to, this Article Eight shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The foregoing discussion of the Company's Restated Articles and of the
Texas Business Corporation Act is not intended to be exhaustive and is
qualified in its entirety by such Restated Articles and statutes, respectively.
Item 25. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the distribution of the securities being registered. The
expenses shall be paid by the Registrant. No expenses will be paid by the
security holders.
SEC Registration Fee $ 3,637
Nasdaq Application and Listing Fee 7,500
Printing and Engraving Expenses 10,000
Legal Fees and Expenses 80,000
Accounting Fees and Expenses 95,000
Blue Sky Fees and Expenses 15,000
Transfer Agent Fees 1,000
Miscellaneous 7,863
-----------
TOTAL $ 220,000
===========
Item 26. Recent Sales of Unregistered Securities
Set forth below is certain information regarding securities that the
Company has sold in the past three years to directors ("D"), officers ("O"),
employees ("E"), consultants ("C"), institutional investors ("I"), affiliates
("A") and non-affiliates ("N").
In January 1995, the Company issued warrants to purchase an aggregate of
50,000 shares of Common Stock to Richard and Elaine Gibson (N) at an exercise
price of $1.00 per share, in connection with a loan made to the Company in the
principal amount of $500,000.
In January 1995, the Company issued warrants to purchase 5,000 shares to
the Young Family Trust (N) at an exercise price of $1.00 per share in
connection with a $50,000 loan to the Company.
In March 1995, the Company issued warrants to purchase an aggregate of
25,000 shares to Chapman Freeborn (N), Paul R. Gregory Family Partnership, Ltd.
(D), and Juris Padegs (D), in connection with loans made to the Company in the
aggregate principal amount of $250,000.
Between March 1995 and May 1996, the Company issued an aggregate of
2,063,285 shares of its Common Stock to various unaffiliated private placement
investors for an aggregate amount of $2,225,188.
In July 1995, the Company issued a warrant to purchase 100,000 shares to
Norman Alston (C) for consulting services rendered.
In August 1995, the Company issued, effective June 30, 1995, an aggregate
of 118,500 shares of Convertible Redeemable Series A Preferred Stock ("Series A
Preferred Stock") to Messrs. Gibson (N), Davier (O), Knauss (O), Gregory (D),
Padegs (D), Mosher (N) and Goodchild (O) and to the Young Family Trust (N) upon
conversion of $1,1850,000 in aggregate principal amount of indebtedness.
In August 1995, the Company issued, effective June 30, 1995, 116,000
shares of Common Stock to T.G. Shown Associates, Inc., the Company's former
partner in BWAF, (A) upon conversion of $145,000 in principal amount of short-
term debt. In December 1995, April 1996 and May 1996, an additional 29,000,
10,000 and 19,000 shares, respectively, of Common Stock were issued to T.G.
Shown Associates, Inc. as part of this conversion of short-term debt.
In September 1995, the Company issued an aggregate of 4,500 shares of
Series A Preferred Stock to Mr. Weisser (N) upon conversion of $145,000 in
aggregate principal amount of indebtedness.
In September 1995, the Company issued warrants to purchase an aggregate of
85,500 shares to Messrs. Sandler (D) and Harrington (C) for consulting services
rendered.
In November 1995, the Company issued warrants to purchase an aggregate of
15,000 shares of Common Stock to Hratch Azadian (E), Don Evans (E) and Vincent
Rodricks (E) at an exercise price of $2.25 per share in connection with
services rendered prior to and in connection with their termination with the
Company.
In December 1995, the Company issued warrants to purchase an aggregate of
10,000 shares of Common Stock to Dougal Cameron (N), Robert Knauss (D), the
Gregory Family Partnership (D), James Goodchild (O) and Juris Padegs (D) at an
exercise price of $1.00 per share in connection with loans made to the Company
in the aggregate principal amount of $100,000.
In December 1995, the Company issued options to purchase an aggregate of
213,000 shares of Common Stock to the Gregory Family Partnership (D), Homi
Davier (D), Juris Padegs (D), Ted Reynolds (D), Morris Sandler (D), Dan Solon
(E), Jo Ann Johnson (O), Mehelli Behrana (E), Diana Arnett (E), Don Janacek (E)
and Jean Wilson (E) at an exercise price of $1.375 per share for services
rendered.
In January 1996, the Company issued 21,202 shares of Common Stock to Wall
Street Financial Corporation (C) for consulting services rendered.
In February and March 1996, the Company issued an aggregate of 50 shares
of Series B Convertible Redeemable Preferred Stock to a group of unaffiliated
private placement investors for an aggregate amount of $1,250,000. This
offering was conducted pursuant to Regulation S. In connection with this
offering, the Company paid commissions of $156,250 and issued warrants to
purchase an aggregate of 78,125 shares to Regal International Capital, Inc.
(N), Wheaton Partners (N) and Perseus Holdings, Ltd. (N), the placement agents,
at an exercise price of $2.40 per share, which warrants expire in March 2001.
From May 1996 to November 1997, the Company issued an aggregate of 1,676,437
shares of Common Stock for the conversion of 32 shares of Series B Preferred
Stock.
In April 1996, the Company issued a convertible note to Eureka
Communications, Inc. (N) in connection with a loan to the Company in the
original principal amount of $250,000.
In May 1996, the Company issued warrants to purchase an aggregate of
25,000 shares of Common Stock to Robert Knauss (D) at an exercise price of
$0.75 per share in connection with a loan made to the Company in the aggregate
principal amount of $250,000.
Between June 1996 and January 1997, the Company issued an aggregate of
121,961 shares of Common Stock to Robert Knauss (D), James Goodchild (D), David
Grossman (O) and Thomas Glenister (O) for services rendered.
In October 1996, the Company issued warrants to purchase an aggregate of
1,000 shares of Common Stock to Juris Padegs (D) at an exercise price of
$0.5625 per share in connection with a loan made to the Company in the
aggregate principal amount of $10,000.
In November 1996, the Company issued warrants to purchase an aggregate of
500,000 shares of Common Stock to various non-affiliated parties at an exercise
price of $0.75 per share in connection with loans made to the Company in the
aggregate principal amount of $2,000,000. In connection with this loan, the
Company paid aggregate commissions of $160,000 to Rauscher Pierce & Clark, Inc.
and Rauscher Pierce Refsnes, Inc., the placement agents.
In April 1997, the Company issued warrants to purchase an aggregate of
20,250 shares of Common Stock to Homi Davier (D) at exercise prices from
$0.8438 to $1.1875 per share in connection with a guarantee on a loan made to
the Company.
In April 1997, the Company issued warrants to purchase an aggregate of
160,000 shares of Common Stock to holders of Series B Preferred Stock at an
exercise price of $0.75 per share in connection with an agreement with the
Company. In connection with this agreement, the Company issued warrants to
purchase an aggregate of 107,500 shares to Regal International Capital, Inc.
(N), , the placement agent, at an exercise price of $0.75 per share, which
warrants expire in April 2002.
In May 1997, the Company issued warrants to purchase an aggregate of 4,000
shares of Common Stock to Robert Knauss (D), Paul R. Gregory (D), the Gregory
Family Partnership (D), Juris Padegs (D) and Ted Reynolds (D) at an exercise
price of $0.50 per share in connection with loans made to the Company in the
aggregate principal amount of $40,000.
Between May 1997 and August 1997, the Company issued an aggregate of
750,000 shares of its Common Stock to various unaffiliated private placement
investors for an aggregate amount of $375,000. In connection with these
private placements, the Company issued warrants to purchase an aggregate of
750,000 shares of Common Stock at an exercise price of $0.65 per share, which
warrants are currently exercisable and expire in May through August 2002.
In August and September 1997, the Company sold an aggregate of 6,250,000
shares of common stock to Celox S.A. and ORESA Ventures N.V., affiliates of
Jonas af Jochnick (D), for $2,500,000. In connection with these private
placements, the Company issued warrants to purchase 6,250,000 shares of Common
Stock at an exercise price of $0.65 per share, which warrants are currently
exercisable and expire in August 2002.
Unless otherwise indicated above, the issuance of securities was exempt
from registration under the Securities Act under Section 4(2) as a transaction
by an issuer not involving any public offering. In each instance, the
purchaser had a pre-existing relationship with the Company, the offers and
sales were made without public solicitation, the certificates bear restrictive
legends, and appropriate stop-transfer orders have been given to the transfer
agent. No underwriter was involved in the transactions and no commissions were
paid.
Item 27. Exhibits
The following exhibits are filed as part of this Registration Statement:
Exhibit No. Identification of Exhibit
2.1(2) Plan and Agreement of Recapitalization
3.1(a)(2) Restated Articles of Incorporation
3.1(b)(2) Amended Articles of Incorporation
3.1(c)(2) Articles of Correction
3.2(2) Bylaws
3.3(2) Statement of Resolution Establishing and Designating a Series
of Shares of the Company, Series A Cumulative Preferred Stock,
$10.00 par value
3.4(5) Certificate of Elimination of Shares Designated as Series A
Cumulative Preferred Stock
3.5(5) Certificate of the Designation, Preference, Rights and
Limitations of Convertible Redeemable Series A Preferred Stock
4.1(2) Common Stock Specimen
5.1(1) Opinion Regarding Legality
10.3(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(9) Articles of Incorporation of LAMCO
10.40(9) Amendment to Air Baltic Joint Venture Agreement
10.41(7) Share Purchase Agreement with SAS
10.42(12) AIRO Catering Services Joint Venture Agreement
10.43(8) Riga Catering Services Shareholders' Agreement
10.44(9) Amendment to Articles of Incorporation of LAMCO
10.45(9) 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
23.1(1) Consent of Counsel (included in Exhibit 5.1)
23.2(1) Consent of Arthur Andersen LLP
_____________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 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 Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(9) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), 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.
(12) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997, and incorporated herein by
reference thereto.
Item 28. Undertakings
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this
registration statement:
i. To include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
ii. To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in the registration statement;
and
iii. To include any additional or changed material
information with respect to the plan of
distribution.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and
the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which
remain unsold at the termination of the offering.
(4) That, for the purpose of determining liability under the
Securities Act of 1933, the information omitted from the
form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4), or 497(h) under the Securities Act
of 1933 shall be deemed to be part of this registration
statement as of the time it was declared effective.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form SB-2 and authorized this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Houston, State of Texas, on the 29th day of May, 1998.
BALTIC INTERNATIONAL USA, INC.
By /s/ ROBERT L. KNAUSS
-------------------------------------------
ROBERT L. KNAUSS, Chairman of the Board and
Chief Executive Officer
____________________________
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated:
Signature Title Date
/s/ Robert L. Knauss Chairman of the Board and Chief May 29, 1998
ROBERT L. KNAUSS Executive Officer (Principal
Executive Officer)
/s/ David A. Grossman Chief Financial Officer and May 29, 1998
DAVID A. GROSSMAN Corporate Secretary (Principal
Financial and Accounting Officer)
/s/ Homi M. Davier Director May 29,1998
HOMI M. DAVIER
/s/ James W. Goodchild Director May 29, 1998
JAMES W. GOODCHILD
/s/ Paul R. Gregory Director May 29, 1998
PAUL R. GREGORY
/s/Adolf af Jochnick Director May 29, 1998
ADOLF af JOCHNICK
/s/ Jonas af Jochnick Director May 29, 1998
JONAS af JOCHNICK
/s/ Juris Padegs Director May 29, 1998
JURIS PADEGS
/s/ Ted Reynolds Director May 29, 1998
TED REYNOLDS
/s/ Morris A. Sandler Director May 29, 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
5.1(1) Opinion Regarding Legality
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(9) Articles of Incorporation of LAMCO
10.40(9) Amendment to Air Baltic Joint Venture Agreement
10.41(7) Share Purchase Agreement with SAS
10.42(12) AIRO Catering Services Joint Venture Agreement
10.43(8) Riga Catering Services Shareholders' Agreement
10.44(9) Amendment to Articles of Incorporation of LAMCO
10.45(9) 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
23.1(1) Consent of Counsel (included in Exhibit 5.1)
23.2(1) Consent of Arthur Andersen LLP
_____________________
(1) Filed herewith.
(2) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-74654-D), as amended, and incorporated herein by
reference thereto.
(3) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 33-86378), as amended, and incorporated herein by
reference thereto.
(4) Previously filed as an exhibit to the Company's Registration Statement
on Form S-8 (No. 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 Annual Report on Form
10-KSB for the year ended December 31, 1995, and incorporated herein by
reference thereto.
(9) Previously filed as an exhibit to the Company's Registration Statement
on Form SB-2 (No. 333-860), 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.
(12) Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB for the year ended December 31, 1997, and incorporated herein by
reference thereto.
Exhibit 5.1
LOOPER, REED, MARK & MCGRAW
INCORPORATED
ATTORNEYS
1300 POST OAK BOULEVARD, SUITE 2000
HOUSTON, TEXAS 77056
713-986-7000
FAX: 713-986-7100
June 1, 1998 EXHIBIT 5
Baltic International USA, Inc.
1990 Post Oak Boulevard
Suite 1630
Houston, Texas 77056
Re: Baltic International USA, Inc. Form SB-2 Registration Statement
Gentlemen:
I have acted as counsel for Baltic International USA, Inc. (the "Company")
in connection with the registration by the Company of 21,619,169 shares of its
common stock, par value $0.01 per share (the "Securities"), as contemplated by
the Company's Registration Statement on Form SB-2 filed on the date hereof with
the Securities and Exchange Commission (the "Commission") under the Securities
Act of 1933, as amended.
In connection therewith, I have examined, among other things, the Articles
of Incorporation and Bylaws of the Company, the corporate proceedings of the
Company with respect to the issuance and registration of the Securities, the
Registration Statement, certificates of public officials, statutes and other
instruments and documents, as a basis for the opinions expressed herein.
Based upon and subject to the foregoing, and upon such other matters as I
have determined to be relevant, I am of the opinion that:
1. The Company is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Texas.
2. All of the Securities, upon issuance and delivery thereof, will be
validly issued, fully paid and nonassessable.
I hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement.
Very truly yours,
/s/ Norman T. Reynolds
Norman T. Reynolds
Exhibit 23.2
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
May 29, 1998
