U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For Quarterly Period Ended March 31, 1998.
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Transition Period From to .
Commission File Number: 0-26558
BALTIC INTERNATIONAL USA, INC.
(Exact name of small business issuer as specified in its charter)
TEXAS 76-0336843
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1990 Post Oak Blvd., Suite 1630, Houston, Texas 77056
(Address of principal executive offices)
(713) 961-9299
(Issuer's telephone number)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X . No .
Number of shares outstanding of each of the issuer's classes of common stock
as of May 14, 1998: 15,586,785 shares.
Transitional Small Business Disclosure Format (Check one): Yes ; No X .
<PAGE>
BALTIC INTERNATIONAL USA, INC.
TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1 - Consolidated Financial Statements
Condensed Balance Sheets -
March 31, 1998 and December 31, 1997 3
Condensed Statements of Operations -
Three Months Ended March 31, 1998 and 1997 4
Condensed Statements of Cash Flows -
Three Months Ended March 31, 1998 and 1997 5
Notes to Condensed Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings 12
Item 2 - Changes in Securities 12
Item 3 - Defaults on Senior Securities 12
Item 4 - Submission of Matters to a Vote of Security Holders 12
Item 5 - Other Information 12
Item 6 - Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1 - FINANCIAL STATEMENTS
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Balance Sheets
March 31, December 31,
1998 1997
(unaudited) (audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 675,244 $ 965,992
Accounts receivable 163,012 273,234
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, net 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 condensed consolidated financial statements.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Operations
(unaudited)
Three Months Ended March 31,
1998 1997
REVENUES:
Freight revenue........................ $ 46,771 $ 53,782
Food distribution......................... 59,097 61,529
General sales agency revenue................. 19,500 19,500
Net equity in earnings of joint operations... 42,530 157,889
----------- -----------
Total operating revenues..................... 167,898 292,700
----------- -----------
OPERATING EXPENSES:
Cost of revenue........................ 87,554 77,053
General and administrative..................... 309,946 293,558
----------- -----------
Total operating expenses..................... 397,500 370,611
----------- -----------
LOSS FROM OPERATIONS.................. (229,602) (77,911)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense......................... (66,813) (133,252)
Interest income........................ 21,962 4
Other............................ (1,204) 3,921
----------- -----------
TOTAL OTHER INCOME (EXPENSE).............. (46,055) (129,327)
----------- -----------
LOSS BEFORE INCOME TAXES................ (275,657) (207,238)
INCOME TAX EXPENSE..................... - -
----------- -----------
NET LOSS.......................... $ (275,657) $ (207,238)
----------- -----------
LESS PREFERRED DIVIDENDS................. (40,462) (49,702)
----------- -----------
NET LOSS ATTRIBUTABLE TO COMMON SHAREHOLDERS.... $ (316,119) $ (256,940)
=========== ===========
LOSS PER SHARE AMOUNTS:
Basic.............................. $ (0.02) $ (0.03)
Diluted............................. $ (0.02) $ (0.03)
See accompanying notes to condensed consolidated financial statements.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
Condensed Consolidated Statements of Cash Flows
(unaudited)
Three Months Ended March 31,
1998 1997
Cash flows from operating activities:
Net loss $ (275,657) $ (207,238)
Noncash adjustments:
Net equity in (earnings) and losses of
joint operations (42,530) (157,889)
Other 8,313 63,107
Changes in assets and liabilities 98,505 65,220
----------- -----------
Net cash used by operating activities (211,369) (236,800)
----------- -----------
Cash flows from investing activities:
Investment in and advances to joint operations (1,007) (1,974)
Acquisition of property and equipment (3,911) -
----------- -----------
Net cash used by investing activities (4,918) (1,974)
----------- -----------
Cash flows from financing activities:
Repayment of debt (8,711) -
Issuance of stock, net of related costs - 6,667
Purchase of preferred stock (29,973) -
Preferred dividends paid (35,777) -
----------- -----------
Net cash provided (used) by financing
activities (74,461) 6,667
----------- -----------
Net increase (decrease) in cash and cash
equivalents (290,748) (232,107)
Cash and cash equivalents, beginning of period 965,992 384,245
----------- -----------
Cash and cash equivalents, end of period $ 675,244 $ 152,138
=========== ===========
See accompanying notes to condensed consolidated financial statements.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
Notes to Condensed Consolidated Financial Statements
The accompanying unaudited consolidated financial statements have been
prepared by Baltic International USA, Inc. (the "Company") and include all
adjustments which are, in the opinion of management, necessary for a fair
presentation of financial results for the 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.
The information contained herein is condensed from that which would
appear in the annual financial statements; accordingly, the financial
statements included herein should be reviewed in conjunction with the
financial statements and related notes thereto contained in the Annual
Report on Form 10-KSB filed by the Company with the Securities and Exchange
Commission for the fiscal year ended December 31, 1997. Accounting
measurement at interim dates inherently involve greater reliance on
estimates than at year end. The results of operations for the interim
period presented are not necessarily indicative of the results which can be
expected for the entire year.
NOTE 1 - OPERATIONS AND FINANCIAL CONDITION
The Company was organized to identify, form and participate in
aviation-related and other business ventures in Eastern Europe. The Company
currently owns an 8.02% interest in airBaltic Corporation SIA ("airBaltic"),
the national airline of Latvia. The Company will expand its catering
operations through its 46% interest in AIRO Catering Services ("AIRO"). In
March 1998, the Company transferred its remaining interest in Riga Catering
Services ("RCS") to AIRO as part of a capital contribution. In January
1998, AIRO opened a inflight catering kitchen in Tallinn, Estonia, and in
May 1998, AIRO opened its third kitchen in Kiev, Ukraine. The Company also
serves as a cargo marketing and sales company to airBaltic and other
airlines through its wholly owned subsidiary, Baltic World Air Freight
("BWAF"). American Distributing Company ("ADC"), a wholly owned subsidiary,
began operations on December 1, 1995 as a beverage and food distribution
company.
The Company also owns 89% of Baltic International Airlines ("BIA"), a
joint venture registered in the Republic of Latvia. The routes and
passenger service operations of BIA were transferred to airBaltic effective
October 1, 1995, and BIA has not conducted any substantive business
operations since that date. The Company made significant investment in and
advances to BIA which has incurred losses of approximately $12,700,000 from
inception through March 31, 1998.
The Company requires substantial capital to pursue its operating
strategies. To date, the Company has relied upon net cash provided by
financing activities to fund its capital requirements. There can be no
assurance that the Company's business interests will generate sufficient
cash in future periods to satisfy its capital requirements. In April 1998,
the Company obtained a line of credit in the aggregate of $800,000 from two
shareholders to provide additional liquidity. This line of credit matures
on December 31, 1999 and any outstanding balance will bear interest at a
rate of 13%. No advances are to be made under the line of credit until the
$2,000,000 loan to a shareholder is repaid, and the line of credit is
secured by the shares of stock owned in AIRO. The Company does not
anticipate needing to draw on this line of credit in 1998.
NOTE 2 - NEW ACCOUNTING PRONOUNCEMENT
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
comprehensive Income", which establishes standards for reporting the
components of comprehensive income. The Company adopted SFAS No. 130 as of
January 1, 1998. However, the Company has no items of other comprehensive
income in any period presented in the accompanying consolidated financial
statements. Therefore, a separate statement of comprehensive income has not
been presented.
<PAGE>
NOTE 3 - 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:
airBaltic $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
========= =========
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,
1998 1997
Combined 100% Basis:
Operating revenues $ 971,190 $ 651,147
Income from operations $ 199,859 $ 197,519
Net income $ 61,954 $ 381,332
Company Percentage Interest:
Operating revenues $ 447,550 $ 261,865
Income from operations $ 105,787 $ 81,882
Net income $ 42,530 $ 157,889
<PAGE>
NOTE 4 - LOSS PER COMMON SHARE
The computations of loss per common share are computed using
15,510,857 and 7,532,659 weighted average shares of common stock for the
three months ended March 31, 1998 and 1997, respectively. Stock warrants
and options are considered to be dilutive for earnings per share purposes if
the average market price during the three and nine month periods ending on
the balance sheet date exceeds the exercise price and the Company had
earnings for the period. For the three months ended March 31, 1998 and
1997, all stock warrants and options are considered anti-dilutive.
NOTE 5 - EQUITY TRANSACTIONS
During the three months ended March 31, 1998, the company purchased
one share of its Series B Convertible Redeemable Preferred Stock from a
shareholder for an aggregate $35,000 including accrued dividends.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company's revenues are derived from its equity in the net income
of its joint operations and from revenue generated by BWAF and ADC.
Quarter Ended 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 started in January
1998 and the kitchen in Kiev, Ukraine started 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 decreased from 1997 to 1998 to offset 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
airBaltic 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.
<PAGE>
The Company's consolidated financial statements included elsewhere
herein present the Company's share of the joint operations using the equity
method of accounting in accordance with generally accepted accounting
principles. The Company's interests in airBaltic, BIA and LAMCO are
accounted for using the cost method. The following table presents a pro
forma condensed combined statement of operations of the Company assuming its
proportionate share of the joint operations accounted for using the equity
method is combined with the Company. Management believes this presentation
is informative of the Company's results of operations given that a
significant portion of the Company's business is conducted through the joint
operations.
<TABLE>
<CAPTION>
Pro forma Condensed Combined Statement of Operations
For the Three Months Ended March 31, 1998
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>
<PAGE>
Liquidity and Capital Resources
The Company had $675,244 in cash at March 31, 1998, compared to
$965,992 at December 31, 1997.
At March 31, 1998, the Company had working capital deficit of
$1,669,296 as compared to $693,699 at December 31, 1997. The decrease in
the working capital is due primarily to a decrease in cash of $290,748 and 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 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 of $6,667 for the three months ended March 31, 1997.
The Company's consolidated balance sheet included elsewhere herein
presents the Company's share of the joint operations using the equity method
of accounting in accordance with generally accepted accounting principles.
The Company's interests in airBaltic, BIA and LAMCO are accounted for using
the cost method. The following table presents a pro forma condensed
combined balance sheet of the Company assuming its proportionate share of
the joint operations accounted for using the equity method is combined with
the Company. Management believes this presentation is informative of the
Company's financial condition since the majority of the Company's underlying
investment in its joint operations consists of net current assets.
Pro forma Condensed Combined Balance Sheet
As of March 31, 1998
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 requires substantial capital to pursue their operating
strategies. To date, the Company has relied upon net cash provided by
financing activities to fund its capital requirements. The Company has no
firm commitments for external sources of financing upon which the Company
will rely for the near future.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings, None
Item 2. Changes in Securities, None
Item 3. Defaults Upon Senior Securities, None
Item 4. Submission of Matters to a Vote of Security-Holders, None
Item 5. Other Information, None
Item 6. Exhibits and Reports on Form 8-K:
(a) Exhibits, None
(b) No reports on Form 8-K were filed during the quarter ended
March 31, 1998.
<PAGE>
BALTIC INTERNATIONAL USA, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BALTIC INTERNATIONAL USA, INC.
(Registrant)
Date: May 19, 1998 By: /s/ Robert L. Knauss
-------------------------- ---------------------------
Robert L. Knauss,
Chairman of the Board and
Chief Executive Officer
Date: May 19, 1998 By: /s/ David A. Grossman
-------------------------- ---------------------------
David A. Grossman,
Chief Financial Officer and
Corporate Secretary
[ARTICLE] 5
<TABLE>
<S> <C>
[PERIOD-TYPE] 3-MOS
[FISCAL-YEAR-END] DEC-31-1998
[PERIOD-END] MAR-31-1998
[CASH] 675,244
[SECURITIES] 0
[RECEIVABLES] 163,012
[ALLOWANCES] 0
[INVENTORY] 143,126
[CURRENT-ASSETS] 991,299
[PP&E] 15,799
[DEPRECIATION] 0
[TOTAL-ASSETS] 5,618,695
[CURRENT-LIABILITIES] 2,660,595
[BONDS] 0
[PREFERRED-MANDATORY] 0
[PREFERRED] 1,605,000
[COMMON] 156,292
[OTHER-SE] 1,196,808
[TOTAL-LIABILITY-AND-EQUITY] 5,618,695
[SALES] 125,368
[TOTAL-REVENUES] 167,898
[CGS] 87,554
[TOTAL-COSTS] 397,500
[OTHER-EXPENSES] 0
[LOSS-PROVISION] 0
[INTEREST-EXPENSE] 66,813
[INCOME-PRETAX] (275,657)
[INCOME-TAX] 0
[INCOME-CONTINUING] (275,657)
[DISCONTINUED] 0
[EXTRAORDINARY] 0
[CHANGES] 0
[NET-INCOME] (275,657)
[EPS-PRIMARY] (0.02)
[EPS-DILUTED] (0.02)
</TABLE>
