-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TMhsXFM+dkMerBlyigofcpy5dLzeCpKlKLvSJa2USnhVJs9x8uP3qLuxoEjypsz2 WGhaYdsS7cLT2yOpENCuRQ== 0000918545-00-000013.txt : 20000417 0000918545-00-000013.hdr.sgml : 20000417 ACCESSION NUMBER: 0000918545-00-000013 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000414 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALTIC INTERNATIONAL USA INC CENTRAL INDEX KEY: 0000918545 STANDARD INDUSTRIAL CLASSIFICATION: ARRANGEMENT OF TRANSPORTATION OF FREIGHT & CARGO [4731] IRS NUMBER: 760336843 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-26558 FILM NUMBER: 601871 BUSINESS ADDRESS: STREET 1: 5151 SAN FELIPE STREET 2: SUITE 1661 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7139619299 MAIL ADDRESS: STREET 1: 5151 SAN FELIPE STREET 2: SUITE 1661 CITY: HOUSTON STATE: TX ZIP: 77056 10KSB 1 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-KSB (Mark One) [x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1999 OR [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ___________ to ___________. Commission File Number: 0-26588 BALTIC INTERNATIONAL USA, INC. (Name of small business issuer in its charter) Texas 76-0336843 (State or other jurisdiction (IRS Employer of incorporation or organization) Identification No.) 5151 San Felipe, Suite 1661 Houston, Texas 77056 (Address of principal executive offices, including zip code) (713) 961-9299 (Issuer's telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act: None Securities registered under Section 12(g) of the Exchange Act: Common Stock, $.01 par value Warrants (Title of Class) Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained in this form, and no disclosure will be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10- KSB or any amendment to this Form 10-KSB. [X] Issuer's revenues for the year ended December 31, 1999 were $261,700. The aggregate market value of Common Stock held by non-affiliates of the registrant at March 30, 2000, based upon the last sales price as reported by the OTC Bulletin Board, was $1,282,167. As of March 30, 2000, there were 9,975,960 shares of Common Stock outstanding. Transitional Small Business Disclosure Format (Check one): Yes ; No X . TABLE OF CONTENTS Page PART I Item 1. Description of Business 3 Item 2. Description of Property 4 Item 3. Legal Proceedings 4 Item 4. Submission of Matters to a Vote of Security Holders 4 PART II Item 5. Market for Common Equity and Related Stockholder Matters 5 Item 6. Management's Discussion and Analysis or Plan of Operation 5 Item 7. Financial Statements 7 Item 8. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 7 PART III Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act 8 Item 10. Executive Compensation 10 Item 11. Security Ownership of Certain Beneficial Owners and Management 11 Item 12. Certain Relationships and Related Transactions 12 Item 13. Exhibits and Reports on Form 8-K 13 SIGNATURES PART I Item 1. DESCRIPTION OF BUSINESS Baltic International USA, Inc. (the "Company" or "BIUSA") is a Texas corporation that provides and has provided capital, management, and technical services to start-up and established private companies. 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. During 1999, the Company decided to sell most of its business interests in Eastern Europe and to focus on utilizing its assets to achieve profitability by acquiring business operations based in the United States. The Company has limited cash resources available for investment purposes. Advanced Reclamation Company In February 2000, the Company purchased the units of Advanced Reclamation Company, L.L.C. ("ARC") from the Nicol Family Partnership. The Company purchased all of the units of ARC for cash of $400,000, a total of 500,000 common shares of the Company, a note payable to seller of an additional $400,000 and an earnout agreement. ARC is a complete refrigerant management company. ARC provides a full range of refrigerant services including, but not limited to, recovery, reclamation, the sale of new or reclaimed refrigerants. AIRO Catering Services In February 1996, the Company formed AIRO Catering Services ("AIRO") with TOPflight Catering AB ("TOPflight"). TOPflight operates kitchens in Malmo, Gothenburg and Stockholm, Sweden. In this joint operation, the Company contributed its management and operational expertise, part of its interest in Riga Catering Services ("RCS"), market knowledge, knowledge of the regional customer base and labor force for a 51% interest. TOPflight contributed its technical experience in building in-flight kitchens and its interest in RCS for a 49% interest. During 1997, LSG Lufthansa Services/Sky Chefs ("LSG") purchased 51% of TOPflight. In December 1997, the Company entered into a share purchase and shareholder agreement with LSG. The primary purpose of the agreement is to identify AIRO as the vehicle for the development of new LSG in-flight kitchens in Eastern Europe and the Republics of the former Soviet Union. Under the agreement, the Company sold 5% of the stock of AIRO to LSG in return for the LSG commitments and $600,000 in cash. Following the share purchase, the Company controlled 46% of AIRO and LSG controlled 54%. In January 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. In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock and $250,000 in cash. In October 1999, the Company sold the remaining 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of about $200,000 in debt. Baltic Catering Services The business of BCS after the transfer of the catering business to RCS was primarily the operation of a restaurant in the Riga Airport. BCS ceased operations in 1998 and has been liquidated. Air Baltic Corporation In 1992, the Company developed Baltic International Airlines ("BIA") - the first independent airline in the former Soviet Union. In October 1995, the Company sold the scheduled passenger service operations of its 49% interest in BIA, to the newly created national airline of Latvia, Air Baltic. The Company sold its remaining 8.02% interest in Air Baltic to SAS in January 1999 for $2,144,333 cash under the terms of an option agreement between the Company and SAS. The Company used the proceeds from the sale to repay the $2 million loan from a shareholder. Baltic International Airlines The Company currently owns an 89% interest in BIA. BIA currently has no substantive operations. The Company believes that maintaining BIA's airline certification and the availability of BIA's tax holiday in Latvia are beneficial to the Company. American Distributing Company American Distributing Company ("ADC") is a wholly-owned subsidiary of the Company. It distributes beer products in the Baltic States. This business commenced in December 1995 as a successor to the Company's distribution activities which began in 1993. Baltic World Air Freight Through its wholly-owned subsidiary Baltic World Air Freight ("BWAF"), the Company served as a cargo marketer to Air Baltic and other airlines. In August 1998, the Company ceased the operations of BWAF. Competition The Company's business ventures face competition from other companies and individuals. Businesses that the Company currently operates, or may operate in the future, presently compete and will compete with other entities, many of which may have greater financial, marketing and technical resources. Employees The Company currently employs 10 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. None of the employees of the Company and its subsidiaries and joint operations are represented by a labor organization. The Company believes its relationships with all of these employees are satisfactory. Item 2. DESCRIPTION OF PROPERTY The Company leases office space in Houston, Texas. ARC leases office and plant facilities in League City, Texas. The Company believes that its facilities are adequate for its current operations. Item 3. LEGAL PROCEEDINGS None. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II Item 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock is listed on the OTC Bulletin Board under the symbol "BISA." On September 8, 1998, Nasdaq informed the Company that due to the bid price of the Company's Common Stock not meeting Nasdaq's minimum bid price requirement, the Company's securities were no longer to be listed on the Nasdaq Stock Market. The Company's Common Stock was immediately traded on the OTC Bulletin Board. The following table sets forth the high and low sales prices of the Common Stock for the periods indicated: 1999 1998 ------------------- --------------------- High Low High Low ---- --- ---- --- First Quarter $0.156 $0.125 $0.594 $0.219 Second Quarter 0.156 0.125 0.594 0.344 Third Quarter 0.141 0.063 0.406 0.125 Fourth Quarter 0.188 0.078 0.188 0.094 On March 30, 2000, the last sales price for the Common Stock was $0.188, and the Company believes there were approximately 1,000 beneficial holders of its Common Stock. The Company has not paid, and does not currently intend to pay, cash dividends on its Common Stock. The current policy of the Company's Board of Directors is to retain earnings, if any, to provide funds for operation and expansion of the Company's business. Such policy will be reviewed by the Board of Directors of the Company from time to time in light of, among other things, the Company's earnings and financial position. Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussions contain forward-looking information. Readers are cautioned that such information involves risks and uncertainties, including those created by general market conditions, competition and the possibility of events may occur which limit the ability of the Company to maintain or improve its operating results or execute its primary growth strategy. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could be inaccurate, and there can therefore be no assurance that the forward-looking statements included herein will prove to be accurate. The inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere herein. General In 1999, the Company shifted its focus to concentrate on operations in the United States. In January 1999, the Company sold its 8.02% of Air Baltic stock to SAS for $2,144,333 under the terms of the option agreement between the Company and SAS. The Company used the proceeds from the sale to repay the $2 million loan from a shareholder. In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock and $250,000 in cash. In October 1999, the Company sold the remaining 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of approximately $200,000 in debt. In February 2000, the Company purchased ARC as our first operation based in the United States. The Company's revenues have historically been derived from its equity in the net income of its joint operations, beer and food distribution and commissions due from sales of airline tickets under the agreement between Air Baltic and the Company. Significant portions of the operational activities of the Company are reflected in the net equity in earnings and losses of joint operation investments. The Company uses the equity method to record its interest in its joint operations owned 20% to 50% or companies owned greater than 50% in which the Company does not have control. The Company's interests relating to joint operation activities resulted in losses of $192,947 for 1999 and earnings of $85,579 for 1998. Results of Operations Years Ended December 31, 1999 and 1998. Revenues for 1999 decreased by $311,256 to $261,700 compared to $572,956 for 1998. This decrease is due to the decrease in beverage distribution revenue resulting from increased competition from other distributors of import beer products, which decreased ADC's market share. Operating expenses decreased 72% to $712,049 for 1999 compared to $2,544,198 for 1998. This decrease was due to a decrease in a reserve on the Company's investment in BIA, decreased food distribution costs and a decrease in personnel and consulting and other general and administrative expenses. The Company recorded the reserve in 1998 of $1,143,115 as a result of the uncertainty of the characteristics of the contribution from the Latvian partner and the length of time that has transpired since the Latvian partner committed to make the contribution. The decrease in personnel and consulting and other general and administrative expenses results from the Company's continued efforts to reduce its overhead expenses. As a result of the changes in revenues and expenses discussed above, the operating loss for the Company decreased 77% to $450,349 for 1999 from $1,971,242 for 1998. The Company had a net income (including interest expense, non-recurring gains and discontinued operations discussed below) of $769,137 for 1999 compared to a net loss of $2,375,781 for 1998. Interest expense decreased by $239,763 or 90% to $25,800 for 1999 from $265,563 in 1998, reflecting the repayment by the Company of the $2 million loan from a shareholder that was repaid in January 1999. In January 1999, the Company sold its interest in Air Baltic for $2,144,333. A gain of $121 was recognized on this sale. In July 1999 and October 1999, the Company sold its interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock, $1,395,000 in cash and forgiveness of approximately $200,000 in debt. Aggregate gains of $1,457,059 were recognized on these sales and included in gain from disposal of discontinued operations. As a result of the sale of the Company's interest in AIRO, the net equity in losses of the catering operations of $192,947 is included in loss from discontinued operations. The loss of the catering operations is primarily the result of the adoption of AICPA SOP 98-5, "Reporting on the Costs of Start-Up Activities". SOP 98-5 requires at adoption the Company to write-off any unamortized start-up costs as a cumulative change in accounting principle and, going forward, expense all start-up activity costs as they are incurred. The Company's share of the write-off of AIRO's start-up costs as of January 1, 1999 was $298,877. In August 1998, the Company discontinued the operations of BWAF. The unamortized goodwill of $176,766 resulting from the acquisition of the remaining 50% interest in BWAF was written off in 1998 and included in the loss on disposal of discontinued operations. Liquidity and Capital Resources At December 31, 1999 the Company had a working capital of $405,729 compared to working capital deficit of $2,635,670 at December 31, 1998. The increase in working capital is due primarily to the sale of Air Baltic and AIRO and repayment of debt. The Company had shareholders' equity of $454,982 at December 31, 1999. Net cash used by operating activities was $642,091 for 1999, compared to $605,192 for 1998. The increase in cash used by operating activities in 1999 was primarily due to the payment of accounts payable and accrued liabilities partially offset by the Company's continued efforts to reduce its overhead expenses. Net cash provided by investing activities was $3,450,233 for 1999, compared to net cash used of $54,459 for 1998. The increase in cash provided by investing activities was attributable to the sale of assets. Net cash used by financing activities was $2,050,000 for the 1999, compared to $195,961 for 1998 due to an increase in repayment of debt. During 1997, the Company issued 7,000,000 shares of Common Stock for net proceeds of an aggregate of $2,510,501 pursuant to private sales and the exercise of stock options. In 1999 and 1998, the Company issued 119,175 and 126,437 shares of Common Stock, respectively, for payment of accounts payable and services rendered of $9,311 and $40,992 respectively. 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 were immediately exercisable and expire in August 2002. The Company reacquired an aggregate of 6,250,000 shares of the Company's common stock and 6,250,000 of these warrants were cancelled in July 1999 as part of the consideration received from the sale of a 23% interest in AIRO. The Company has incurred operating losses since inception through December 31, 1999. The Company incurred operating losses of $450,349 in 1999 and $1,971,242 in 1998. At December 31, 1999, the Company had an accumulated deficit of $13,419,467. Net cash used in operating activities was $642,091 in 1999 and $605,192 in 1998. Management believes that the Company will be able to achieve a satisfactory level of liquidity to meet its business plan and capital needs through December 31, 2000. During 1999, the Company borrowed an aggregate principal amount of $118,000 as bridge financing from officers and directors of the Company. In connection with these borrowings, the Company issued warrants to purchase 11,800 shares of common stock at exercise prices of $0.10 to $0.15 per share. In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock and $250,000 in cash. In October 1999, the Company sold the remaining 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of approximately $200,000 in debt. Additionally, management believes the Company has the ability to obtain additional financing from key officers, directors and certain investors. However, there can be no assurance that the Company will be able to generate sufficient liquidity to maintain its operations. At December 31, 1999, the Company had cash of $868,522. Significant payments made in the first quarter of 2000 include $400,000 in connection with the purchase of ARC and $87,000 paid to officers for deferred compensation previously accrued. The Company has limited cash resources available and has obligations due and past due. The above factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or other adjustments should the Company be unable to continue as a going concern. Inflation Inflation has not had a significant impact on the Company during the last two years. However, an extended period of inflation could be expected to have an impact on the Company's earnings by causing operating expenses to increase. It is likely that the Company's subsidiaries and joint operations would attempt to pass increased expenses to customers. If the Company's subsidiaries and joint operations are unable to pass through increased costs, their operating results could be adversely affected which would adversely affect the Company's operating results. Item 7. FINANCIAL STATEMENTS The information required hereunder is included in this report as set forth in the "Index to Consolidated Financial Statements" on page F-1. Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There have been no changes in accountants during the Registrant's two most recent fiscal years, nor have there been any disagreements with accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure. PART III Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT Executive Officers and Directors The following table gives certain information with respect to the executive officers and directors of the Company: Name Age Position ---- --- -------- Robert L. Knauss (3) 69 Chairman of the Board and Chief Executive Officer, Director - Class III David A. Grossman 36 President, Chief Financial Officer, Corporate Secretary and Director - Class I Homi M. Davier (1) 51 Director - Class I James W. Goodchild (4) 44 Director - Class II Paul R. Gregory (2) 59 Director - Class I Juris Padegs (1)(2)(3) 68 Director - Class III Ted Reynolds (1)(2) 69 Director - Class II ___________________________ (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. Mr. Knauss was involved in establishing the relationship between the University of Houston Law Foundation and the former Soviet Union in 1991 whereby the University of Houston Law Foundation assisted the former Soviet Union in creating the Petroleum Legislation Project, and was involved with the government of Russia in the development of privatization legislation. Mr. Knauss has served as a director of Equus Investments, Inc. since 1984 and as one of the two United States directors for the Mexico Fund since 1985. He was elected as a director of Philip Services Corp. in 1997 following the merger of Allwaste, Inc. and Philip Services Corp. and was elected chairman of the board of Philip Services Corp. in May 1998. Securities of the Mexico Fund, Philip Services Corp. and Equus Investments, Inc. are registered under the Securities Exchange Act of 1934 (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. Knauss has served as chairman of the board of the Company since its inception in March 1991. Mr. Grossman has served as president since November 1998, chief financial officer since September 1997 and as corporate secretary since December 1996. He served as comptroller from November 1995 until September 1997. Prior to joining the Company, he was an audit senior manager for Deloitte & Touche LLP. Mr. Grossman is a certified public accountant and graduated from Indiana University in 1985 with a BS 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 BA degree in Russian and Soviet Studies, and a BA degree in International Relations. 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 BS 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. 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 now known as Scudder Kemper Investments, Inc. Mr. Padegs is the chairman and director of the Korea Fund and the Brazil Fund. Mr. Padegs is the director of several other investment companies. Mr. Padegs 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. Directors are divided into three classes. The Class I directors hold office until the 2001 Annual Meeting of Shareholders, the Class II directors hold office until the 2000 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. 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 in addition to reimbursement of out-of-pocket expenses to attend board meetings. In December 1997, Messrs. Davier, Gregory, Padegs and Reynolds 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. In December 1998, Messrs. Davier, Gregory, Padegs and Reynolds each received options to purchase 5,000 shares of common stock at a price of $0.125 per share. Such options expire in December 2003. In December 1999, Messrs. Davier, Goodchild, Gregory, Padegs and Reynolds each received options to purchase 5,000 shares of common stock at a price of $0.10 per share. Such options expire in December 2004. Compliance with Section 16(a) of the Exchange Act Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers and persons who own more than ten percent of a registered class of the Company's equity securities to file reports with the Securities and Exchange Commission relating to transactions and holdings in the Company's common stock. The Company believes that during the fiscal year ended December 31, 1999 all such filing requirements were satisfied. Item 10. EXECUTIVE COMPENSATION The following table sets forth information with respect to the chief executive officer and the only other executive officer of the Company who received total annual salary and bonus for the fiscal year ended December 31, 1999 in excess of $100,000:
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 Robert Knauss, 1999 $ 24,000 $ 0 $0 $ 0 174,000 Chief Executive 1998 100,000 0 0 0 0 Officer 1997 120,000 0 0 51,616 (2) 244,700 (2) David Grossman, 1999 $ 82,500 $25,000 (3) $ 0 $ 0 0 President and Chief 1998 70,000 0 0 18,562 (2) 88,000 (2) Financial Officer 1997 70,000 0 0 10,052 (4) 0
(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) In August 1997, the Company granted 122,350 and 44,000 shares of the Company's common stock and 244,700 and 88,000 options to Messrs. Knauss and Grossman, respectively, for services to be rendered. Half of the shares and options were vested in February 1998 and the remaining half vested in August 1999. (3) The Company paid the 1998 bonus to Mr. Grossman in 2000. 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 compensation committee of the Company's Board of Directors administers the Plan. 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 March 30, 2000, options to purchase an aggregate of 1,472,700 shares were outstanding under the Plan. The following table shows, as to the named executive officers, information concerning individual grants of stock options during 1999.
Option Grants in Last Fiscal Year Number of Percentage of Total Securities Options/Warrants Underlying Granted to Options/Warrants Employees in Exercise Price Expiration Name Granted 1999 Per Share Date Robert L. Knauss 174,000 44% $ 0.145 May 10, 2005 David A. Grossman 174,000 44% $ 0.145 May 10, 2005
The following table shows, as to the named executive officers, information concerning aggregate stock option and warrant exercises during 1999 and the stock option and warrant values as of December 31, 1999.
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, 1999 December 31, 1999 Acquired on Value Exercisable/ Exercisable/ Name Exercise Realized Unexercisable Unexercisable Robert L. Knauss 0 $0 477,100/72,500 $0/$0 David A. Grossman 0 0 219,900/72,500 $0/$0
The Company has not established, nor does it provide for, long-term incentive plans or defined benefit or actuarial plans. Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 30, 2000, certain information with respect to the beneficial ownership of the Company's Common Stock by (i) each person known to the Company who beneficially owns more than 5% of the Company's outstanding Common Stock; (ii) each director; (iii) each named executive officer; and (iv) all directors and officers as a group: Shares Beneficially Owned Name of Beneficial Owner Number Percent Robert L. Knauss 1,467,667 (2) 13.77% Citibank (Switzerland) (1) 1,000,000 10.02% Paul R. Gregory 838,369 (3) 8.14% James W. Goodchild 541,573 (4) 5.27% Nicol Family Partnership 500,000 5.01% David A. Grossman 389,567 (5) 3.79% Homi M. Davier 368,624 (6) 3.64% Juris Padegs 319,859 (7) 3.17% Ted Reynolds 119,000 (8) 1.19% All 7 directors and executive officers 4,044,659 (9) 34.04% (1) The business address for Citibank (Switzerland) is P. O. Box 244, Zurich, Switzerland CH-8021. The business address for the Nicol Family Partnership is P.O. Box 278, Grapeland, Texas 75844. (2) Includes an aggregate of 679,463 shares subject to options, warrants and Series A Preferred Stock that are exercisable within 60 days. (3) Includes an aggregate of 323,000 shares subject to options, warrants and Series A Preferred Stock that are currently exercisable. (4) Includes an aggregate of 295,945 shares subject to options, warrants and Series A Preferred Stock that are currently exercisable. (5) Includes 304,900 shares subject to options that are exercisable within 60 days. Excludes an aggregate of 87,500 shares subject to options that are not currently exercisable. (6) Includes an aggregate of 145,195 shares subject to options, warrants and Series A Preferred Stock that are currently exercisable. (7) Includes 122,418 shares subject to options, warrants and Series A Preferred Stock that are currently exercisable. (8) Includes 36,000 shares subject to options and warrants that are currently exercisable. (9) Includes an aggregate of 1,906,921 shares subject to options, warrants and Series A Preferred Stock that are exercisable within 60 days. Excludes an aggregate of 87,500 shares subject to options that are not currently exercisable. Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In August and September 1997, Celox S.A., an affiliate of Jonas af Jochnick (a former director), 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., an affiliate of Jonas af Jochnick, 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. This loan was repaid in January 1999. In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock and $250,000 in cash. In October 1999, the Company sold the remaining 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of approximately $200,000 in debt. Management believes that all prior related party transactions are on terms no less favorable to the Company as could be obtained from unaffiliated third parties. All ongoing and future transactions with such persons, including any loans to such persons, will be approved by a majority of disinterested, independent outside members of the Company's Board of Directors. Item 13. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits. Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto. Exhibits identified in parentheses below, on file with the Securities and Exchange Commission, are incorporated herein by reference as exhibits hereto. Exhibit No. Identification of Exhibit 2.1 Plan and Agreement of Recapitalization (Exhibit 2.1 to Form SB-2, No. 33-74654-D) 3.1(a) Restated Articles of Incorporation (Exhibit 3.1(a) to Form SB-2, No. 33-74654-D) 3.1(b) Amended Articles of Incorporation (Exhibit 3.1(b) to Form SB-2, No. 33-74654-D) 3.1(c) Articles of Correction (Exhibit 3.1(c) to Form SB-2, No. 33-74654-D) 3.2 Bylaws (Exhibit 3.2 to Form SB-2, No. 33-74654-D) 3.3 Statement of Resolution Establishing and Designating a Series of Shares of the Company, Series A Cumulative Preferred Stock, $10.00 par value (Exhibit 3.3 to Form SB-2, No. 33-74654-D) 3.4 Certificate of Elimination of Shares Designated as Series A Cumulative Preferred Stock (Exhibit 3.4 to Form 10-QSB for the quarter ended June 30, 1995, File No. 0-26588) 3.5 Certificate of the Designation, Preference, Rights and Limitations of Convertible Redeemable Series A Preferred Stock (Exhibit 3.5 to Form 10-QSB for the quarter ended June 30, 1995, File No. 0-26588) 4.1 Common Stock Specimen (Exhibit 4.1 to Form SB-2, No. 33-74654-D) 10.1 1992 Equity Incentive Plan, as amended (Exhibit 10.3 to Form S-8, No. 33-90030) 10.2 Employment Agreement between the Company and Robert L. Knauss (Exhibit 10.4 to Form SB-2, No. 33-74654-D) 10.3 Baltic International Airlines Joint Venture Limited Liability Company Agreement between the Latvian Civil Aviation Board and the Company (Exhibit 10.7 to Form SB-2, No. 33-74654-D) 10.4 Settlement Agreement between the Company and Latvian Airlines and Ministry of Transportation of the Republic of Latvia (Exhibit 10.12 to Form SB-2, No. 33-74654-D) 10.5 Air Baltic Joint Venture Agreement (Exhibit 10.36 to Form 8-K dated August 29, 1995, File No. 0-26588) 10.6 Amendment to Air Baltic Joint Venture Agreement (Exhibit 10.40 to Form SB-2, File No. 333-860) 10.7 Share Purchase Agreement with SAS (Exhibit 10.41 to Form 8-K dated January 10, 1996, File No. 0-26588) 10.8 AIRO Catering Services Joint Venture Agreement (Exhibit 10.42 to Form 10-KSB for the year ended December 31, 1997, File No. 0-26588) Exhibit No. Identification of Exhibit 10.9 Statement of the Designation, Preferences, Rights and Limitations of Series B Convertible Redeemable Preferred Stock, as amended (Exhibit 10.45 to Form SB-2, File No. 333-860) 10.10 Compensatory Plan for Robert Knauss, James Goodchild and David Grossman (Exhibit 10.46 to Form 10-QSB for the quarter ended September 30, 1997, File No. 0-26588) 10.11 Promissory Note Agreement with ORESA Ventures N.V. (Exhibit 10.47 to Form 10-QSB for the quarter ended September 30, 1997, File No. 0-26588) 10.12 Share Purchase Agreement with SAS (Exhibit 10.48 to Form 8-K dated January 4, 1999, File No. 0-26588) 10.13 Share Purchase Agreement with ORESA Ventures and Celox (Exhibit 10.1 to Form 8-K dated July 12, 1999, File No. 0-26588) 10.14 Unit Purchase Agreement for Advanced Reclamation Company, L.L.C. (Exhibit 10.1 to Form 8-K dated February 2, 2000, File No. 0-26588) 23.1 Consent of Arthur Andersen LLP 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed during the fourth quarter of 1999. BALTIC INTERNATIONAL USA, INC. INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of independent public accountants F-2 Consolidated balance sheets at December 31, 1999 and 1998 F-3 Consolidated statements of operations for the years ended December 31, 1999 and 1998 F-4 Consolidated statements of shareholders' equity for the years ended December 31, 1999 and 1998 F-5 Consolidated statements of cash flows for the years ended December 31, 1999 and 1998 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. (a Texas corporation) and subsidiaries as of December 31, 1999 and 1998, and the related consolidated statements of operations, shareholders' equity and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Baltic International USA, Inc. and subsidiaries as of December 31, 1999 and 1998, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the accompanying consolidated financial statements, the Company has incurred significant operating losses through December 31, 1999. At December 31, 1999 the Company had an accumulated deficit of $13,419,467, the Company has limited cash resources available and has obligations due and past due. These conditions raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. ARTHUR ANDERSEN LLP Houston, Texas April 13, 2000 BALTIC INTERNATIONAL USA, INC. Consolidated Balance Sheets December 31, December 31, 1999 1998 ASSETS CURRENT ASSETS Cash and cash equivalents $ 868,522 $ 110,380 Accounts receivable: Trade 42,377 89,247 Affiliates 3,448 74,633 Note receivable 89,100 - Inventory 50,638 66,589 Prepaids and deposits 10,352 8,144 ---------- ---------- Total current assets 1,064,437 348,993 PROPERTY AND EQUIPMENT, net 14,229 35,211 INVESTMENT IN AND ADVANCES TO JOINT OPERATIONS 1,500 3,276,094 OTHER ASSETS 33,524 33,899 ---------- ---------- Total assets $ 1,113,690 $ 3,694,197 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 270,076 $ 704,031 Dividends payable 388,632 230,632 Short-term debt, net - 50,000 Short-term debt to a shareholder - 2,000,000 ---------- ---------- Total liabilities 658,708 2,984,663 ---------- ---------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Warrants 252,793 1,306,610 Preferred stock: Series A, convertible, $10 par value, 499,930 shares authorized, 123,000 shares issued and outstanding 1,230,000 1,230,000 Series B, convertible, $10 par value, $25,000 stated value, 70 shares authorized, 14 shares issued and outstanding 350,000 350,000 Common stock, $.01 par value, 40,000,000 shares authorized, 15,629,229 shares issued and 9,455,960 and 15,586,785 shares outstanding 156,292 156,292 Additional paid-in capital 12,763,943 11,717,776 Accumulated deficit (13,419,467) (14,030,604) Treasury stock, at cost (878,579) (20,540) ---------- ---------- Total shareholders' equity 454,982 709,534 ---------- ---------- Total liabilities and shareholders' equity $ 1,113,690 $ 3,694,197 ========== ========== See accompanying notes to consolidated financial statements. BALTIC INTERNATIONAL USA, INC. Consolidated Statements of Operations Year Ended December 31, 1999 1998 REVENUES: Beverage distribution $ 238,039 $ 494,956 General sales agency revenue 23,661 78,000 ---------- ---------- Total operating revenues 261,700 572,956 ---------- ---------- OPERATING EXPENSES: Cost of revenue-food distribution 233,301 490,126 Personnel and consulting 214,375 478,621 Legal and professional 85,675 129,191 Other general and administrative 178,698 303,145 Reserve of investment in BIA - 1,143,115 ---------- ---------- Total operating expenses 712,049 2,544,198 ---------- ---------- LOSS FROM OPERATIONS (450,349) (1,971,242) ---------- ---------- OTHER INCOME (EXPENSE): Interest expense (25,800) (265,563) Interest income 10,360 15,536 Other income (expense) (23,377) (1,935) ---------- ---------- Total other income (expense) (38,817) (251,962) ---------- ---------- LOSS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (489,166) (2,223,204) INCOME TAX EXPENSE - - ---------- ---------- LOSS FROM CONTINUING OPERATIONS (489,166) (2,223,204) DISCONTINUED OPERATIONS: Loss from operations of freight and catering operations (198,756) 37,904 Loss on disposal of freight and catering operations 1,457,059 (190,481) ---------- ---------- NET INCOME (LOSS) $ 769,137 $(2,375,781) ========== ========== INCOME (LOSS) PER SHARE AMOUNTS: Basic: Continuing operations $ (0.05) $ (0.15) Discontinued operations $ 0.10 $ (0.01) Total $ 0.05 $ (0.16) Diluted: Continuing operations $ (0.02) $ (0.15) Discontinued operations $ 0.05 $ (0.01) Total $ 0.03 $ (0.16) See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC. Consolidated Statements of Shareholders' Equity Preferred Stock Series A Series B Common Stock Warrants Shares Amount Shares Amount Shares Amount Balance, January 1, 1998 $1,306,610 123,000 $1,230,000 16 $ 400,000 15,502,792 $ 155,028 Common shares issued 126,437 1,264 Purchase of preferred stock (2) (50,000) Net loss Dividends on preferred stock: Series A, $1.00 per share Series B, $2500 per share ---------- -------- ---------- --- ---------- ---------- ------- Balance, December 31, 1998 $1,306,610 123,000 $1,230,000 14 $ 350,000 15,629,229 156,292 Purchase of treasury stock Common shares issued Cancellation of warrants (1,053,817) Net income Dividends on preferred stock: Series A, $1.00 per share Series B, $2500 per share ---------- -------- ---------- --- ---------- ---------- ------- Balance, December 31, 1999 $ 252,793 123,000 $1,230,000 14 $ 350,000 15,629,229 156,292 ========== ======== ========== === ========== ========== =======
See accompanying notes to consolidated financial statements.
BALTIC INTERNATIONAL USA, INC. Consolidated Statements of Shareholders' Equity (Continued) Additional paid-in Accumulated Treasury stock capital deficit Shares Amount Total Balance, January 1, 1998 $ 9,905,403 $(10,421,525) 42,444 $ (20,540) $ 709,534 Common shares issued 39,728 40,992 Purchase of preferred stock (9,761) (59,761) Net loss (2,375,781) (2,375,781) Dividends on preferred stock: Series A, $1.00 per share (123,000) (123,000) Series B, $2500 per share (36,116) (36,116) ----------- ------------ ----------- --------- ----------- Balance, December 31, 1998 $11,717,776 $(14,030,604) 42,444 $ (20,540) $ 709,534 Purchase of treasury stock 6,250,000 (875,000) (875,000) Common shares issued (7,650) (119,175) 16,961 9,311 Cancellation of warrants 1,053,817 - Net income 769,137 769,137 Dividends on preferred stock: Series A, $1.00 per share (123,000) (123,000) Series B, $2500 per share (35,000) (35,000) ----------- ------------ ----------- --------- ----------- Balance, December 31, 1999 $12,763,943 $(13,419,467) 6,173,269 $(878,579) $ 454,982 =========== ============ =========== ========= ===========
See accompanying notes to consolidated financial statements. BALTIC INTERNATIONAL USA, INC. Consolidated Statements of Cash Flows Year Ended December 31, 1999 1998 Cash flows from operating activities: Net income (loss) $ 769,137 $ (2,375,781) Noncash adjustments: Net equity in earnings of discontinued joint operations 192,947 (85,579) Reserve of investment in BIA - 1,143,115 Gain (loss) on disposal of discontinued operations (1,457,059) 190,481 Depreciation and amortization 20,982 35,720 Gain on sale of assets (121) - Increase/decrease in current assets and current liabilities: Accounts receivable 42,426 89,011 Prepaid and other (1,833) 32,379 Inventory 15,951 129,382 Accounts payable and accrued liabilities (224,521) 236,080 ----------- ------------- Net cash used by operating activities (642,091) (605,192) ----------- ------------- Cash flows from investing activities: Investment in and advances to joint operations - (37,119) Distributions and repayments from joint operations - 8,673 Advances paid on note receivable 89,100 - Proceeds from sale of assets 3,539,333 - Acquisition of property and equipment - (26,013) ----------- ------------- Net cash used by investing activities 3,450,233 (54,459) ----------- ------------- Cash flows from financing activities: Borrowings of debt 142,000 - Repayment of debt and long-term obligations (2,192,000) (33,711) Purchase of preferred stock - (59,761) Preferred dividends paid - (102,489) ----------- ------------- Net cash provided (used) by financing activities (2,050,000) (195,961) ----------- ------------- Net increase (decrease) in cash and cash equivalents 758,142 (855,612) Cash and cash equivalents, beginning of period 110,380 965,992 ----------- ------------- Cash and cash equivalents, end of period $ 868,522 $ 110,380 =========== ============= See accompanying notes to consolidated financial statements. BALTIC INTERNATIONAL USA, INC. Notes to Consolidated Financial Statements NOTE 1 - BUSINESS OPERATIONS AND FINANCIAL CONDITION Business operations Baltic International USA, Inc. (the "Company" or "BIUSA"), a Texas corporation, was organized on March 1, 1991 to identify, form and participate in aviation- related and other business ventures in the former Soviet Union. The Company initially pursued its plans to participate in airline service in Latvia through a 49% interest in a newly formed start-up airline - Baltic International Airlines ("BIA"), a limited liability company registered in the Republic of Latvia. The Company made significant investments in and advances to BIA, which has incurred losses since inception. 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 owned an 8.02% interest in Air Baltic. As discussed in Note 5, the Company sold its interest in Air Baltic in January 1999. BIA has no current operations and has not conducted any substantive business operations since October 1995. The Company was also engaged in providing aviation catering services to Air Baltic and other airlines through its interest in AIRO Catering Services ("AIRO"). As discussed in Note 5, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in July 1999. In October 1999, the Company sold the remaining 23% of AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of approximately $200,000 in debt. American Distributing Company ("ADC"), a wholly owned subsidiary, began operations on December 1, 1995 as a food and beverage distribution company. In August 1998, the Company ceased operations as a cargo marketer to Air Baltic and other airlines through its wholly owned subsidiary, Baltic World Air Freight ("BWAF"). In February 2000, the Company purchased Advanced Reclamation Company, L.L.C. ("ARC") from the Nicol Family Partnership. The Company purchased all of the units of ARC for cash of $400,000, a total of 500,000 common shares of the Company, a note payable to seller of an additional $400,000 and an earnout agreement. ARC is a complete refrigerant management company. ARC provides a full range of refrigerant services including, but not limited to, recovery, reclamation, the sale of new or reclaimed refrigerants. Financial condition The Company has incurred operating losses since inception through December 31, 1999. The Company incurred operating losses of $450,349 in 1999 and $1,971,242 in 1998. At December 31, 1999, the Company had an accumulated deficit of $13,419,467. Net cash used in operating activities was $642,091 in 1999 and $605,192 in 1998. The Company currently has limited cash resources available and has obligations due or past due. Management believes that the Company will be able to achieve a satisfactory level of liquidity to meets its business plan and capital needs through December 31, 2000. During 1999, the Company borrowed an aggregate principal amount of $118,000 as bridge financing from officers and directors of the Company. In connection with these borrowings, the Company issued warrants to purchase 11,800 shares of common stock at an exercise prices of $0.10 to $0.15 per share. Additionally, management believes the Company has the ability to obtain additional financing from key officers, directors and certain investors. However, there can be no assurance that the Company will be able to generate sufficient liquidity to maintain its operations. In addition, management believes that the Company can continue to defer certain amounts payable by the Company that are either currently due or past due. At December 31, 1999, the Company had cash of $868,522. Significant payments made in the first quarter of 2000 include $400,000 in connection with the purchase of ARC and $87,000 paid to officers for deferred compensation previously accrued. The Company has limited cash resources available and has obligations due and past due. The above factors raise substantial doubt about the Company's ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded assets or other adjustments should the Company be unable to continue as a going concern. 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 accounted for its investment in AIRO using the equity method until the Company sold its remaining interest in AIRO in October 1999. The Company's interest in Air Baltic was accounted for using the cost method because the Company owned only 8.02% of Air Baltic and had 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. The Company's interest in Lithuanian Aircraft Maintenance Corporation ("LAMCO") was accounted for using the cost method because the Company owned only 2.6% of LAMCO and it 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. Goodwill is amortized over ten years. As a result of the discontinued operations of BWAF, all unamortized goodwill was written off in 1998. Long-lived assets The Company periodically evaluates the carrying value of long-lived assets for potential impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Income taxes Deferred income taxes result from temporary differences between the financial statements and tax basis of assets and liabilities. Income (loss) per common share Basic earnings per share is computed by dividing income available to common shareholders 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. 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. 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 At December 31, 1999 and 1998, the Company's cash in financial institutions exceeded the federally insured deposits limit by $766,507 and $0, respectively. An investment of $760,000 in a reverse repurchase agreement is included in cash and cash equivalents at December 31, 1999. The collateral for this investment consisted of a collateralized mortgage obligation with a market value of approximately $761,000 at December 31, 1999. Foreign currency translation Portions of the Company's operations are conducted in convertible foreign currencies and are translated into U.S. dollars at average current rates during each period reported. Foreign currency transaction gains and losses are included in net income. Net exchange gains or losses resulting from the translation of assets and liabilities are accumulated as a separate component of joint venture partners' equity. Any translation gains or losses are not significant and therefore have not been recorded on the Company's consolidated balance sheets as of December 31, 1999 and 1998. New accounting pronouncements The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments of an Enterprise and Related Information" as of December 31, 1998. SFAS No. 131 requires that segment reporting for public reporting purposes be conformed to the segment reporting used by management for internal purposes. This standard also requires disclosures about products and services, geographic areas and major customers. In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up Activities" which requires at adoption the Company to write-off any unamortized start-up costs as a cumulative change in accounting principle and, going forward, expense all start-up activity costs as they are incurred. The Company adopted SOP 98-5 in the first quarter of 1999 and resulted in a negative effect on its net equity in earnings of joint operations of $298,877 as a result of the write-off of AIRO's unamortized start-up costs. In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", which establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. Changes in the derivative's fair value will be accounted for based upon their intended use and designation. Since the Company's holdings in such instruments are minimal, adoption of this standard is not expected to have a material effect on the consolidated financial statements. The Company is required to adopt SFAS No. 133 no later than the first quarter of fiscal 2001. Reclassifications Certain prior year amounts have been reclassified to conform to the current presentation. NOTE 3 - NOTE RECEIVABLE The note receivable of $89,100 and accrued interest of $3,471 at December 31, 1999 is from Pembrooke Calox, Inc., a start-up company intending to begin limestone operations in 2000. In February 2000, the Company acquired a 10% interest in Pembrooke Calox. The note bears interest at 10% and was due on January 31, 2000. The note receivable is collateralized by common shares of another public company and a 10% interest in Pembrooke Calox. These common shares had a value of approximately $155,000 at December 31, 1999 based on the closing market price. The Company is in the process of liquidating the common shares included in the collateral for repayment of the note receivable. NOTE 4 - CONSOLIDATED SUBSIDIARIES American Distributing Company ADC, a wholly owned subsidiary of BIUSA, distributes beer products in the Baltic States. This business commenced in December 1995, as a successor to the Company's distribution activities which began in 1993. Baltic World Air Freight The Company operated BWAF to serve as the cargo sales agent for Air Baltic and other airlines in Riga, Latvia. In August 1998, the Company ceased the operations of BWAF. The consolidated statements reflect the operating results of the discontinued operations separately from continuing operations including the write-off of unamortized goodwill. The unamortized goodwill of $176,766 resulting from the acquisition of the remaining 50% interest in BWAF was written off in 1998. Operating results for the discontinued operations were: December 31, 1998 Operating revenues $ 101,461 Loss from operations $ (128,236) Net loss $ (47,675) At December 31, 1999, BWAF had current assets aggregating $10,960, noncurrent assets of $2,024 and current liabilities of $148,302 which are included in the Company's consolidated financial statements. The Company recorded a loss from the disposal of the operation for the write-off of the goodwill and the estimated costs to liquidate BWAF. NOTE 5 - INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS The investment in and advances to joint operations are as follows: December 31, 1999 1998 Air Baltic $ - $2,144,212 BCS 1,500 5,000 AIRO - 1,126,882 --------- --------- Total $ 1,500 $3,276,094 ========= ========= 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. On January 4, 1999, the Company sold its remaining 8.02% interest in Air Baltic to SAS for $2,144,333 in cash under the terms of the option agreement between the Company and SAS. The Company used the proceeds from the sale to repay the $2 million loan from ORESA Ventures N.V. Summarized financial information for Air Baltic is as follows (100%): December 31, 1998 Current assets $ 10,931,000 Noncurrent assets 23,675,000 ---------------- Total assets $ 34,606,000 ================ Current liabilities $ 22,062,000 Noncurrent liabilities 12,126,000 Equity 418,000 ---------------- Total liabilities and equity $ 34,606,000 ================ Year Ended December 31, 1998 Revenues $ 39,757,000 Loss from operations $ (5,487,000) Net loss $ (7,325,000) Baltic International Airlines The Company entered into a joint venture agreement with the Latvian Civil Aviation Department, an agency of the Government of Latvia, on June 6, 1991 to create BIA as a limited liability company in the Republic of Latvia. The Company currently owns an 89% interest in BIA. As discussed in Note 1, BIA experienced significant losses that 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 that 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 in the future. 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. The Company recorded a reserve against the investment in BIA of $1,143,115 in 1998 as a result of the uncertainty of the characteristics of the contribution from the Latvian partner and the length of time that has transpired since the Latvian partner committed to make the contribution. 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 was liquidated in 1998. The Company received cash of $8,673, equipment with an estimated value of $3,700 and Lithuanian government securities with a face value of approximately $28,000 from the liquidation in 1998. These government securities bear no interest, mature beginning in April 2002 and have been included in other assets in the consolidated balance sheet. Joint operations using equity method - 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 ("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 for a 49% interest. AIRO is targeting various airports for in- flight catering development. During 1997, LSG purchased 51% of TOPflight. AIRO is accounted for using the equity method as certain provisions of the partnership agreement result in the Company not having control of AIRO. In December 1997, the Company entered into a share purchase and shareholder agreement with LSG. The primary purpose of the agreement is to identify AIRO as the vehicle for the development of new LSG in-flight kitchens in Eastern Europe and the Republics of the former Soviet Union. Under the agreement, the Company sold 5% of the stock of AIRO in return for the LSG commitments and $600,000 in cash. Following this share purchase, the Company controlled 46% of AIRO and LSG controls 54%. In July 1999, the Company sold a 23% interest in AIRO to ORESA Ventures N.V. and Celox S.A. in exchange for an aggregate of 6,250,000 shares of the Company's common stock, warrants to purchase 6,250,000 shares of the Company's common stock and $250,000 in cash. In October 1999, the Company sold the remaining 23% of AIRO to ORESA Ventures N.V. and Celox S.A. for $1,145,000 in cash and forgiveness of approximately $200,000 in debt. The Company recognized a gain of $1,457,059 on these sales. At December 31, 1999, the Company has receivables aggregating $764,157. When these receivables are received, additional gains will be recorded by the Company. Summarized financial information for AIRO is as follows (100%): December 31, 1998 Current assets $ 1,089,182 Noncurrent assets 6,468,654 ---------- Total assets $ 7,557,836 ========== Current liabilities $ 2,157,576 Minority interest 603,134 Equity 4,797,126 ---------- Total liabilities and equity $ 7,557,836 ========== A summary of the results of operations of the combined joint operations accounted for using the equity method of accounting is as follows: Nine Months Ended Year Ended September 30, December 31, 1999 1998 Revenues $ 5,031,519 $ 5,149,474 Income from operations $ 908,540 $ 637,956 Cumulative effect of change in accounting for start-up costs $ (651,574) $ - Net income (loss) $ (548,328) $ (80,867) 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. In January 1998, the Company transferred its remaining direct interest in RCS to AIRO as part of a capital contribution. At December 31, 1998, RCS was owned 58.5% by AIRO and 41.5% by the principals of the Company's partner in BCS. 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. BCS ceased its operations in 1998 and has been liquidated by the Company in 2000. NOTE 6 - DEBT Debt consists of the following: 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%, repaid in January 1999 $ - $ 2,000,000 Subordinated bridge loan financing, interest payable quarterly at 10% per annum, secured by warrants to purchase 175,000 common shares of the Company, originally due March 31, 1996, repaid in October 1999 - 50,000 ---------- ---------- Total debt - 2,050,000 Less short-term debt, net - (2,050,000) ---------- ---------- Long-term debt, net $ - $ - ========== ========== NOTE 7 - INCOME TAXES The components of net deferred tax assets consisted of the following: December 31, 1999 1998 Deferred tax assets: Net operating loss carryforward $ 2,435,923 $ 3,020,442 Reserve on investment 98,090 - Losses from joint operations and subsidiaries 91,884 - Amortization and depreciation 54,315 54,854 Deferred compensation - 89,222 Other - 30,720 ---------- ---------- Total deferred tax assets 2,680,212 3,195,238 ---------- ---------- Deferred tax liabilities: Unremitted earnings of joint operations - 129,709 Other 1,977 1,977 ---------- ---------- Total deferred tax liabilities 1,977 131,686 ---------- ---------- Net deferred tax assets before valuation allowance 2,678,235 3,063,552 Valuation allowance (2,678,235) (3,063,552) ---------- ---------- Net deferred tax assets $ - $ - ========== ========== Provisions for income taxes in the statements of operations were as follows: Year ended December 31, 1999 1998 Current expense: U.S. $ - $ - Foreign - - Deferred expense - - ---------- ---------- Total expense $ - $ - ========== ========== 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. In 1999, the Company utilized approximately $1,700,000 of the net operating loss carryforwards primarily due to the gain on the sale of the interest in AIRO. As of December 31, 1999, the Company had net operating loss carryforwards of approximately $7,200,000 available to offset future taxable income. These carryforwards will expire at various dates beginning in 2009. NOTE 8 - 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. As discussed in Note 5, the Company reacquired all of these shares and warrants in July 1999 as part of the consideration received from the sale of a 23% interest in AIRO. At December 31, 1999 and 1998, the Company has 6,173,269 and 42,444 treasury shares, respectively. NOTE 9 - 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 follows the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation" which allow 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 income (loss) and income (loss) per common share would have changed to the following pro forma amounts:
Year ended December 31, 1999 1998 Net income (loss) As Reported $ 769,137 $(2,375,781) Pro Forma 704,287 (2,452,849) Basic income (loss) per common share As Reported 0.05 (0.16) Pro forma 0.04 (0.17) Diluted income (loss) per common share As Reported 0.03 (0.16) Pro forma 0.03 (0.17)
The resulting pro forma compensation cost may not be representative of that to be expected in future years because the method of accounting under SFAS No. 123 has not been applied to options granted prior to January 1, 1995. At December 31, 1999, the Company had 1,190,700 shares of common stock reserved for issuance upon exercise of outstanding options, and 309,300 options were available for future grant under the Plan. A summary of changes in outstanding options is as follows:
Year Ended December 31, 1999 1998 Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price Shares under option, beginning of period 1,102,366 $ 0.76 1,072,366 $ 0.78 Changes during the period: Granted 421,000 0.14 30,000 0.13 Canceled (332,666) 1.03 - - Exercised - - - - --------- --------- Shares under option, end of period 1,190,700 $ 0.46 1,102,366 $ 0.76 ========= ========= Options exercisable, end of period 1,025,700 $ 0.52 864,016 $ 0.85 ========= =========
The exercise prices of the options outstanding at December 31, 1999 range from $0.10 to $1.38. The weighted average contractual life of the options outstanding at December 31, 1999 was 3.9 years. The options granted in 1999 and 1998 were issued to officers, directors and employees with an exercise price equal to the market price of the Company's common stock on the grant date. The weighted-average grant-date fair value of options granted during 1999 was $0.13 and during 1998 was $0.11. 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 1999 and 1998: risk-free interest rate of 6.0% and, 6.0%, respectively; expected dividend yield of 0% and 0%, respectively; expected lives of 6 years and 5 years, respectively; and expected volatility of 118% and 122%, respectively. NOTE 10 - WARRANTS At December 31, 1999, the Company had 3,422,650 shares of common stock reserved for issuance upon exercise of outstanding warrants. A summary of changes in outstanding warrants is as follows:
Year Ended December 31, 1999 1998 Weighted Weighted Average Average Shares Exercise Price Shares Exercise Price Shares under warrant, beginning of period 9,911,849 $ 1.00 10,045,845 $ 1.01 Changes during the period: Granted 11,800 0.14 - - Canceled (6,500,999) 0.80 (133,996) 0.84 Exercised - - - - ---------- ---------- Shares under warrant, end of period 3,422,650 $ 1.38 9,911,849 $ 1.00 ========== ========== Warrants exercisable, end of period 3,422,650 $ 1.38 9,911,849 $ 1.00 ========== ==========
The exercise prices of the warrants outstanding at December 31, 1999 range from $0.10 to $9.80. The weighted average contractual life of the warrants outstanding at December 31, 1999 was 1.8 years. The weighted-average grant- date fair value of warrants granted during 1999 was $0.12. During 1999, the Company issued warrants to purchase 11,800 shares of common stock at exercise prices of $0.10 to $0.15 per share in connection with bridge financing aggregating $118,000 from officers and directors of the Company. The bridge financing was repaid in 1999. NOTE 11 - 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. 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, 1999, 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 1998 and 1999, there were no conversions of Series B Preferred Stock into shares of the Company's common stock. During 1998, the Company purchased two shares of Series B Preferred Stock from a shareholder for an aggregate $70,000 including accrued dividends. There were no such purchases in 1999. NOTE 12 - INCOME (LOSS) PER SHARE Supplemental disclosures for loss per share are as follows: Year ended December 31, 1999 1998 Basic Net income (loss) to be used to compute basic income (loss) per share: Net income (loss) $ 769,137 $(2,375,781) Less preferred dividends (158,000) (159,116) ---------- ---------- Net income (loss) attributable to common shareholders $ 611,137 $(2,534,897) ========== ========== Weighted average number of shares: Average common shares outstanding 12,683,372 15,568,063 ========== ========== Basic loss per common share $ 0.05 $ (0.16) ========== ========== Diluted Net income (loss) to be used to compute diluted income (loss) per share: Net income (loss) $ 769,137 $(2,534,897) ========== ========== Weighted average number of shares: Average common shares outstanding 12,683,372 15,568,063 Impact of convertible preferred stock 10,779,123 - ---------- ---------- Average common shares outstanding, assuming dilution 23,462,495 15,568,063 ========== ========== Diluted loss per common share $ 0.03 $ (0.16) ========== ========== NOTE 13 - RELATED PARTY TRANSACTIONS The following is a summary of related party transactions that have occurred during 1999 and 1998, 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 $23,661 and $78,000 of such revenue for each of the years ended December 31, 1999 and 1998, respectively. The general sales agency revenue from Air Baltic comprised 12% of the Company's revenue in 1998. Air Baltic purchases goods and services from RCS and AIRO. BWAF was dependent upon Air Baltic for cargo transportation. NOTE 14 - 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 $18,189 and $37,595 for 1999 and 1998, respectively. Future minimum lease payments under noncancelable operating leases are as follows: Year Amount 2000 $ 17,527 2001 1,513 ---------- Total $ 19,040 ========== 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 15 - SUPPLEMENTAL CASH FLOW DISCLOSURES Supplemental disclosure of noncash transactions is as follows: Year ended December 31, 1999 1998 Conversion of accounts payable and accrued dividends to equity $ - $ 3,750 Common stock issued for services 9,311 37,242 Dividends declared and unpaid 158,000 97,616 Common shares and warrants received for sale of AIRO 1,928,817 - Forgiveness of debt 200,123 - Transfer of RCS shares to AIRO - 191,695 Supplemental disclosures: Interest paid $ 151,927 $ 8,153 Income taxes paid $ - $ - NOTE 16 - SEGMENT INFORMATION As discussed in Note 2, the Company adopted SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information" as of December 31, 1998. Reportable segments are based on internal organizational structure and are comprised of Catering, Airlines, Distribution and Cargo. The Company's catering products were primarily sold to airlines. Airline services are promoted to the general public. Distribution products are sold principally to wholesalers, food stores and food and drink establishments. Cargo services were sold to freight forwarders. Segment financial information is summarized as follows:
Corporate Catering Airlines Distribution Cargo and Other Total 1999 Revenues $ - $ 23,661 $ 238,039 $ - $ - $ 261,700 Income (loss) before income taxes and discontinued operations 1,258,303 13,338 (115,890) - (386,614) (489,166) Discontinued operations - - - - - 1,258,303 Net income (loss) 1,258,303 13,338 (115,890) - (386,614) 769,137 Other disclosures: Depreciation and amortization $ - $ - $ 20,193 $ - $ 789 $ 20,982 Capital expenditures - - - - - Investment in and advances to joint operations at end of year 1,500 - - - - 1,500 Total assets at end of year 1,500 - 101,964 12,984 997,242 1,113,690 1998 Revenues $ - $ 78,000 $ 494,956 $ - $ - $ 572,956 Income (loss) before income taxes and discontinued operations - (1,065,115) (117,120) - (1,040,969) (2,223,204) Discontinued operations 85,579 - - (238,156) - (152,577) Net income (loss) 85,579 (1,065,115) (117,120) (238,156) (1,040,969) (2,375,781) Other disclosures: Depreciation and amortization $ - $ - $ 3,657 $ - $ 32,063 $ 35,720 Capital expenditures - - 25,813 - 200 26,013 Investment in and advances to joint operations at end of year 1,192,965 2,157,762 - - - 3,350,727 Total assets at end of year 1,192,965 2,157,762 203,221 17,313 122,936 3,694,197
Information concerning principal geographic areas was as follows: North America Eastern Europe Total 1999 Revenues $ 23,661 $ 238,039 $ 261,700 Investment in and advances to joint operations at end of year - 1,500 1,500 Other long-term assets at end of year 578 47,175 47,753 1998 Revenues $ 78,000 $ 494,956 $ 572,956 Investment in and advances to joint operations at end of year - 3,276,094 3,276,094 Other long-term assets at end of year 32,694 36,416 69,110 NOTE 17 - SUBSEQUENT EVENTS In February 2000, the Company purchased Advanced Reclamation Company ("ARC") from the Nicol Family Partnership for $400,000 in cash, a total of 500,000 common shares of the Company, a note payable to seller of an additional $400,000 and an earnout agreement. The note payable matures on January 1, 2005, has an interest rate of 10% with interest due quarterly and is collateralized by the fixed assets of ARC. The note payable has a prepayment provision such that prepayments of principal are to be made equal to the ARC's annual pretax profits in excess of $225,000. However, the prepayments are not to exceed $120,000 for any year. The earnout agreement provides for an equal split of ARC's annual pretax profits in excess of $225,000 between the Company and the Nicol Family Partnership for a period of three years ending December 31, 2002. The following unaudited pro forma condensed financial statements are based upon our historical consolidated financial statements and those of ARC. You should read this pro forma financial information in connection with the historical financial statements. With respect to our acquisition of ARC, the unaudited pro forma condensed financial statements give effect to our acquisition of ARC applying the purchase method of accounting and adjustments that are directly attributable to the ARC acquisition and are anticipated to have a continuing impact. We have prepared the unaudited pro forma condensed financial statements based upon currently available information and assumptions that we have deemed appropriate. This pro forma information may not be indicative of what actual results would have been, not does the data purport to represent our and ARC's combined financial results for future periods. We are currently in the process of allocating the purchase price among the assets acquired and the liabilities assumed. The allocation of the purchase price to the assets and liabilities acquired reflected in this pro forma financial data is preliminary. The final purchase price and its allocation are expected to be completed within one year following the ARC acquisition. Accordingly, the actual financial position and results of operations may differ from these pro forma amounts. Condensed financial information for the unaudited pro forma consolidated balance sheet as of December 31, 1999 assuming this transaction occurred on December 31, 1999 is as follows:
Actual ARC Pro Forma December 31, December 31, Pro Forma December 31, 1999 1999 Adjustments 1999 ASSETS CURRENT ASSETS Cash and cash equivalents $ 868,522 $ 3,721 $ (400,000) (a) $ 472,243 Accounts receivable 45,825 49,452 - 5,277 Note receivable 89,100 - - 89,100 Inventory 50,638 15,870 - 66,508 Prepaids and deposits 10,352 16,943 (1,220) (b) 26,075 ------------ ------------ ------------ ------------ Total current assets 1,064,437 85,986 (401,220) 749,203 PROPERTY AND EQUIPMENT, net 14,229 168,072 - 182,301 INVESTMENTS IN AND ADVANCES TO JOINT OPERATIONS 1,500 - - 1,500 GOODWILL - - 761,555 (c) 761,555 OTHER ASSETS 33,524 20,748 - 54,272 ------------ ------------ ------------ ------------ Total assets $ 1,113,690 $ 274,806 $ 360,335 $ 1,748,831 ============ ============ ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable and accrued liabilities $ 270,076 $ 112,044 $ - $ 382,120 Dividends payable 388,632 - - 388,632 Short-term debt, net - 58,746 (2,000) (b) 56,746 ------------ ------------ ------------ ------------ Total current liabilities 658,708 170,790 (2,000) 827,498 LONG-TERM DEBT - 6,351 400,000 (a) 406,351 ------------ ------------ ------------ ------------ Total liabilities 658,708 177,141 398,000 1,233,849 ------------ ------------ ------------ ------------ SHAREHOLDERS' EQUITY Warrants 252,793 - - 252,793 Preferred stock: Series A 1,230,000 - - 1,230,000 Series B 350,000 - - 350,000 Common stock 156,292 - - 156,292 Additional paid-in capital 12,763,943 - (11,160) (a) 12,752,783 Accumulated deficit (13,419,467) - - (13,419,467) Treasury stock, at cost (878,579) - 71,160 (a) (807,419) Member's equity - 97,665 (97,665) (d) - ------------ ------------ ------------ ------------ Total shareholders' equity 454,982 97,665 (37,665) 514,982 ------------ ------------ ------------ ------------ Total liabilities and shareholders' equity $ 1,113,690 $ 274,806 $ 360,335 $ 1,748,831 ============ ============ ============ ============
Condensed financial information for the unaudited pro forma consolidated income statement for the year ended December 31, 1999 assuming this transaction occurred on January 1, 1999 is as follows:
Actual ARC Pro Forma December 31, December 31, Pro Forma December 31, 1999 1999 Adjustments 1999 REVENUES: Beverage distribution $ 238,039 $ - $ - $ 238,039 Refrigerant revenue - 805,736 - 805,736 General sales agency revenue 23,661 - - 23,661 ------------ ------------ ------------ ------------ Total operating revenues 261,700 805,736 - 1,067,436 ------------ ------------ ------------ ------------ OPERATING EXPENSES: Cost of revenue 233,301 432,284 - 665,585 Personnel and consulting 214,375 164,566 - 378,941 Legal and professional 85,675 401 - 86,076 Other general and administrative 178,698 256,856 (52,468) (e) 383,086 ------------ ------------ ------------ ------------ Total operating expenses 712,049 854,107 (52,468) 1,513,688 ------------ ------------ ------------ ------------ INCOME (LOSS) FROM OPERATIONS (450,349) (48,371) 52,468 (446,252) ------------ ------------ ------------ ------------ OTHER INCOME (EXPENSE): Interest expense (25,800) (2,709) (40,000) (f) (68,509) Interest income 10,360 - - 10,360 Other income (expense) (23,377) - - (23,377) ------------ ------------ ------------ ------------ Total other income (expense) (38,817) (2,709) (40,000) (81,526) ------------ ------------ ------------ ------------ INCOME (LOSS) BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS (489,166) (51,080) 12,468 (527,778) INCOME TAX EXPENSE - - - - DISCONTINUED OPERATIONS 1,258,303 - - 1,258,303 ------------ ------------ ------------ ------------ NET INCOME $ 769,137 $ (51,080) $ 12,468 $ 730,525 ============ ============ ============ ============ PER SHARE AMOUNTS: Basic $ 0.05 $ 0.05 Diluted $ 0.03 $ 0.03
NOTES TO UNAUDITED PRO FORMA CONDENSED FINANCIAL STATEMENTS The following pro forma adjustments have been made to the unaudited pro forma financial statements: (a) Reflects the purchase of ARC for cash of $400,000, a total of 500,000 Baltic common shares, a note payable to seller of an additional $400,000. (b) Reflects the elimination of receivables from and payables to related parties of ARC that were eliminated as part of the acquisition of ARC. (c) Reflects the goodwill for the purchase of ARC. (d) Reflects the elimination of ARC's equity account. (e) Reflects the impact of goodwill amortization of $38,078 for the year less the elimination of $5,800 of administrative costs reimbursed to a related party of the former owner and $84,746 of personal expenses incurred by the former owner. (f) Reflects the interest expense accrual for the loan used to purchase ARC. In February 2000, the Company acquired a 10% interest in Pembrooke Calox, Inc. Pembrooke Calox owns about 350 acres in Indiana containing high calcium limestone. The Company acquired this interest in exchange for its efforts during 1999 and 2000 to develop the business plan and negotiate operating agreements and debt financing for Pembrooke Calox. SIGNATURES In accordance with the requirements of Section 13 or 15(d) of the Exchange Act, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 13th day of April, 2000. BALTIC INTERNATIONAL USA, INC. /s/ Robert L. Knauss ------------------------------------------------- ROBERT L. KNAUSS Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Robert L. Knauss Chairman of the Board and Chief April 13, 2000 - ----------------------- Executive Officer (Principal ROBERT L. KNAUSS Executive Officer) /s/ David A. Grossman President, Chief Financial Officer, April 13, 2000 - ----------------------- Corporate Secretary and Director DAVID A. GROSSMAN (Principal Financial and Accounting Officer) /s/ Homi M. Davier Director April 13, 2000 - ----------------------- HOMI M. DAVIER /s/ James W. Goodchild Director April 13, 2000 - ----------------------- JAMES W. GOODCHILD /s/ Paul R. Gregory Director April 13, 2000 - ----------------------- PAUL R. GREGORY /s/ Juris Padegs Director April 13, 2000 - ----------------------- JURIS PADEGS /s/ Ted Reynolds Director April 13, 2000 - ----------------------- TED REYNOLDS EX-23.1 2 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our report included in this Annual Report on Form 10-KSB, into the Company's previously filed registration statement on Form S-8 (33-90030). ARTHUR ANDERSEN LLP Houston, Texas April 13, 2000 EX-27 3
5 YEAR YEAR DEC-31-1999 DEC-31-1998 DEC-31-1999 DEC-31-1998 868,522 110,380 0 0 45,825 163,880 0 0 50,638 66,589 1,064,437 348,993 14,229 35,211 0 0 1,113,690 3,694,197 658,708 2,984,663 0 0 0 0 1,580,000 1,580,000 156,292 156,292 (1,281,310) (1,026,758) 1,113,690 3,694,197 261,700 572,956 261,700 572,956 233,301 490,126 712,049 2,544,198 23,377 1,935 0 1,143,115 25,800 265,563 (489,166) (2,223,204) 0 0 (489,166) (2,223,204) 1,258,303 (152,577) 0 0 0 0 769,137 (2,375,781) 0.05 (0.16) 0.03 (0.16)
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