U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
CELTIC INVESTMENT, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 36-3729989
(State or other jurisdiction of (I.R.S. employer
incorporation or organization identification
No.)
901 Warrenville Road, Suite 104
Lisle, Il 60532
(Address of principal executive offices)
Issuer's telephone number, including area code: (708) 434-8093
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2)has been subject to such filing requirements for the past 90 days. Yes x/ No
.
Common Stock outstanding at November 13, 1996 - 3,306,471 shares of $.001
par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
CELTIC INVESTMENT, INC.
For the Quarter Ended September 30, 1996
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--September 30, 1996 and
June 30, 1996 3
Condensed Consolidated Statements of Income--for the three months
ended September 30, 1996 and 1995 4
Condensed Consolidated Statements of Cash Flows--for the three
months ended September 30, 1996 and 1995 5
Condensed Consolidated Statements of Stockholders' Equity 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6(a). Exhibits 12
Item 6(b). Reports of Form 8-K 12
2
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CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, 1996 June 30, 1996
<S> <C> <C>
Cash $ 509,652 $ 450,864
Receivables 3,584,399 3,746,347
Furniture, fixtures and equipment, net of accumulated
depreciation 9/30/96 $36,766; 6/30/96 $32,205 58,968 61,803
Deferred Finance Fees, net of accumulated amortization
9/30/96 $32,199; 6/30/96 $12,880 139,632 158,951
Prepaid Expenses and Other Assets 17,809 7,713
_________________ ________________
Total assets $ 4,310,460 $ 4,425,678
================= ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and Accrued Expenses 178,545 263,804
Due to factoring clients 1,179,988 1,321,829
Note Payable - Line of Credit (Capital Factors) 69,936 0
_________________ ________________
Total liabilities 1,428,469 1,585,633
Commitments and contingencies
Stockholders' equity:
Preferred stock - $.001 par value; 7,500,000 shares
authorized, none issued and outstanding
Common stock - $.001 par value; 25,000,000 shares
authorized, 9/30/96 3,306,471; 6/30/96 3,306,471 3,306 3,306
Additional paid-in capital 4,232,904 4,232,904
Accumulated deficit (1,282,357) (1,324,889)
_________________ ________________
Total stockholders' equity 2,953,853 2,911,321
Less notes receivable and interest receivable from
stockholders (71,862) (71,276)
_________________ ________________
2,881,991 2,840,045
_________________ ________________
Total liability and stockholders' equity $ 4,310,460 $ 4,425,678
=============== =============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Fevenues:
Factoring income $ 337,612 $ 325,639
Interest 4,244 12,961
Other 30,895 179
________________ _____________
Total revenues 372,751 338,779
Interest expense 24,156 0
________________ _____________
Income after interest expense 348,595 338,779
Operating Expenses:
Salaries and employee benefits 132,263 132,378
Occupancy 25,724 22,793
Servicing Costs 18,230 50,580
Professional fees 64,535 123,495
Other 65,311 110,993
_______________ ______________
Total operating expenses 306,063 440,239
Net Income (loss) $ 42,532 $ (101,460)
=============== ==============
Primary Earnings per Share $ 0.01 $ (0.04)
=============== ==============
Fully Diluted Earnings per Share $ 0.01 N/A
=============== ==============
Weighted average shares 3,439,356 2,778,438
=============== ==============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1996 September 30, 1995
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 42,532 $ (101,460)
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Allowance for losses
Depreciation 4,561 4,417
Amortization of deferred finance fees 19,319
Changes in operating assets and liabilities:
(Increase) Decrease in factored invoices 161,948 (2,200,389)
Increase in accounts payable and accrued liabilities (85,259) (17,658)
Increase (Decrease) in payables to factoring clients (141,841) 1,273,835
(Increase) in other assets (10,682) (77,854)
Net cash (used in)
operating activities (9,422) (1,119,109)
______________ _____________
Cash flows from investing activities -
Purchase of furniture, fixtures and equipment (1,726) 0
Net cash (used in)/provided by investing activities (1,726) 0
_____________ _____________
Cash flows from financing activities:
Advances from Note Payable 69,936 0
Shares returned 0 4,051
_____________ _____________
Net cash provided by (used in) financing
activities 69,936 (4,051)
_____________ _____________
Increase/(decrease) in cash during the period 58,788 (1,123,160)
Cash at beginning of period 450,864 2,117,618
_____________ _____________
Cash at end of period $ 509,652 994,458
============ ============
Amounts paid for interest $24,156 $0
============ ============
Amounts paid for taxes $0 $0
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CELTIC INVESTMENT, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
For the year ended June 30, 1996 and for the three months ended September 30,
1996.
<TABLE>
<CAPTION>
Note Total
Additional Receivable Stock-
Common Stock Paid-in Retained from holders'
Shares Amount Capital Earnings Stockholders Equity
______ ______ __________ _________ ___________ _____________
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 3,328,271 $ 3,328 $4,281,932 $1,154,887) - $ 3,130,373
Common stock cancelled (21,800) (22) (49,028) - - (49,050)
Advances on note receivable
to director-stockholder - - - - (20,000) (20,000)
Advances on notes receivable to
officers-stockholders - - - - (51,276) (51,276)
Net (loss) - - - (170,002) - (170,002)
_________ ________ __________ __________ _________ ____________
Balance June 30, 1996 3,306,471 $ 3,306 $4,232,904 $(1,324,889 $(71,276) $ 2,840,045
_________ ________ __________ ___________ _________ _____________
Advances on notes receivable to - - - - (586) (586)
officers-stockholders
Net Income - - - 42,532 - 42,532
_________ _______ __________ ___________ _________ __________
Balance September 30, 1996 3,306,471 $ 3,306 $ 4,232,904 $(1,282,357) $ (71,862) $ 2,881,991
========= ======== =========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE>
CELTIC INVESTMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________________________
1. General
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring adjustments, except as noted elsewhere in the notes to the
consolidated condensed financial statement) necessary to present fairly its
financial position as of September 30, 1996 and the results of its operations
for the three months ended September 30, 1996 and 1995 and cash flows for the
three months ended September 30, 1996 and 1995. The statements are condensed and
therefore do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements. The
statements should be read in conjunction with the consolidated financial
statements and the footnotes included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1996. The results of operations for the three
months ended September 30, 1996 are not necessarily indicative of the results to
be expected for the full year.
2. Summary of Significant Accounting Policies
Factoring Income
Income from factored invoices is recorded as earned, in accordance with the
related agreements with clients.
Factored Invoices
Factored invoices are carried at net realizable value. A provision for
losses on factored invoices is charged to income in an amount sufficient to
provide for anticipated losses on such invoices. The Company determines those
invoices that are uncollectible based upon a detailed review. Any write-offs are
charged to the allowance for losses on such invoices.
Due to Factoring Clients
The Company pays a percentage of the invoice amounts at the time an invoice
is purchased from a client. Upon collection of the purchased invoices, amounts
collected in excess of factoring income net of the initial payment are remitted
to clients. Such amounts may, in instances, be applied to offset uncollected
factored invoices.
7
<PAGE>
CELTIC INVESTMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
___________________________
Income Taxes
Deferred income taxes are provided based on estimated future tax effects of
differences between financial statement carrying amounts and tax bases of
existing assets and liabilities. A valuation allowance is provided if, based on
the weight of available evidence, it is more likely than not that some or all of
the deferred tax assets will be realized.
The Company's net operating loss carry forwards from prior years will be
used to offset current years taxable income. No income tax expense was booked as
of September 30, 1996.
Per Share Data
Net Income or (Loss) per common share data is based on the weighted average
number of common shares outstanding during each year after considering exercise
of stock options. The 1996 Primary and Fully diluted net income per share has
taken the exercise of stock options and warrants into consideration. In
computing the 1995 Net Loss per share, stock options and warrants are not
considered because they have an anti-dilutive effect.
Concentration of Credit Risk
The Company maintains its cash in bank accounts with highly rated financial
institutions, which may at times exceed federally-insured limits.
Reclassifications
Certain amounts have been reclassified in the 1995 financial statements to
conform to the 1996 presentation.
3. Commitments and Contingencies
The Company has entered into employment agreements with USCF officers that
expire in June 1998.Under the terms of the agreements, the Company has agreed to
pay approximately $ 600,000 in compensation for the remainder of the agreement's
terms. In addition, one Celtic officer has an employment agreement that expires
in July 1998 in which the company has agreed to pay approximately $75,000 in
compensation for the remainder of the agreements terms.
8
<PAGE>
The Company has entered into an operating lease agreement for office space
beginning December 1, 1996 through November 30, 1999. The lease commitment is
approximately $54,000 for Year 1, $55,000 for Year 2, and $56,000 for Year 3.
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
The Company commenced operations in the business of purchasing accounts
receivable in July 1994 when it acquired USCF. For accounting purposes, the
acquisition of USCF was treated as a reverse merger, with USCF treated, for
accounting purposes only, as the acquiring or surviving company. Prior to the
acquisition transaction, the Company had conducted no business operations and
its activities were limited to the sale of its securities to raise its initial
capital. USCF was formed in April, 1994 but did not commence operations until
July 1994. From July 1994 through September 30, 1994, the Company devoted most
of its efforts to commencing active operations in the accounts receivable
business.
The Company organized USCF Illinois as a wholly owned subsidiary in March
1995. USCF Illinois was formed to conduct operations in the business of
purchasing accounts receivables on a recourse basis. In August 1995 USCF
Illinois acquired a portfolio of accounts receivable and rights to purchase
additional accounts receivable of Enviropur West Corporation ("Enviropur") from
Plymouth Capital Ltd. As of November 1, 1996 this portfolio had been
substantially liquidated in the normal course of business and the balance is
expected to be collected in full within the next 30 days.
The Company (through USCF) typically purchases accounts receivable for
between 70% and 80%of face amount depending upon the size, age, and type of
accounts being purchased. The difference between the face amount of the
receivable and the purchase price of the receivable known is the discount. The
Company's discount typically ranges from 2.5% to 7.0%. The Company's revenues
are derived primarily from discounts. The Company's revenues are, to a great
extent dependent upon the amount of capital available for the purchase of
accounts receivable.
Liquidity and Capital Resources
The Company's capital requirements will increase as the volume of purchased
receivables increase although faster turnover of receivables can mitigate some
of those capital needs. Prior to May 1996 the Company relied exclusively on cash
proceeds from the sale of common stock to fund its operations. Inasmuch as the
Company's operations in the past were limited this equity capital was
sufficient. However, in order to expand its ability to purchase receivables on a
meaningful basis,
9
<PAGE>
it was necessary to obtain additional capital from debt financing. On April 30,
1996 the Company entered into a agreement with Capital Business Credit a
division of Capital Factors Inc., of Los Angeles, California for a $6,000,000
line of credit. In July 1996, the Company began borrowing under this agreement.
As of September 30, 1996, the Company had borrowed $69,936 under this line of
credit.
At September 30, 1996, the Company had total assets of $4,310,460 and total
liabilities of $1,428,469. This compares to the total assets of $4,425,678 and
total liabilities of $1,585,633 at June 30, 1996. The change in net assets is
the result of a lower net position of Enviropur factored receivables and a lower
cash balance. The Company made a decision to reduce its Enviropur position in
early 1996. Cash at June 30, 1996, totaled $450,864 compared to $509,652 at
September 30, 1996. The Company used this cash to fund additional receivable
purchases and pay the related fee in obtaining the line of credit. The Company
intends to continue to purchase receivables through existing cash and through
the use of the line of credit.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions, and professional
fees, will be approximately $65,000 for each of the next six months based upon
current operations. However, if operations increase, the Company may be required
to increase its staff which will increase its monthly general and administrative
expenses. The Company anticipates that existing working capital and the line of
credit will be adequate to fund its operations and projected factoring volume
during the next twelve months.
The Company anticipates that the costs related to relocating to new offices
during November 1996 should not exceed $10,000.
On October 18, 1996, the Company announced that it had entered into a
non-binding Letter of Intent to acquire Salt Lake Mortgage Corp., a Salt Lake
City based mortgage broker, and Advantage Realty, Inc., a Salt Lake City based
real estate broker. These proposed acquisitions are are intended to diversify
the Company's operations and are consistent with the Company's business plan to
become a diversified financial services company. If these acquisitions are
effected, of which there can be no assurance, the Company will attempt to raise
additional capital, debt and/or equity, to provide additional capital to Salt
Lake Mortgage so that it may expand its operations. There can be no assurance
that the Company will be able to raise such additional capital.
Results of Operations
Revenues
Total revenues increased 10% to $372,751 for the quarter ended September
30, 1996 compared to $338,779 for the three months ended September 30, 1995.
This increase was primarily the result of increased yields of factored
receivables that have replaced the Enviropur receivables.
10
<PAGE>
The Company has expanded its base of clients and industries for purchased
receivables. This has had a positive impact on yields.
For the quarter ended September 30, 1995, the Company included as
"Factoring Income" certain fees it receives in connection with its factoring
operations. Subsequent to September 30, 1995, the Company revised its accounting
for such fees and now allocates such fees to "Other Income". Therefore, Other
Income for the three months ended September 30, 1996 was $30,895 compared to
Other Income of $179 for the three months ended September 30, 1995 as a result
of the Company's accounting change for such fees. The Company continues
purchasing outright factor's client receivables and participating in other
factoring companies' client receivables.
Interest Expenses
For the three months ended September 30, 1995, the Company had no interest
expense; compared to interest expense of $24,156 for the three months ended
September, 1996. The interest expense was the result of payment of interest on
the Line of Credit and the amortization of deferred financing costs relating to
the Line of Credit. As a result of anticipated increased usage of the $6,000,000
line of credit, the Company anticipates that interest expense will increase
during the second quarter of 1997.
Credit Losses
The Company provided for no credit losses for the three months ended
September 30, 1996 or September 30, 1995. Management will make provisions for
credit losses based upon its continuing review of the Company's portfolio of
invoices. The Company believes that the current allowance for credit losses is
adequate. However, there can be no assurance that provisions for credit losses
will be sufficient to cover any actual losses. Although the Company intends to
minimize credit losses through adequate due diligence procedures, there is
always the possibility that it will incur credit losses.
Operating Expenses
The Company's operating expenses for the quarter ended September 30, 1996
decreased to $306,063 from $440,239 for the three months ended September 30,
1995. This is a reduction of approximately thirty percent (30%). There are four
significant reasons for this decrease. First, legal expenses involving certain
lawsuits and the preparation of a debt placement memorandum for the three months
ending September 30, 1995 were approximately $50,000, there were no legal
expenses for these specific matters for the three months ending September 30,
1996. Second, travel by management to Florida and the relocation of
U.S.Commercial Funding Corporation to Lisle, Illinois for the three months
ending September 30, 1995 approximated $40,000, and there were no such expenses
for the three months ending September 30, 1996. Third, portfolio servicing
expenses were approximately $20,000 less for the three months ending September
30, 1996 than the three months ending September 30, 1995. Lastly, marketing
11
<PAGE>
promotional expenses were approximately $19,000 less for the three months ending
September 30,1996 than the three months ending September 30, 1995.
Net Income (Loss)
As a result of increased revenues and decreased operating expenses the
Company's net income for the quarter ended September 30, 1996 was $42,532
compared to a net loss of $101,460 for the quarter ended September 30, 1995. The
Company reported operating profits in the third and fourth quarters of the year
ending June 30, 1996 of $11,304 and $31,822 respectively. These profits were the
first reported in the Company's history.
Inflation
Business operations have not been materially affected by inflation during
the past year and the current fiscal year.
PART II - OTHER INFORMATION
Item 1. Legal Proceeding. No additional disclosure required.
Item 2. Changes is Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5. Other Information. None.
Item 6.(a) Exhibits. None.
Item 6.(b) Reports on Form 8-K. None.
12
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELTIC INVESTMENT, INC.
Date: November 13, 1996 /s/ Douglas P. Morris
By: Douglas P. Morris
President and Principal Executive Officer
Date: November 13, 1996 /s/ Frank Lucchese
By: Frank Lucchese
Principal Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CELTIC
INVESTMENT, INC.'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1996
<PERIOD-END> SEP-30-1996
<CASH> $509,652
<SECURITIES> 0
<RECEIVABLES> 3,584,399
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,310,460
<PP&E> 58,968
<DEPRECIATION> 36,766
<TOTAL-ASSETS> 4,310,460
<CURRENT-LIABILITIES> 1,428,469
<BONDS> 0
0
0
<COMMON> 2,953,853
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,310,460
<SALES> 0
<TOTAL-REVENUES> 372,751
<CGS> 0
<TOTAL-COSTS> 306,063
<OTHER-EXPENSES> 24,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 42,532
<INCOME-TAX> 0
<INCOME-CONTINUING> 42,532
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 42,532
<EPS-PRIMARY> .01
<EPS-DILUTED> 0
</TABLE>
