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, 1997
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.)
17W220 22nd St., Suite 420
Oakbrook Terrace, Il 60181
--------------------------------------
(Address of principal executive offices)
Issuer's telephone number, including area code: (630) 993-9010
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, 1997 - 3,906,471 shares of $.001
par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
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FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
CELTIC INVESTMENT, INC.
For the Quarter Ended September 30, 1997
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, 1997 and June 30, 1997 3
Condensed Consolidated Statements of Operations--
for the three Months ended September 30, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows--
for the three Months ended September 30, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General 7
Part II - Other Information
Item 1. Legal Proceedings 11
Item 2. Changes in Securities 11
Item 3. Defaults Upon Senior Securities 11
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 5. Other Information 11
Item 6(a). Exhibits 11
Item 6(b). Reports of Form 8-K 11
2
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CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
<TABLE>
<CAPTION>
September 30, 1997 June 30, 1997
------------------ ----------------
<S> <C> <C>
Cash $ 886,463 $ 941,789
Receivables 7,649,980 5,890,308
Furniture, fixtures and equipment, net of accumulated
depreciation 129,988 145,218
Goodwill 665,070 676,670
Deferred finance fees, net of accumulated amortization 92,355 111,674
Prepaid Expenses and other assets 509,818 158,824
--------------- --------------
Total assets $ 9,933,674 $ 7,924,483
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 332,620 315,788
Due to factoring clients 2,060,684 1,404,072
Note Payable - line of credit (Capital Factors) 3,897,556 2,448,060
Long Term Debt ---------------- ---------------
Total liabilities 6,290,861 4,208,177
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 3,907 3,907
Additional paid-in capital 5,076,054 5,076,054
Accumulated deficit (1,375,234) (1,299,762)
----------------- ----------------
Total stockholders' equity 3,704,727 3,780,198
Less notes receivable and interest receivable from
stockholders (61,914) (63,892)
----------------- ----------------
3,642,813 3,716,306
----------------- ----------------
Total liability and stockholders' equity $ 9,933,674 $ 7,924,483
================= ================
See accompanying notes to consolidated financial statements
</TABLE>
3
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CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1997 September 30, 1996
------------------ -------------------
<S> <C> <C>
Revenues:
Factoring income $ 471,546 $ 337,612
Mortgage Origination Income 229,334 0
Realty Commission 74,342 0
Other 0 35,139
---------------- -------------
Total revenues 775,221 372,751
Interest expense 121,564 24,156
---------------- -------------
Income after interest expense 653,657 348,595
Operating Expenses:
Salaries and employee benefits 269,471 132,263
Occupancy 125,479 25,724
Servicing costs 14,679 18,230
Professional fees 119,740 64,535
Goodwill amortization 11,600 0
Other 187,889 65,311
--------------- --------------
Total operating expenses 729,128 306,063
Net Income (loss) $ (75,471) $ 42,532
=============== ==============
Primary earnings per share $ ( 0.02) $ 0.01
=============== ==============
Fully diluted earnings per share ( 0.02) $ 0.01
=============== ==============
Weighted average shares outstanding 4,036,812 3,439,356
=============== ==============
</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, 1997 September 30, 1996
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ (75,471) $ 45,532
Adjustments to reconcile net income loss to net cash (used in)
operating activities:
Allowance for losses
Depreciation 18,028 4,561
Amortization of Goodwill 11,600 0
Amortization of deferred finance fees 19,319 19,319
Changes in operating assets and liabilities:
(Increase) decrease in receivables (2,123,877) 161,948
(Increase) decrease loans receivables 224,905 0
(Increase) decrease in accounts payables (13,576) (85,259)
Increase in accounts payable and accrued liabilities 111,119 0
Increase (decrease) in payables due to factoring clients 656,612 (141,841)
(Increase) in other assets 30,285 (10,682)
------------------- ----------------
Net cash (used in)
operating activities (1,252,175) (9,422)
------------------- ----------------
Cash flows from investing activities -
Purchase of furniture, fixtures and equipment (2,798) (1,726)
Sale of furniture, fixtures, and equipment 0 0
------------------- -----------------
Net cash (used in)/ investing activities (2,798) (1,726)
------------------- -----------------
Cash flows from financing activities:
Advances from note payable 1,199,647 69,936
Repurchase and cancellation of shares 0 0
------------------- -----------------
Net cash provided by financing
activities 1,199,647 69,936
------------------- -----------------
Decrease in cash during the period (55,326) (58,788)
Cash at beginning of period 941,786 450,864
------------------- -----------------
Cash at end of period $ 886,463 $ 509,652
=================== =================
</TABLE>
See accompanying notes to consolidated financial statements
5
<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 necessary to present fairly its financial position as of September
30, 1997 and the results of its operations for the three months ended September
30, 1997 and 1996 and cash flows for the three months ended September 30, 1997
and 1996. 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, 1997. The
results of operations for the three months ended September 30, 1997 and 1996 are
not necessarily indicative of the results to be expected for the full year.
2. Summary of Significant Accounting Policies
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 1997 Primary and Fully diluted net income per
share has taken the exercise of stock options and warrants into consideration.
In computing the 1996 Net (Loss) per share, stock options and warrants are not
considered because they have an anti-dilutive effect.
Reclassifications
Certain amounts have been reclassified in the 1996 financial statements to
conform to the 1997 presentation.
3. Commitments and Contingencies
The Company has not entered into new agreements during the period that
contain any long term commitments or contingencies.
6
<PAGE>
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
The Company is a diversified financial services company engaged, through
its wholly owned subsidiaries, in the business of purchasing accounts
receivables, residential mortgage origination, and residential real estate
sales. The Company's subsidiary, U.S. Commercial Funding Corporation (USCF),
commenced operations in July, 1994. The Company's subsidiary Salt Lake Mortgage
Corporation (SLM), a residential mortgage loan originator, and the Company's
subsidiary Advantage Realty Inc. (ADR), a real estate brokerage operation were
acquired by the Company in January 1997 in a merger transaction.
Results of Operations
The following discussion and analysis in the table below presents the
significant changes in financial conditions and results of continuing operations
of the Company and is categorized by the Company's subsidiaries for the three
months ended September 30, 1997 and 1996. The discussion below of SLM and ADR
results of operations do not make a comparison to the same period for the three
months ending September 30, 1996 for the following reasons: first, SLM and ADR
were accounted for as one business entity through January 30, 1997 and were not
acquired by the Company until February 1, 1997; and second, expenses were
handled on more of a monthly cash basis rather than the current accrual method.
Both of these reasons distort the analysis of a comparative three month period.
This discussion should be read in conjunction with the consolidated financial
statement and notes thereto (in thousand).
Revenues 1997 1996
---- ----
USCF 471 343
SLM 229 0
ADR 74 0
-- --
Total Revenue 774 343
Operating Expense
Interest 122 24
USCF 297 244
SLM 276 0
ADR 119 0
Corporate (Celtic) 37 33
-- --
Total Operating Expense 732 218
--- ---
Operating Profit (Loss)
USCF 67 76
SLM (60) 0
ADR (45) 0
Corporate (37) (33)
---- ----
Total Operating Profit (Loss) (75) 44
---- --
Income Tax Expense 0 0
Net Income (Loss) (75) 44
7
<PAGE>
Revenues
Revenues increased $402,470 (108%) to $775,221 for the three months ended
September 30, 1997 compared to $372,751 for the three months ended September 30,
1996. A total of $303,672 of the revenue increase is attributed to the revenues
of SLM and ADR during the three months ended September 30, 1997. No revenues
were attributed to SLM or ADR for the three months ended September 30, 1996.
USCF revenues increased by $128,000 for the three months ending September
30, 1997, a 37% increase from the three months ending September 30, 1996. The
major reason for the increase is the total volume of purchased accounts
receivable increased from $8,031,000 to $14,493,000, a 80% increase. The
disproportional ratio of total revenue increase of 37% compared to the total
accounts receivable volume increase of 80% results from overall lower factor
fees earned. The lower fees earned is a result of a more competitive general
market. Additionally, during the last 12 months, the average size of USCF's
factored transactions have increased. The increased size of the transaction
usually yields a lower factor fee.
SLM is a mortgage broker engaged in originating and selling conventional
as well as government guaranteed, non-conforming and sub-prime loans. SLM earned
revenues of $229,000 for the three month period ending September 30, 1997. As
stated above, there is no comparable results of operations available for SLM for
the three month ended September 30, 1996. However, total revenues for the three
months ended September 30, 1997 were not as great as anticipated. In order to
increase revenues, SLM has hired a new Vice President of Sales and Marketing.
ADR is a real estate brokerage company which primarily operates in the
State of Utah. As stated above, there is no comparable results of operations
available for ADR for the three month ended September 30, 1996. However, total
revenues for the three months ended September 30, 1997 were not as great as
anticipated. ADR's revenues are derived from commissions earned in connection
with the purchase and sale or real estate. Its revenues are dependent upon it
obtaining real estate listings and upon the closing of purchase and sales
transactions. Prior to June 1997, ADR had conducted limited business operations.
It is now operating on a more full scale basis and it anticipates that its
revenues will increase over the next year. However, it is dependent upon real
estate listings and closings for its revenues and it does compete with numerous
real estate brokerage companies which have greater name recognition, longer
operating histories and more sales personnel.
Operating Expense
Interest expense totaled $122,000 for the three months ending September
30, 1997 compared to $24,000 for the three months ending September 30, 1997. The
primary reason for the increase was USCF's utilization of its line of credit to
fund account receivable purchases. Although the line of credit was in place
during the quarter ended September 30, 1996, USCF had drawn down on the line of
credit in limited amounts. As of September 30, 1996, the amount drawn down on
the line of credit was $69,936. As USCF's factoring business was increased over
the past year, it was drawn down larger amounts from the line of credit and as
of September 30, 1997, the amount due on the line of credit was $3,897,556. The
increase in the use of the line of credit has resulted in the increase in
interest expense. The total amount of receivables purchased for the quarter
ended September 30, 1997 was $14,493,000 compared to $8.031,000 for the quarter
ended September 30, 1996.
USCF's operating expense, not including interest, for the three months
ending September 30, 1997 totaled $296,000 or an increase of $44,000 or 22% from
the three months ending September 30, 1996. The primary reasons for this
increase are as follows: (i) during the three months ending September 30, 1997,
8
<PAGE>
factored accounts receivable volume increased by 80% over the three months ended
September 30, 1996. This volume increase proportionately increases expenses
including: sales commission and promotion; salaries and benefits, and supplies
and postage; (ii) USCF accrued $18,000 in credit losses for the three months
ending September 30, 1997, there was no accrual for credit losses for the three
months ending September 30, 1996; and (iii) for the three months ended September
30, 1996 expenses were favorably impacted by reversal of a prior accrual for
collection expense of $30,000 compared to no such accrual reversal for the three
months ending September 30, 1997.
SLM operating expenses were $276,000 for the three months ending September
30, 1997. This expense total includes: Salaries and employee benefits - $77,000,
Occupancy - $30,000, and direct loan expense including origination commissions
amounted to $123,000. As stated above, there are no comparable financial
statements for the three months ended September 30, 1996.
ADR operating expenses were $119,000 for the three months ending September
30, 1997. These expenses include: commissions paid to independent real estate
agents - $43,000, and sales promotion including advertising expense - $10,000;
and salaries and employee benefits - $38,000. As stated above, there are no
comparable financial statements for the three months ended September 30, 1996.
The Company's active business operations are conducted through
wholly-owned subsidiaries. The Company, as a holding company, has limited
expenses and generates no income. The Company's corporate expense increased
slightly from $34,000 for the three months ending September 30, 1996 to $37,000
for the three months ending September 30, 1997.
Operating Profit (Loss)
USCF had a operating profit of $67,000 for the three months ending
September 30, 1997 compared to a operating profit of $76,000 for the three
months ending June 30, 1996. The reduction of $9,000 in operating profit results
from the accrual reversal described above in the discussion about USCF Operating
Expenses, offset by an overall increase in USCF revenues.
SLM had a operating loss of ($60,000) for the three months ending
September 30, 1997.
ADR had a operating loss of ($45,000) for the three months ending
September 30, 1997.
The consolidated net loss for three months ending September 30, 1997
totaled ($75,000) compared to a net profit of $43,000 for the three months ended
September 30, 1996. The consolidated loss is attributed to the operating losses
of SLM and ADR.
Liquidity and Capital Resources
The Company's capital requirements will most likely increase as each of
its subsidiaries grows and requires additional capital. The requirement for
additional capital would provide additional resources to increase volume of
purchase receivables, allow expansion of the mortgage brokerage operation, and
provide financing for any potential acquisition/merger activity. Inasmuch as the
Company's operations in the past were limited to USCF operations, the existing
equity capital and line of credit was sufficient. However, in order to expand
USCF's ability to purchase receivables on a meaningful basis and implement the
Company's overall business plan, the Company will need to access additional
equity and debt capital. There can be no assurance that additional capital will
be available as needed.
9
<PAGE>
At September 30, 1997 the Company had total assets of $9,995,588 and total
liabilities of $6,290,861. This compares to the total assets of $7,924,483 and
total liabilities of $4,192,177 at June 30, 1997. The increase in net assets and
liabilities is the direct result of the increased level of factoring business
activity, and the acquisition of SLM and ADR. Cash at September 30, 1997 totaled
$886,436 compared to $941,789 at June 30, 1997. The Company used this cash to
fund additional receivable purchases, and to fund its ongoing operations. The
Company intends to continue to purchase receivables through existing cash and
through the use of the line of credit as well as expand its mortgage origination
operation by entering into selective funding projects.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions and professional
fees, will be approximately $95,000 for each of the next six months based on
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 may not be adequate to fund its projected factoring volume during the
next six months. The company is reviewing several alternatives with a number of
financial institutions that may provide the capital requirements for the next
several years.
Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company. Given current inflationary trends, the Company
does not believe inflation will have any future adverse effect.
Forward-looking Statements
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain forward-looking
statements, within the meaning of section 27a of the Securities Act of 1933 and
section 21e of the Securities Act, which reflect Management's current views with
respect to the future events and financial performance. Such forward looking
statements may be deemed to include, among other things, statements relating to
anticipated growth, and increased profitability, as well as to statements
relating to the Company's strategic plan, including plans to develop and
increase factored receivables, loan originations, and to selectively acquire
other companies. These forward-looking statements are subject to certain risks
and uncertainties, including, but not limited to, future financial performance
and future events, competitive pricing for services, costs of obtaining capital
as well as national, regional and local economic conditions. Actual results
could differ materially from those addressed in the forward looking statement.
Due to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only of the date
hereof.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1Legal Proceeding.
USCF obtained a default judgment on October 3, 1997 against
Sound Surveillance in the amount of $184,303 and against Inner
City Electrical, Inc. in the amount of $53146.
USCF obtained a default judgment on October 6, 1997 against
LPI Corp. and Magmus Mankut in the amount of $60,420.
Item 2Changes is Securities. None.
Item 3Defaults Upon Senior Securities. None.
Item 4Submission 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.
11
<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, 1997 /s/ Douglas P. Morris
---------------------
By: Douglas P. Morris
President and Principal Executive Officer
Date: November 13, 1997 /s/ Frank Lucchese
------------------
By: Frank Lucchese
Principal Financial Officer
12
<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>
<MULTIPLIER> 1
<CURRENCY> 886,463
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-START> JUL-1-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 886,463
<SECURITIES> 0
<RECEIVABLES> 7,649,980
<ALLOWANCES> 18,000
<INVENTORY> 0
<CURRENT-ASSETS> 9,803,686
<PP&E> 129,988
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,933,674
<CURRENT-LIABILITIES> 6,290,861
<BONDS> 0
0
0
<COMMON> 5,079,961
<OTHER-SE> (1,375,234)
<TOTAL-LIABILITY-AND-EQUITY> 9,933,674
<SALES> 0
<TOTAL-REVENUES> 775,221
<CGS> 0
<TOTAL-COSTS> 729,128
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 121,564
<INCOME-PRETAX> (75,471)
<INCOME-TAX> 0
<INCOME-CONTINUING> (75,471)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (75,471)
<EPS-PRIMARY> (.02)
<EPS-DILUTED> (.02)
</TABLE>
