U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 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 22 nd 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
.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer'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/
The Issuer's revenues for the fiscal year ended June 30, 1997 were
$2,023,929
As of September 10, 1997, 3,906,471 shares of the Issuer's common stock
were issued and outstanding of which 2,293,587 were held by non-affiliates. As
of September 10, 1996, the aggregate market value shares held by non-affiliates
(based upon the closing price reported by the NASDAQ Small Cap Market of $1.375)
was approximately $5,371,397.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
General
Celtic Investment, Inc. ("the Company") is a diversified financial services
holding company. The Company has three wholly-owned subsidiary operating
companies. The three companies are U.S. Commercial Funding Corp (USCF), Salt
Lake Mortgage Corporation (SLM), and Advantage Realty, Inc. (ADR). USCF is in
the business of purchasing accounts receivable from small to medium sized
businesses. The purchase of accounts receivable is commonly referred to as
"factoring". USCF purchase of accounts receivable have historically been true
purchases of assets and not loan transactions. SLM is a mortgage broker with
operations in Utah and Nevada. SLM originates residential mortgage loans for
clients seeking home ownership, "rate-terms" refinances, cash-out refinancing,
and second mortgages. ADR is a real estate brokerage firm licensed in the State
of Utah and utilizes independent sales persons to list and sell residential and
commercial real estate. These three subsidiaries have their own respective Board
of Directors and management teams. Although the subsidiaries operate
independently from one another, the Company requires that each subsidiary adopt
a month by month operating plan for each fiscal year. The Company oversees each
operation and monitors the respective monthly results. Any major cost or changes
in business direction of the subsidiaries operation is approved in advance by
the Company's Board of Directors.
The Company's mission statement is two fold. First, to improve and expand
the existing three business subsidiaries' operations. Second, attempt to expand
the Company through merger and/or acquisitions that meet the Company's criteria.
There can be no assurance that the company will be successful in acquiring any
future businesses.
History of the Company
The Company, was formed under the laws of the State of Delaware on March
22, 1989, for the purpose of investing in any and all types of assets,
properties, and businesses. In June 1992, the Company completed an initial
public offering of shares and warrants. From June 1992 to June 1994, the
Company's activities were limited to searching for suitable acquisitions and
investments.
In July 1994, the Company acquired US Commercial Funding corporation, a
Florida corporation (USCF - Florida) which had been formed in April 1994 to
engage in the factoring business. In connection with the acquisition of USCF,
the Company effected a 1-for 20 reverse stock split reducing the number of
shares issued and outstanding from 9,000,000 to 450,000 and reducing the number
of outstanding warrants and increasing the warrant exercise price respectively.
In connection with the acquisition of USCF-Florida, the Company issued 1,550,775
post split shares to the USCF-Florida shareholders in exchange for their shares
of USCF-Florida and converted
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options to purchase shares of USCF-Florida into options to purchase 2,516,668
shares of the Company's common stock.
The Company commenced operations in the factoring business in July 1994
when it acquired USCF-Florida. Prior to the time USCF-Florida was acquired by
the Company, its activities were limited to developing a business plan and
raising $1,000,000 from the sale of securities. USCF- Florida's first full
quarter of operation as a factoring company was the quarter ending December 31,
1994. In February 1995, the Company raised an additional $3,000,000 in gross
proceeds from the sale of securities. In March 1995, the Company formed another
subsidiary corporation under the laws of the State of Illinois under the name
U.S. Commercial Funding Corporation ("USCF"), in anticipation of its plan to
purchase receivables on a recourse basis as opposed to the nonrecourse purchases
made by USCF- Florida, and in anticipation of the relocation of the company
operations to Illinois.
On January 31, 1997 the Company finalized a merger with Salt Lake Mortgage
Corporation (SLM), a Salt Lake city based mortgage broker, and a real estate
marketing company, Advantage Realty, Inc. (ADR). The merger was a stock for
stock transaction. The Company issued 1,100,000 shares of its stock for the
shares of SLM. Five Hundred Thousand of such shares are held in escrow. The
release of such shares is based a Celtic equity or debt contribution and a
formula of future pre-tax earnings.
SLM was founded in 1993. SLM specializes primarily in conforming agency
and government loan products, such as FHA/VA. SLM has changed its strategy
shifting the majority of its originations from refinance to purchase loans. In
addition, the company is beginning to originate more non -conforming loans
including B and C credit mortgages.
ADR was founded in 1993. ADR is a real estate brokerage operation which
lists real estate properties for sale. ADR has independent contractors that
perform this listing service as well as represent buyers of properties under a
broker/agent relationship.
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USCF
General
USCF provides working capital financing for its clients by purchasing
their accounts receivables (sometimes hereafter referred to as "invoices")
generally at face value less a factors fee. USCF provides financing to its
clients based principally on the financial condition of the client's account
debtors (which may be better than that of the client), rather than the financial
condition of the client itself. This allows USCF's clients to maintain regular
and predictable cash flow from receivables without (or as a supplement to)
conventional borrowing. The sale by the client of its accounts receivables to
USCF may be accounted for by the client as a true sale (as opposed to a
financing), so that the client's balance sheet reflects less leverage than it
would if the client financed its receivables with a traditional secured loan.
A client's receivables typically permit assignment to the USCF without
notice to or the consent of the account debtors. In addition, in most instances,
USCF and its client notify the account debtor that the invoice has been assigned
to USCF and instructs the account debtor to make all payments on the invoice to
the USCF's Bank lockbox. The Company perfects its ownership in the accounts
receivable by making the appropriate filing under the applicable state Uniform
Commercial Codes.
Most of the accounts receivables purchased by USCF are short term invoices
that have payment terms within thirty days or less from the invoice date. USCF
typically purchases accounts receivables from its clients at face value less a
factors fee. USCF will typically advance 60% to 80% of the face value of the
account receivables to its customer depending upon the size, age, type of
accounts being purchased, the quality of client documentation, USCF's judgment
as to the payment history, and the credit worthiness of the account debtors. In
a continuing relationship with its client USCF will generally maintain a portion
of the payment in a reserve account which may be used to fund a credit reserve
to offset defaults of other invoices sold by the client to USCF. The factors fee
varies but are generally negotiated on a individual client basis on the face
value of the receivables. USCF supplies a client with information as to the
credit worthiness of and potential payment problems with its account debtors.
USCF also provides the client with a monthly portfolio analysis which includes
an aging schedule of all open receivables, by account debtor.
Business to Date
The Company acquired USCF- Florida on July 22,1994. As of June 30, 1995,
USCF- Florida had been in business for less than one year. During this period,
USCF hired a staff, opened an office, developed marketing plans, developed
account receivable analysis and servicing procedures, raised capital, and
commenced marketing. From July 22, 1994 to June 30, 1995, the Company had
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factored $5,244,019 in invoices purchased. Most of the invoices purchased were
payable by the debtor within 30 days of receipt by the debtor of the invoice.
The Company's total revenues from factoring invoices from July 1, 1994 to June
30, 1995 was $418,270. Most of these revenues were earned after December 31,
1995. The Company's loss during the fiscal year ending June 30, 1995 totaled
$1,135,827 which is directly attributed to the startup expenses of operation and
lack of initial factoring volume.
In the fiscal year ending June 30, 1996, USCF relocated the company,
liquidated the Florida portfolio of non-recourse factored invoices, obtained a
bank line of credit, and improved profitability by both increasing the volume of
factored invoices and reducing costs. USCF successfully achieved all of these
objectives as factored invoice volume increased sharply to $22,261,965, which
generated factored revenue of $1,141,802 and reduced the net loss to $170,002.
USCF purchases invoices from clients involved in various industries. For
the year ending June 30, 1997, USCF purchased invoices totaling $38,375,760 a
72% increase over the year ending June 30, 1996. In addition, USCF diversified
the overall mixture of the receivable portfolio which improved client
concentration issues. The following table indicates the amount of invoices
purchased by USCF for the year ended June 30, 1996 as compared to the year ended
June 30, 1997 on a industry basis:
Factored
Invoices Purchased
For the year ended June
Business of Client 1997 1996
- ------------------ ---- ----
Audio Text $ 902,286 $ 2,104,775
Professional Services 4,358,272 2,315,254
Service Related 4,058,059 924,885
Custom Manufacturing 16,565,620 5,398,254
Temporary Help 4,753,416 1,872,973
Distribution/Trucking 6,799,010 1,597,553
Waste Disposal 939,097 8,047,931
------------ -----------
TOTAL $ 38,375,760 $ 22,261,965
============= ============
For the year ended June 30, 1997 the Company had purchased invoices from
approximately 56 different clients. During this period 8% of all of the face
value of invoices purchased were from a single client, Blue Star Foods, and 26%
were from the Company's largest five clients. No other client totaled more than
8% of the purchased receivables during the year. The Company's clients are
located in various states including California, Michigan, Florida, Illinois, and
New York.
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Competition
USCF encounters significant competition in purchasing accounts
receivables, both from factoring companies, commercial banks, and other
financial institutions engaged in secured lending. Additionally, the Company's
client's will likely seek alternate sources of financing from many different
sources, including finance companies, investment partnerships and entities,
small business investment companies, suppliers and individuals. As a result,
USCF competes with a large number of local and regional sources of financing,
and a smaller number of large national competitors. Many of USCF's competitors
have significantly greater financial and other resources than the Company and
access to capital markets at a lower cost than the Company. The Company believes
that the principal competitive factors in its business are price, flexibility
and service. There can be no assurance that the Company will be able to
effectively compete in the market place.
Governmental Regulation
Usury laws generally limit the amount of interest that a creditor may
contract for, charge or receive in connection with a loan of money. The Company
believes that its purchases of accounts receivables should not be subject to the
usury laws because the purchases do not constitute loans of money. The Company's
position is based upon the following: (I) the modified recourse nature of the
purchases of accounts receivable; (ii) the intention of the parties as expressed
in the documents evidencing the purchases; (iii) the absence of a clients right
to repurchase or redeem the purchased accounts receivable at face value; (iv)
the arms-length nature of the purchases and of the negotiations resulting in a
purchase price; (v) the control that the Company has over the collection and
administration of the purchased accounts receivable; and (vi) the accounting
treatment of the transactions as purchases. If, despite these facts, a court or
jury were to conclude that the Company's purchases of accounts receivable should
be re-characterized as loans of money, the fees contracted for, charged and
received by the Company in connection with the purchases could be viewed as
interest. To the extent that the rate of interest contracted for, charged or
received by the Company exceeds the usury ceiling, the Company could be subject
to usury penalties under applicable law.
SLM and ADR
General
On January 31, 1997, the Company acquired SLM and ADR in a merger
transaction. (See "Certain Relationship and Related Party Transactions."
SLM is a mortgage broker operating in Utah and Nevada. SLM originates
residential mortgage loans for clients seeking home ownership, "rate-term"
refinances, "cash-out" refinances, and second mortgages. SLM originates these
mortgages through real estate industry referrals, relationships with builders,
and direct customer solicitations. SLM uses a sales force comprised of loan
officers. The loan officers develop sales leads by implementing various
advertising/marketing
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campaigns. These campaigns utilize radio, direct mail, and telemarketing in an
attempt to initiate contact with potential customers in need of residential
mortgage loan products.
Although SLM has historically focused on the "Prime" mortgage market which
is dominated by Fannie Mae, Freddie Mac, and Government loans including
traditional VA and FHA, an increase in the demand for "Sub-Prime" mortgage
products has created a need for SLM to increase the number and type of products
offered. To increase SLM proficiency in these types of products, several
employees of Red Rock Financial (RRF), a Sub-Prime mortgage broker, joined SLM
on May 15, 1997.
Once a mortgage application is originated, SLM processes the application
in accordance with the guidelines which have been established for the different
types of loan products it offers. The majority of SLM loan products are
currently conventional, or government loans and are therefore, processed in
accordance with Fannie Mae, Freddie Mac, VA, or FHA guidelines. The underwritten
application is submitted to the wholesale mortgage lender which SLM has been
awarded delegated underwriting authority. "Non-conforming" or "Sub-Prime"
products are forwarded to the respective lenders who will make the underwriting
decision. An approved loan is generally closed at a Title Company. A majority of
SLM loans are funded using "Table Funding" where the lender funds directly to
the Title Company who then make the required disbursements. In the event SLM
does fund directly, its is reimbursed within several days by the final investor
after review of the closing documents.
ADR is a real estate brokerage firm licensed in the State of Utah and is a
wholly owned subsidiary of SLM. ADR utilizes a sales force of independent
contractors who primarily list and sell residential real estate in the Salt Lake
area and are compensated on varying commission splits. In addition the company
is a listing broker on several large tracts of vacant land.
Competition
SLM's competition in the mortgage industry is significant. There are many
mortgage brokers who have created a competitive environment. Other financial
institutions also compete on several levels of residential lending as well.
Pricing is a key issue for the consumer as well as the mortgage brokers. While
mortgage loans are themselves a commodity, the personalized service provided by
the mortgage broker creates a value added feature that differentiates mortgage
companies. SLM believe's it offers clients more personalized services that , in
fact, set them apart from the competition.
ADR also faces a competitive real estate brokerage environment.
Competition is two fold. First, the real estate brokers compete between each
other for top producing agents. Since a very small percentage of the agents
produce a majority of the transactions, competition for these agents is fierce.
Second, competition for real estate buy and sell transactions between brokers
and agents is competitive which ultimately effects the amount of gross revenue
the real estate broker will earn.
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Government Regulation
Although SLM is not directly supervised by any specific local, state , or
federal government agency it must adhere to certain laws, and regulations
pertaining to the mortgage industry. The Real Estate Settlement and Procedures
Act (RESPA) has been established to guarantee borrowers receive adequate
disclosure upon initial loan application, and dictates certain procedures which
must be followed at closing, specifically the disclosure of all fees charged in
conjunction with the loan. In addition SLM must comply with the guidelines
established by the Department of Housing and Urban Development (HUD) pertaining
to a Non-supervised lender.
ADR must adhere to the laws and regulations of the Real Estate Division of
the Department of Commerce of the State of Utah. There is annual reporting
documents which must be filed with the Real Estate Division to ensure compliance
with Utah law. ADR believes it is currently in compliance with all Utah
regulations.
Other Business Operations
The Company, USCF, and SLM and ADR have made several attempts to expand in
the financial services industry through the acquisition of other operating
companies or through starting operations internally. The Company is evaluating
several potential acquisitions, including several non financial services
industries; however; there can be no assurance that the Company will able to
acquire these or any other opportunities.
Employees
The Company and its subsidiaries currently have 17 full time employees. As
the Company's business grows, it will hire such additional employees as may be
reasonably necessary to conduct its business.
ITEM 2. PROPERTIES
The Company leases 500 square feet of space at 330 E. Main St.,
Barrington, Illinois 60010. The lease is $250 per month, and expires in December
1997.
USCF currently leases office facilities at 17W220 22nd St., Suite 420,
Oakbrook Terrace, Illinois 60181. The lease expires in November 1999. These
facilities currently consists of 2,500 square feet and requires a monthly rent
of approximately $4,600.
SLM currently leases office facilities at 102 West 500 South, Suite 300,
Salt Lake City, Utah 84101. These facilities consists of 5400 square feet and
requires a monthly rent of approximately $5,800. This lease expires in April
2001. SLM also leases a office at 2889 East 3300 South; Salt
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Lake City, Utah 84109. These facilities consists of 1200 square feet and
requires a monthly rent of $1,000. This lease expires April 2000. SLM also
leases office facilities at 340 Main Street, Suite 202, Park City, Utah 84060.
These facilities consists of 1000 square feet, and a monthly rent of $ 1,148
that expires in December 1999.
In August 1997, ADR leased offices facilities in Salt Lake City, Utah.
This facilities consists of 2300 square feet and requires a monthly rent of
$2,425. This lease expires in August 2000.
ITEM 3. LEGAL PROCEEDINGS
USCF is involved in various legal proceedings arising out of the normal
course of business which they are the plaintiff. None of the legal proceedings
which USCF is currently involved with is expected to have a adverse material
effect on USCF business or its financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to the Company's shareholders for a vote during
the year ended June 30, 1997.
ITEM 5. MARKET FOR THE REGISTRANTS COMMON STOCK AND RELATED SECURITY
HOLDER MATTERS
Since May 20, 1996 the Company's common stock has traded on the NASDAQ
Small Cap market listing under the "CELT" symbol. The information with regard to
NASDAQ Small Cap quotes contained in the following table was obtained from the
NASDAQ and shows the range of representative bid prices for the Company's common
stock for the periods indicated. The prices represent quotations between dealers
and do not include retail mark ups and mark-downs or broker commissions and do
not necessarily represent actual transactions:
Bid Price 1996 1997
High Low High Low
First Quarter $3.00 $3.00 $1.906 $1.875
Second Quarter $3.50 $3.00 $1.875 $1.00
Third Quarter $3.50 $2.25 $1.375 $1.00*
Fourth Quarter $2.50 $1.875
* Through September 20, 1997
Holders
The number of record holders of the Company's common stock as of September
1, 1997 was 156. The Company anticipates that the number of beneficial owners of
its common stock is more than 450.
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Dividends
The Company has not paid any cash dividends to date and does not
anticipate or contemplate paying dividends in the foreseeable future. It is the
present intention of management to utilize all available funds for the
development of the Company's business.
THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company is a diversified financial services company engaged in the
business of the purchase of accounts receivables, residential mortgage
origination, and residential real estate sales. USCF, the factoring entity,
commenced operations in July, 1994. SLM, the residential mortgage loan
originator, and ADR, the 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 catagorize by the Company's subsidiaries for the years
ended June 30, 1997 and 1996. The results of operations of SLM and ADR are
included in the consolidated financial statement from the date of acquisition
only. The discussion below of SLM and ADR results of operations do not make a
comparison to the same period for the year ending June 30, 1996. First, SLM and
ADR were accounted for as one business entity for the year ending June 30, 1996.
Second, expense were handled on more of a monthly cash basis rather than the
current accrual method. Both of these reasons tend to distort the analysis of a
comparative five month period. This discussion should be read in conjunction
with the consolidated financial statement and notes thereto (in thousand).
Revenues 1997 1996
------- ----------
USCF 1,551 1,163
SLM 204 0
ADR 269 0
Interest 0 83
------- ----------
Total Revenue 2,024 1,246
Operating Expense
USCF and Interest 1,330 1,199
SLM 342 0
ADR 219 0
Corporate (Celtic) 121 217
------- ---------
Total Operating Expense 2,012 1,416
Operating Profit (Loss)
USCF 221 (36)
SLM (138) 0
ADR 50 0
Corporate (121) (134)
------- --------
Total Operating Profit (Loss) 12 (170)
------- --------
Income Tax Expense 0 0
Net Income 12 (170)
======== ========
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Revenues
USCF revenues increased by $388,000 in Fiscal Year 1997, a 33% increase
from Fiscal Year June 30, 1996. The major reason for the increase is the total
volume of purchased accounts receivable increased from $22,261,965 to
$38,375,760, a 72% increase. The disproportional ratio of total revenue increase
of 33% compared to the total accounts receivable volume increase of 72% results
from overall lower factor fees earned. The lower fees earned is a result of a
more competitive general market and also USCF single factor amount increased in
size for the year ending June 30, 1997. The increased sized of the transactions
usually yields a lower factor fee.
SLM earned revenues of $204,000 for the five month period between February
1st, and June 30, 1997. This is a reduction from the comparable prior period due
to a decrease in the overall mortgage loan origination volume.
ADR earned revenue of $269,000 for the five month between February 1st and
June 30, 1997. This is a increase from the comparable prior period operating
years'. Future revenue may significantly fluctuate in any given period depending
on real estate buy and sell activity on the broker listed properties and the
independent contractor agents overall closing volume.
The Table on page 11 shows a interest revenue for the year ending June 30,
1996 of $83,000, compared to $0 for the year ending June 30, 1997. USCF
significant volume of total receivables purchased, resulted in the use of all
the Company's cash for the year ending June 30, 1997.
Operating Expense
Interest expense totaled $258,000 for the year ending June 30, 1997 versus
$35,000 for the year ending June 30, 1996. In April of 1996, USCF closed a Line
of Credit. For the year ending June 30, 1997 this Line of Credit was used to
finance the significant growth in accounts receivable purchases which resulted
in the increase in interest expense.
USCF operating expense, not including interest, for the year ending June
30, 1997 totaled $1,072,000 or a reduction of $92,000 or 7.9% from the year
ending June 30, 1996. The reasons for this reduction are as follows: first, in
the year ended June 30, 1996, USCF utilized an outside service agency for
processing accounts receivable and as well as two contract accounting services.
For the year ended June 30, 1997, USCF performed all these functions in house
saving approximately $95,000; second, USCF reduced legal expenses by $50,000 for
the year ending June 30,1997. Lower collection related expense and more direct
expense charges to customers comprise a majority of the reduction. Offsetting
these reductions were a increase in commissions paid to independent broker
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referral sources of $53,000 for the year ending June 30, 1997 and an increase in
a provision of credit losses for $16,000. Both of these expense increases are
related to the 72% increase in factored receivable volume. All other operating
expenses were constant for the year ending June 30, 1997.
SLM operating expenses were $367,000 for the five month period between
February 1, 1997 and June 30, 1997. This expense total includes: Salaries and
employee benefits - $170,000, Occupancy - $73,000, and direct loan expense
including origination commissions amounted to $75,000.
ADR operating expenses were $216,000 for the five month period between
February 1, 1997 June 30, 1997. These expenses include: commissions paid to
independent real estate agents - $135,000, and sales promotion including
advertising expense - $26,000.
The Company's corporate expense decreased from $148,000 for the year
ending June 30, 1996 to $121,000 for the year ending June 30, 1997 or a decrease
of 27,000 or 18%.
Operating Profit (Loss)
USCF had a profit of $221,000 for the year ending June 30, 1997 compared
to a operating loss of ($33,000) for the year ending June 30,1996. This profit
turn around of $254,000 is the result of a strong increase of factored volume
purchased receivables and a reduction in operating expense.
SLM and ADR had a combined net loss of ($80,000) for the five month period
ending June 30, 1997. There are several reasons for this loss. Mortgage
originations decreased month by month. The addition of Red Rock Financial
personal resulted in additional overhead costs. In order to correct this
downward trend, management has hired a new Vice President of Sales and
Marketing. Subsequent to year end, mortgage origination has increased from the
June 30, 1997 levels, and SLM and ADR have been segregated and stronger
management accountability is in place.
The consolidated net income for the year ending June 30,1997 totaled
$12,000.This is a turnaround from a loss of $170,000 for year ending June 30,
1996 and a loss of $1,135,000 for the year ending June 30, 1995 and was
attributed to the positive increase in profitability of USCF.
Liquidity and Capital Resources
The Company's capital requirements will most likely increase as the
Company's mission statement is achieved. The requirement may include additional
resources to increase volume of purchased receivables, expansion of the mortgage
brokerage operation, and financing any 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 plan, the Company will need to access additional
equity and debt capital.
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USCF 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.
The Company is a guarantor of this agreement and has agreed to subordinate
certain interests with regard to the agreement. The agreement has a two year
term with an option.
At June 30,1997 the Company had total assets of $7,924,483 and total
liabilities of $4,192,177. This compares to the total assets of $4,425,678 and
total liabilities of $1,585,663 at June 30, 1996. The increase in net assets and
liabilities is the direct result of the use of the line of credit and the
increased level of factoring business activity, and the acquisition of SLM and
ADR. Cash at June 30, 1997 totaled $941,789 compared to $ 450,864 at June 30,
1996. The Company used this cash to fund additional receivable purchases, and
fund it's 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" contains forward-looking
statements, within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act, which reflect Management's current
views with respect to 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 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 statements. Due to such
uncertainties and risks, readers are cautioned not to place undue reliance on
such forward-looking statement, which speak only as of the date whereof.
14
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Celtic Investment Financial Statements
Independent Auditor's Report(s) 16
Consolidated Balance Sheet as of
June 30, 1997 and 1996 17
Consolidated Statements of Operations 19
For the Years ended June 30, 1997 and 1996
Consolidated Statements of Stockholders' Equity 21
For the years ended June 30, 1997 and 1996
Consolidated Statements of Cash Flows for the years 22
ended June 30, 1997 and 1996
Notes to Consolidated Financial Statements 25
15
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Celtic Investment, Inc.
Lisle, Illinois
We have audited the accompanying consolidated balance sheets of Celtic
Investment, Inc. and subsidiaries as of June 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Celtic Investment,
Inc. and subsidiaries as of June 30, 1997 and 1996, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
MCGLADREY & PULLEN, LLP
Chicago, Illinois
August 13, 1997
- 16 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and 1996
ASSETS 1997 1996
- ---------------------------------------------- ----------- ----------
Cash and cash equivalents $941,789 $450,864
Mortgage loans held for sale 113,786 -
Receivables 5,209,907 3,676,862
Notes receivable 426,037 69,485
Loans receivable 123,441
Prepaid expenses and other assets 162,564 7,713
----------- ----------
Total current assets 6,977,524 4,204,924
----------- ----------
Furniture, fixtures and equipment, net of accumulated
depreciation 1997 $127,912; 1996 $32,205 145,218 61,803
Deferred finance fees, net of accumulated amortization
1997 $90,157; 1996 $12,880 111,674 158,951
Goodwill, net of accumulated amortization in 1997 of 676,670 -
$19,333
----------- ----------
933,562 220,754
----------- ----------
Total assets $7,911,086 $4,425,678
=========== ==========
- 17 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - Continued
June 30, 1997 and 1996
1997 1996
- ---------------------------------------------- ----------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $2,448,060 $ -
Due to factoring clients 1,404,072 1,321,829
Current portion of long-term debt 22,016 -
Accounts payable and accrued expenses 293,772 263,804
----------- ----------
Total current liabilities 4,167,920 1,585,633
----------- ----------
Long-Term Debt, less current portion 40,257 -
----------- ----------
Stockholders' Equity
Common stock, $.001 par value; authorized 25,000,000
shares; issued and outstanding 1997 3,906,471;
1996 3,306,471 shares 3,906 3,306
Additional paid-in capital 5,076,054 4,232,904
Accumulated deficit (1,313,159) (1,324,889)
----------- ----------
3,766,801 2,911,321
Less notes receivable and interest receivable from
stockholders (63,892) (71,276)
----------- ----------
3,702,909 2,840,045
----------- ----------
$7,911,086 $4,425,678
=========== ==========
See Notes to Consolidated Financial Statements.
- 18 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended June 30, 1997 and 1996
1997 1996
- ---------------------------------------------- ------------- -----------
Revenues:
Factoring income $1,424,363 $1,141,802
Commission income 268,600 -
Mortgage fee income 228,418 -
Interest 102,548 82,898
Other - 21,063
------------- -----------
Total revenue 2,023,929 1,245,763
Interest expense 258,781 35,026
------------- -----------
Revenue after interest expense 1,765,148 1,210,737
Provision for credit losses 18,460 -
------------- -----------
Revenue after interest expense and
provision for credit losses 1,746,688 1,210,737
------------- -----------
Operating Expenses:
Salaries and employee benefits 766,770 464,002
Occupancy 159,577 105,498
Servicing costs 81,217 265,655
Commissions and other costs 202,259 -
Professional fees 233,504 204,855
Amortization of goodwill 19,333 -
Other 272,298 340,729
------------- -----------
Total operating expenses 1,734,958 1,380,739
------------- -----------
Income (loss) before income taxes 11,730 (170,002)
Income taxes - -
------------- -----------
Net income (loss) $ 11,730 $(170,002)
============= ===========
Net income (loss) per common share $ 0.00 $ (.05)
============= ===========
Weighted average number of common shares
and common stock equivalents outstanding 3,559,166 3,441,551
============= ===========
See Notes to Consolidated Financial Statements.
- 19 and 20 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended June 30, 1997 and 1996
<TABLE>
<CAPTION>
Note
Additional Receivable Total
Common Stock Paid-in Accumulated from Stockholders'
Shares Amount Capital Deficit 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 repurchased (21,800) (22) (49,028) - - (49,050)
and canceled
Advances on note receivable - - - - (20,000) (20,000)
from director-stockholder
Advances on notes - - - - (51,276) (51,276)
receivable from officer-
stockholders
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
Repayment on notes - - - - 7,384 7,384
receivable from director-
stockholders
Common stock issued in 600,000 600 843,150 - - 843,750
acquisition
Net Income - - - 11,730 - 11,730
- ----------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 3,906,471 $3,906 $5,076,054 $(1,313,159) $(63,892) $3,702,909
================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- 21 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended June 30, 1997 and 1996
1997 1996
- ---------------------------------------------- ----------------- ---------------
Cash Flows From Operating Activities
Net Income (loss) $11,730 $(170,002)
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Provision for credit losses 18,460 -
Depreciation 42,241 17,775
Amortization of deferred finance fees 77,277 12,880
Amortization of goodwill 19,333 -
Loss on disposal of furniture, fixtures and equipment - 6,013
Change in assets and liabilities, net of effects
from purchase of Salt Lake Mortgage Company:
(Increase) in receivables (1,528,242) (2,217,284)
(Increase) in loans receivable (123,441) -
(Increase) in mortgage loans held for sale (113,786) -
(Increase) decrease in prepaid expenses and other asset (123,737) 14,011
(Decrease) increase in accounts payable and accrued (116,623) 37,670
expenses
Increase in due to factoring clients 82,243 999,653
----------------- --------------
Net cast (used in) operating activities (1,754,545) (1,299,284)
----------------- --------------
Cash Flows From Investing Activities
Cash acquired on purchase of Salt Lake Mortgage 253,905 -
Corporation
Acquisition costs paid on purchase of Salt Lake (69,985) -
Mortgage Corporation
Advances on notes receivable (672,838) (69,485)
Payments received on notes receivable 316,286 -
Purchase of furniture, fixtures and equipment (3,690) (5,831)
Advances on notes receivable from stockholders - (71,276)
Payment received on notes receivable from stockholders 7,384 -
----------------- --------------
Net cash (used in) investing activities (168,938) (146,592)
----------------- --------------
Cash Flows From Financing Activities
Payments on long-term debt (3,652) -
Repurchase and cancellation of common stock - (49,050)
Payment of deferred finance fees (30,000) (171,831)
Proceeds from private debt placement - 500,000
Repayment of private placement debt - (500,000)
Net proceeds from notes payable 2,448,060 -
----------------- --------------
Net cash provided by (used in) financing activities 2,414,408 (220,881)
----------------- --------------
Net increase (decrease) in cash and cash equivalents 490,925 (1,666,757)
Cash and cash equivalents:
Beginning 450,864 2,117,621
----------------- --------------
Ending $941,789 $450,864
================= ==============
- 22 and 23 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Years Ended June 30, 1997 and 1996
1997 1996
- ---------------------------------------------- ------------- -----------
Supplemental Disclosure of Cash Flow Information
Cash paid for interest $ 258,781 $ 22,146
Supplemental Disclosure of Noncash Financing and
Investing Activities
Debt incurred for the purchase of furniture, fixtures, $43,485 -
and equipment and prepaid expenses
Acquisition of Salt Lake Mortgage Corporation:
Cash acquired $253,905
Other current assets acquired 23,263
Long-term assets acquired 106,595
Goodwill 696,004
Current liabilities assumed (152,530)
Long-term liabilities assumed (13,502)
Acquisition costs incurred (69,985)
----------------
Common stock issued $ 843,750
================
See accompanying notes to financial statements.
- 24 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies
Nature of business: Celtic Investment, Inc. (Celtic) was formed to seek
business acquisitions and combinations in the United States which, in the
opinion of management, would be in the best interest of the Company.
US Commercial Funding Corp., US Commercial Funding Corp. Illinois
(collectively "USCF"), and Salt Lake Mortgage Company are the wholly owned
subsidiaries of Celtic Investment, Inc. US Commercial Funding Corp. Illinois was
formed in 1995, and the operations were moved from Florida to Illinois. USCF
purchases accounts receivable, with recourse, from clients located in major U.S.
cities. Clients are found by the Company and by independent commissioned
representatives. The Company pays for a portion of the accounts receivable when
purchased and the balance, net of fees and interest, after the accounts
receivable have been collected. The Company requires a security interest in all
of the client's assets as part of the factoring arrangement. Salt Lake Mortgage
Corporation is engaged in the mortgage brokerage and real estate brokerage
business with offices in Utah and Nevada.
Significant accounting policies are as follows.
Principles of consolidation: The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated.
Accounting estimates: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Concentration of business and credit risk: The Company maintains its cash
in bank accounts with highly rated financial institutions which may, at times,
exceed federally insured limits. Approximately 62 percent of factored invoices
at June 30, 1997, consist of amounts due from three clients. Approximately 10
percent of factored invoices at June 30, 1996, consist of amounts due from a
different single client. Revenue of approximately $393,000 was received from one
client in the year ended June 30, 1996.
Financial instruments: The Company has no financial instruments for which
the carrying value differs materially from fair value.
- 25 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
Mortgage loans held for sale: Mortgage loans held for sale, consisting of
mortgage loans made to individuals that are collateralized by residential one-
to four-family dwellings, are carried at the lower of aggregate cost or market.
Fees received for the funding of mortgage loans held for sale to investors
are recognized when the mortgages are sold to the investors. Loans are usually
sold, along with the servicing rights to investors, within two weeks of the
initial closing.
Furniture, fixtures and equipment: Furniture, fixtures and equipment are
stated at cost. Depreciation and amortization are computed using the
straight-line method over the estimated useful lives of the assets.
Deferred finance fees: Deferred finance fees consist of costs incurred in
the acquisition of an operating line of credit and are being amortized straight
line over the term of the line of credit.
Goodwill: The Company has classified as goodwill the cost in excess of fair
value of the net assets of the business acquired in a purchase transaction.
Goodwill is being amortized on a straight-line method over 15 years commencing
with the purchase of the business.
Impairment of long-lived assets: Long-lived assets are evaluated for
impairment based on a periodic analysis of future cash flow at an operating
level.
Factoring operations: Income from factored invoices is recorded as earned
in accordance with the related agreements with clients. Income is earned when
receivables are purchased and over the time that a receivable remains unpaid.
The terms are normally 1% at the time of purchases and 1% every 10 days the
invoice remains uncollected. A provision for credit 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
credit losses on such invoices. The Company has a right to amounts due to
factoring clients if a factored invoice becomes uncollectible. Upon collection
of the purchased invoices, amounts collected in excess of factoring income and
the initial payment are remitted to clients. Such amounts may, in some
instances, be applied to offset uncollected factored invoices.
Commission and mortgage fee income: Commission and mortgage fee income
consists of loan brokerage fees, application fees and commissions on sales of
residential real estate. Revenue from loan
- 26 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Nature of Business and Significant Accounting Policies (Continued)
origination fees is recognized at the time of closing or, for loans held
for sale, when loan is sold. Loan origination fees are comprised of the fees
paid to the Company by lenders of the various residential mortgage placements.
The loan origination fees vary based upon current market rates for residential
mortgages. During the period, the Company originated the majority of its loans
for a single investor. Real estate commissions are recognized at closing.
Income taxes: Deferred taxes are provided on a liability method whereby
deferred tax assets are recognized for deductible temporary differences and
operating loss and tax credit carry forwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of management, it is more likely than not that some portion or all of
the deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and rates on the
date of enactment.
Per share data: Net income (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. In computing the 1996 loss per share,
stock options and warrants are not included because they have an antidilutive
effect. The stock options and warrants are included in the 1997 net income per
share calculation.
Reclassifications: Certain items in the 1996 financial statements have been
reclassified to conform to the 1997 presentation.
Note 2. Business Combination
On January 31, 1997, the Company completed its merger with Salt Lake
Mortgage Corporation, whereby Salt Lake Mortgage Corporation became a subsidiary
of Celtic Investment, Inc. through the issuance of 1,100,000 shares of common
stock of which 500,000 shares are being held in escrow subject to the
satisfaction of certain conditions, for all of the outstanding common stock of
Salt Lake Mortgage Corporation.
In the transaction accounted for as a purchase, the consideration given
totaled $843,750 for the issuance of the 600,000 shares including $69,985 for
acquisition costs. The excess of cost over the net assets acquired of $696,004
was recorded as goodwill and is being amortized using the straight-line method
over 15 years. The additional 500,000 shares may be issued subject to the
satisfaction of certain conditions. The value of any of the shares issued will
be recognized as an increase in goodwill.
- 27 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma consolidated results of operations for
the years ended June 30, 1997 and 1996, as though Salt Lake Mortgage had been
acquired as of July 1, 1995, are as follows:
-------------- ------------
1997 1996
-------------- ------------
Revenue $2,774,000 $2,446,000
Net income 189,000 130,000
Net income per share 0.05 0.03
The above amounts represent the effect of combining actual results of
operations and recording the effect of amortization of goodwill. The Company
believes no other adjustments are necessary. The pro forma results do not
necessarily represent results which would have occurred if the business
combination had taken place at the date on the basis assumed above.
Note 2. Business Combination (Continued)
The Company acquired the following assets and liabilities in the merger:
Cash $253,905
Accounts receivable 23,263
Goodwill 696,004
Other assets 106,595
-----------------
1,079,767
Accounts payable and accrued expenses 132,195
Other liabilities 33,837
Acquisition costs paid 69,985
-----------------
Total consideration $843,750
=================
-28-
<PAGE>
Note 3. Receivables and Notes and Loans Receivable
Receivables at June 30, 1997 and 1996, are summarized as follows:
1997 1996
------------- -----------
Factored invoices on a recourse basis $ 5,309,306 $ 3,679,326
Factored invoices on a nonrecourse basis - 72,269
------------- -----------
5,309,306 3,751,595
Less allowance for credit losses (99,399) (74,733)
------------- -----------
$ 5,209,907 $ 3,676,862
============= ===========
Beginning in 1996, the Company no longer factors invoices on a nonrecourse
basis.
Notes receivable consist of additional advances made to clients.
Approximately $32,000 of the notes receivable at June 30, 1997, are due from
current clients and are unsecured. The notes bear interest at 18 percent. The
remaining balances are also due from current clients and are collateralized by
accounts receivable, real estate and equipment. The notes bear interest between
18 percent and 30 percent. Notes receivable totaled $426,037 and $69,485 as of
June 30, 1997 and 1996.
Loans receivable totaled $123,441 as of June 30, 1997, and consist of the
following:
Construction line of credit with an $80,000 limit bearing interest at a
rate of prime (8.5% at June 30, 1997) plus 2%. The loan is collateralized
by the property under construction. The outstanding balance is due along
with accrued interest on October 31, 1997. Advances on this line of credit
were $7,204 at June 30, 1997. Construction line of credit with an $122,800
limit bearing interest at a rate of prime plus 3%. The loan is
collateralized by the property under construction. The outstanding balance
is due along with accrued interest on September 30, 1997. Advances on this
line of credit were $40,432 at June 30, 1997.
- 29 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3. Receivables and Notes Receivable (continued)
Construction line of credit for the development of a residential
subdivision. The Company has agreed to lend the borrower up to $575,000.
The loan is collateralized by land. The line of credit bears interest at a
rate of prime plus 3%, and the outstanding balance is due along with
accrued interest on March 31, 1998. Salt Lake Mortgage Corporation collects
an origination fee in an amount equal to 3% of the entire loan amount. In
addition, the borrower will pay an additional amount of $5,000 per lot
developed. Advances on the line of credit were $75,805 at June 30, 1997.
Additional advances on the line of credit of $240,000 have been approved as
of June 30, 1997.
All loans and notes receivable have been evaluated for collectibility on a
note-by-note basis. The Company had no investments in impaired loans for
the years ended June 30, 1997 and 1996. The Company does not recognize
interest on loans and notes receivable once they have been deemed to be
impaired unless the interest is collected.
The following is an analysis of the activity in the allowance for credit
losses:
1997 1996
----------- --------------
Balance at beginning of year $ 74,733 $ 74,733
Provision for credit losses 18,460 -
Recoveries 10,255 -
Charge-offs (4,049) -
----------- --------------
Balance at end of year $ 99,399 $ 74,733
=========== ==============
Note 4. Related Party Transactions
The Company incurred expenses related to promotion and professional
services for the years ended June 30, 1997 and 1996, of approximately $11,000
and $2,000, respectively, which were provided by a corporation owned by a major
stockholder of the Company.
- 30 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5. Bank Line of Credit and Long-Term Debt
The Company has a $6,000,000 line of credit from a financial institution,
collateralized by substantially all of the Company's assets and due April 1999.
The Company can borrow in aggregate the lesser of $6,000,000 or its borrowing
base, essentially 80% of factored accounts receivable. At June 30, 1997, the
outstanding balance was $2,448,060. The revolving line of credit bears interest
at 4% plus the prime rate of interest if the average monthly borrowing exceed
$3,000,000 and 4.5% plus the prime rate of interest if the average monthly
borrowing are less than $3,000,000. The prime rate was 8.5% at June 30, 1997.
The Company has debt obligations for the purchase of certain equipment. The
notes are payable in monthly installments totaling $2,389 and are collateralized
by the equipment purchased. The notes bear interest at a rate of 10% and 15% per
annum. Aggregate maturities required at June 30, 1997, are as follows:
Year ending June 30:
1998 $ 22,016
1999 24,297
2000 15,960
------------------
$ 62,273
==================
Note 6. Income Taxes
The deferred tax assets and liabilities consist of the following components
as of June 30, 1997 and 1996:
1997 1996
----------------- -------------
Deferred tax assets:
Allowance for doubtful accounts $ 38,300 $ 27,800
Loss carryforwards 477,900 482,800
Other - 23,000
----------------- -------------
- 31 -
<PAGE>
516,200 533,600
Less valuation allowance 516,200 533,600
----------------- -------------
$ - $ -
================= =============
Reconciliations of income taxes computed at the statutory federal income
tax rate to the Company's income tax for the years ended June 30, 1997 and 1996,
are as follows:
1997 1996
-------------- -------------
Computed "expected" tax (credits) $ 8,500 $ (57,800)
Increase (decrease) resulting from:
State income taxes, net of federal tax benefit 1,500 (8,160)
Nondeductible expenses 10,500 3,950
Valuation allowance (17,400) 84,400
Other (3,100) (22,390)
-------------- -------------
$ - $ -
============== =============
At June 30, 1997, the Company had available net operating loss carry
forwards of approximately $1,200,000 for income tax purposes which expire
beginning in years 2005 through 2010.
Note 7. Notes Receivable and Interest Receivable from Stockholders
During 1996, the Company issued notes receivable to two
officer-stockholders, for the purchase of Company stock from a minority
stockholder, totaling $51,000. The principal and interest, at 5.5% per annum,
are due in June 1999. Interest accrued on these notes was $2,616 and $276, for
the years ended June 30, 1997 and 1996, respectively. Since these notes result
from the purchase of the Company's common stock they are presented in the
financial statements as a reduction in stockholders' equity.
- 32 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
During 1996, the Company issued a note receivable and advanced $20,000 to a
director-stockholder. This item has been presented in the financial statements
as a reduction in stockholders' equity since the amount is due from a
stockholder. During 1997, the Company received payments of $10,000 on this note.
Notes receivable and interest receivable from stockholders were $63,892 and
$71,276 for the years ended June 30, 1997 and 1996, respectively.
Note 8. Common Stock Options and Warrants
There are currently outstanding various warrants and options which, if
exercised, will result in the issuance of additional shares of the Company's
common stock. The following table sets forth information about options and
warrants:
Exercise
Shares Price Per
Outstanding Options and Warrants Issuable Share
------------- -------------
June 30, 1997:
Management Options 300,000 $ 1.00
Private Placement Debt Options 25,000 3.50 or 3.00
Management Options 75,000 1.00
Ferguson Warrants 100,000 3.00
Glick Morganstern Options 60,000 3.00
USCF Management Options 25,000 3.13
USCF Management Options 12,500 3.00
USCF Management Options 537,500 1.00
Salt Lake Mortgage Corporation Options 500,000 1.00
Salt Lake Mortgage Corporation Options 45,000 3.00
- 33 -
<PAGE>
Options and Warrants Canceled/Expired
Year ended June 30, 1997:
Class A Warrants 30,0000 4.00
Class B Warrants 11 300,000 8.00
USCF Options 716,667 4.00
Private Placement Options 1,357,134 4.00
Underwriter Warrants 130,000 2.50
USCF Management Options 8 537,500 3.00
Salt Lake Mortgage Corporation Options 9 500,000 3.00
Year ended June 30, 1996:
Management Options 1 1,500,000 1.00
(1)The Company management had been granted options to purchase 1,800,000
shares of the Company's common stock at a price of $1.00 per share. These
options are exercisable only upon fulfillment of certain conditions and are not
currently exercisable. During 1996, the Company and management agreed to reduce
the number of options to 300,000. The options are exercisable through April 26,
1999.
- 34 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2)These options were issued as part of the units sold in the Company's
private debt placement in December 1995. 11,625 options contain an option to
purchase one share of the Company's common stock at a price of $3.50 per share.
The remaining 13,375 options contain an option top purchase one share of the
Company's common stock at a price of $3.00 per share. These options are
exercisable through December 31, 1999.
(3)These options were originally granted April 26, 1994. Each unit contains
an option to purchase one share of the Company's common stock at a price of
$1.00 per share. The options may only be exercised if the Company meets certain
financial conditions relating to net worth. The option are exercisable
through April 26, 1999.
(4)These warrants were issued in consideration of the execution of a
financial consulting agreement which entitles the individual to purchase 100,000
shares of the Company's common stock at any time prior to June 1, 1999, to a
purchase price of $3.00 per share.
(5)These options were issued to Glick Morganstern as part of their
compensation in obtaining the line of credit in April 1996. The options carry
certain registration rights. These options are exercisable through April 30,
1999.
(6)Under employment agreements, management has been granted options to
purchase 25,000 shares of the Company's common stock at a price of $3.13 per
share through July 22, 1999.
(7)Under employment agreements, management has been granted options to
purchase 12,500 shares of the Company's common stock at a price of $3.00 per
share through September 18, 2000.
(8)Under employment agreements, management has been granted options to
purchase 750,000 shares of the Company's common stock at a price of $3.00 per
share. 700,000 of the options are exercisable as to 25 percent as of June 28,
1995, and an additional 25 percent on each June 30, 1996, 1997, and 1998. The
remaining 50,000 of these options are exercisable as to 25 percent as of
September 26, 1995, and an additional 25 percent on each September 30, 1996,
1997, and 1998. The Company granted options to purchase an additional 325,000
shares to certain officers and employees on July 1, 1996. During 1997, the
Company and management agreed to reduce the number of options to 537,500 shares
in exchange for a reduction in the option price to $1.00 per share. These
options expire through July 1, 2003.
- 35 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
(9)Under the merger agreement dated January 31, 1997, with Salt Lake
Mortgage Corporation, the Company granted the option to purchase 1,000,000
shares of the Company's common stock at a price of $3.00 per share. During 1997,
the Company and management of Salt Lake Mortgage have agreed to reduce the
number of shares to 500,000 in exchange for reduction of the option price to
$1.00 per share. These options expire through June 30, 2007.
(10)Under the merger agreement dated January 31, 1997, with Salt Lake
Mortgage Corporation, the Company granted the option to purchase 45,000 shares
of the Company's common stock at a price of $3.00 per share. These options
expire through July 1, 2004.
(11)These warrants were issued as part of the units sold in Celtic's
initial public offering. As a result of the 1 for 20 reverse split effective in
June, 1994, the exercisable price of the Class A and Class B warrants was
adjusted to $6.00 and $12.00, respectively. The Company's Board of Directors
subsequently adopted resolutions reducing the exercise price of the Class A and
B warrants following the reverse split to $4.00 and $8.00, respectively. In
December 1995, the Company's Board of Directors extended the exercise period of
the Class A and B warrants to December 31, 1996. In December 1996, the Company's
Board of Directors extended the exercise period of the Class A warrants to June
30, 1997. The Class A warrants expired on June 30, 1997.
(12)These options were issued to USCF stockholders as part of the units
sold by USCF in a private placement effected prior to the merger. The shares
underlying these options carry certain registration rights. The options expired
on June 30, 1997.
(13)These options were issued as part of the units sold in the Company's
private placement effective September 27, 1994. Each unit consists of an option
to purchase one share of the Company's common stock at a price of $4.00 per
share. The options expired on June 30, 1997.
(14)These warrants, which expired on October 21, 1996, were issued as
underwriter compensation to ACAP, Inc. the underwriter of the Company's initial
public offering. The Company has agreed to file, not more than once, a
Registration Statement under the 1933 Act, registering the shares acquired upon
the exercise of the underwriter's warrants at the request of the holders of at
least a majority of such shares.
- 36 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8. Common Stock Warrants and Options (Continued)
Employee stock option agreements are accounted for following APB Opinion
No. 25 and related interpretations. Accordingly, no expense has been recognized
for grants under the stock option agreements. Had compensation costs for all of
the stock option agreements been determined based on the grant date fair values
of awards (the method described in FASB Statement No. 123), reported net income
and earnings per common share would have been reduced to the pro forma amounts
shown below.
1997 1996
------------- ---------------
Net income (loss):
As reported $ (11,730) $ (170,002)
Pro forma (123,684) (170,002)
Net income (loss) per share:
As reported 0.00 (.05)
Pro forma (.03) (.05)
The per share weighted average fair value of stock options granted under
employee stock option agreements granted during 1997 was $.44 on the date of
grant.
The option values were determined using the Black Scholes option-pricing
model with the following assumptions: expected dividend yield 0%, expected
volatility 42%, risk-free interest rate of 5.34% to 6.30%, and expected lives of
3 to 8 years.
A summary of the status of the Company's stock options and warrants as of
June 30, 1997 and 1996, and changes during the years then ended is presented
below:
- 37 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1997 1996
--------------------------- --------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
--------------- ----------- ------------- ------------
Options outstanding,
beginning of year 4,013,801 $ 3.77 4,678,801 $ 3.96
Options granted 1,507,500 3.00 835,000 3.01
Options exercised - - - -
Options expired (3,841,301) 3.99 (1,500,000) 1.00
--------------- ----------- ------------- ------------
1,680,000 $ 1.32 4,013,801 $ 3.77
=============== =========== ============= ============
- 38 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 8. Common Stock Warrants and Options (Continued)
The following table summarizes the stock options and warrants outstanding
at June 30, 1997:
Options and Warrants Options and Warrants Exercisable
Outstanding
- --------------------------- --------------------------------
Average
Remaining
Exercise Number Contractual Number
Price Outstanding Life Exercisable
-------- -------------- --------------- ------------------
$ 3.50 25,000 2.5 25,000
3.13 25,000 2.1 25,000
3.00 217,500 2.9 187,500
1.00 1,412,500 4.6 356,250
------------- --------------- ------------------
1,680,000 4.1 593,750
============= =============== ==================
Note 9. Commitments and Related Expenses
The Company has entered into employment agreements with certain officers
that expire at various times from June 1998 to January 2002. Under the terms of
the agreements, the Company has agreed to pay approximately $820,000 in
compensation for the remainder of the agreements' terms.
- 39 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
The Company leases office space under operating lease agreements expiring
through April 2001. The Company also leases office equipment under operating
leases expiring through May 2000.
Total lease commitments are:
Years ending June 30:
1998 $ 155,372
1999 151,101
2000 118,487
2001 69,279
-----------------
$ 494,239
=================
Rent expense under all operating leases including insurance and real estate
taxes for the years ended June 30, 1997 and 1996, amounted to approximately
$151,126 and $57,000, respectively.
The Company has a servicing agreement with a factoring company to process
factored invoices. The agreement requires the Company to pay fees of .6% of the
face value of the invoice once it is factored and .1% of the face value of the
invoice every five days the invoice remains uncollected. This agreement was
terminated in October 1996. Fees paid under this agreement were none and
$115,926 for the years ended June 30, 1997 and 1996, respectively.
- 40 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Note 9. Commitments and Related Expenses (Continued)
The Company has a servicing agreement with a second factoring company to
process factored invoices. The agreement can be terminated by either party with
30 days written notice. The agreement requires the Company to pay fees that vary
from .6% of the face value of invoices collected to 1.45% of the face value of
invoices collected plus 20% of fees collected. Fees paid under this agreement
were $81,216 and $20,714 for the years ended June 30, 1997 and 1996,
respectively.
In 1997, the Company entered into a servicing agreement with a factoring
company to process factored invoices. The agreement can be terminated by either
party within 45 days written notice. The agreement requires the Company to share
35% of any revenues earned on purchased invoices. Revenues earned under the
agreement were approximately $86,000 of which $56,000 was retained by the
Company.
Note 10. Retirement Plan
The Company sponsors a 401(k) retirement plan covering substantially all of
its employees. Plan contributions are at the discretion of management. There
were no contributions for the years ended June 30, 1997 and 1996.
Note 11. New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement No. 128,
Earnings per Share, which superseded APB Opinion No. 15. Statement No. 128
requires the presentation of earnings per share by all entities that have common
stock or potential common stock, such as options, warrants and convertible
securities, outstanding that trade in a public market. Those entities that have
only common stock outstanding are required to present basic earnings per share
amounts. All other entities are required to present basic and diluted per share
amounts. Diluted per share amounts assume the conversion, exercise or issuance
of all potential common stock instruments unless the effect is to reduce a loss
or increase the income per common share from continuing operations. All entities
required to present per share amounts must initially apply Statement No. 128 for
annual and interim periods ending after December 15, 1997. Earlier application
is not permitted.
Because the Company has potential common stock outstanding, stock purchase
warrants, and stock options to employees, as discussed in Note 8, the Company
will be required to present basic and diluted earnings per share (EPS). If the
Company had applied Statement No. 128 in the accompanying financial statements,
the following per share information would have been reported.
- 41 -
<PAGE>
CELTIC INVESTMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued
Basic earnings per share is based on the weighted average number of common
shares outstanding. Stock options are only considered for the diluted earnings
per share calculation. In computing the 1996 loss per common share, stock
options and warrants are not considered because they have an antidilutive
effect. The stock options and warrants are part of the dilutive earnings per
share calculation in 1997.
Note 11. New Accounting Pronouncements (Continued)
Years Ended June 30,
-------------------------------------------------------
1997 1996
-------------------------------------------------------
Basic EPS Diluted Basic EPS Diluted
EPS EPS
-------------------------------------------- ----------
.00 .00 (.05) (.05)
=======================================================
In June 1997, the FASB issued Statement 130, Reporting Comprehensive
Income. The Statement establishes standards for the reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The Statement does not address when transactions are
recorded, how they are measured in the financial statements, or whether they
should be included in net income or other comprehensive income. The Statement is
effective for fiscal years beginning after December 15, 1997, with earlier
application permitted. Management has not assessed the effect that this
statement will have on its financial statement presentation.
Also in June 1997, the FASB issued Statement No. 131, Disclosures About
Segments of an Enterprise and Related Information. The Statement established
standards for the way that public companies report information about operating
segments in annual financial statements and requires that those enterprises
report selected financial information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
related disclosures about products and services, geographic areas, and major
customers. Statement No. 131 is effective for financial statements for fiscal
years beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is required to be restated. Management
has not assessed the effect that this statement will have on its financial
reporting practices.
- 42 -
<PAGE>
ITEM 8. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Does not apply.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
A.
Identification of Directors and Executive Officers. The current
directors and officers of the Company who will serve until the next annual
meeting of shareholders or until their successors are elected or appointed and
qualified, are set forth below:
Name Age Position
Douglas P. Morris 42 Director of Celtic, USCF, SLM, ADR,
Chairman and President of Celtic
Larry D. Meek 45 Director of Celtic and USCF,
President and CEO of USCF
Howard D. Talks 43 Director of Celtic
Reese Howell Jr. 29 Director and Senior Vice President
of Celtic, Director, President, and
CEO of SLM, Director of ADR
Pamela Davis 33 Director of Celtic
Frank Lucchese 47 CFO, Secretary/Treasurer of Celtic;
Director, Secretary /Treasurer, and
CFO of USCF, Director of SLM and ADR
There are no family relationships among the Company's officers and
directors. Background information concerning the Company's officers and
directors is as follows:
- 43 -
<PAGE>
Douglas P. Morris. Mr. Morris has been an officer and director of the
Company since July, 1994. Mr. Morris is, and has been since 1988, the owner of H
& M Capital Investments, Inc., a privately-held business consulting firm, H & M
Capital Investments, Inc. is engaged in consulting with privately-held and
publicly-held companies relating to management, debt financing and equity
financing. From 1984 to 1988, Mr. Morris was self-employed in managing his own
investments. Mr. Morris received his Masters Degree in Public Administration at
the University of Southern California in 1982 and his Bachelor of Arts Degree in
Judicial Administration from Brigham Young University in 1978. Mr. Morris is a
director of Emerald Capital Investments, Inc., a publicly held company with no
current operations. Mr. Morris is Vice President of Capital Markets and a
director of Millennium Electronics, Inc., a publicly-held computer/electronics
company. Mr. Morris is a director of Dauphin Technology, Inc., a publicly traded
electronic manufacturing and computer company.
Howard D. Talks. Mr. Talks has been a director of the Company since July 1,
1994. Mr. Talks has been involved in the real estate industry for the past 19
years. Mr. Talks has developed and/or purchased commercial and residential real
estate properties in Florida. He has lectured at Dale Carnegie seminars. Mr.
Talks attended Queensboro Community College in New York.
Larry D. Meek. Mr. Meek became a director of the Company and President of
USCF in August 1995. He has over twenty years experience in sales, marketing,
general management, and business development. From 1992 to 1995, he was the Vice
President of Sales and Marketing for Oxford Capital Corporation. Mr. Meek served
in a number of positions with Budget Rent A Car and Hertz Corporation prior to
Oxford Capital Corporation. Mr. Meek earned his B.A. in Business Administration
from the University of Mississippi.
Frank Lucchese. Mr. Lucchese was appointed CFO of the Company and USCF in
August 1995. Mr. Lucchese is also a director of SLM and ADR. Mr. Lucchese has
over twenty years experience in financial management with companies such as
Budget Rent A Car and Continental Grain. Mr. Lucchese earned his M.B.A. from
Northern Illinois University and his B.S. in Accounting from Southern Illinois
University.
Reese Howell Jr. Mr. Howell was appointed Senior Vice-President and a
director of the Company in January 1997. He also serves as President and CEO of
SLM and is a director of ADR. Mr. Howell was the founder of SLM and has been in
the mortgage industry since 1990. Prior to entering the mortgage industry he was
involved in the federal procurement process for IBM's Federal Systems Division.
Mr Howell obtained his B.S. in Finance and his M.B.A. from the University of
Utah.
- 44 -
<PAGE>
Pamela Davis. Ms. Davis was appointed a director of the Company in January
1997. She is currently employed by Westin Technology, a subsidiary of Westin
Hotels. Ms. Davis has over 10 years experience in information technology, and
related area. Ms. Davis attended both Utah State university and Westminster
College.
Compliance With Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and persons who beneficially own more than 10% of a registered class
of the Company's securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required by the Exchange Act regulations to
furnish to the Company copies of all Section 16(a) forms they file with the SEC.
Based solely on its review of the copies of such forms received by it, or
written representations from certain reporting persons, the Company believes
that during the fiscal year ended June 30, 1997, all filing requirements
applicable to its officers, directors and greater than 10% beneficial owners
were complied with.
ITEM 10. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the aggregate compensation paid by the
Company for services rendered during the last three calendar years to the
Company's President and to the Company's most highly compensated executive
officers whose annual salary and bonus exceeded $100,000:
- 45 -
<PAGE>
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long Term Compensation
Annual Compensation(1) Awards Payouts
Restricted Securities
Name and Fiscal Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Award(s) Option(s) Payouts Compensation
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Douglas P. Morris 1997 $26,000 $-0- $-0- $-0- #-0- $-0- -0-
1996 $26,000 $-0- $-0- $-0- #-0- $-0-
1995 $24,000 $-0- $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Larry Meek 1997 $133,337 $-0- $-0- $-0- #150,000(3) $-0- $-0-
1996 $125,000 $-0- $-0- $-0- #560,000(2) $-0- $-0-
1995 $4,800 $50,000 $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Frank Lucchese 1997 $91,062 $-0- $-0- $-0- #150,000(3) $-0- $-0-
1996 $85,000 $-0- $-0- $-0- #140,000(2) $-0- $-0-
1995 $4,904 $-0- $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
Reese Howell, Jr. 1997 $37,500 $-0- $-0- $-0- #500,000(2) $-0- $-0-
1996 $-0- $-0- $-0- $-0- #-0- $-0- $-0-
1995 $-0- $-0- $-0- $-0- #-0- $-0- $-0-
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) See the discussions under the caption "EXECUTIVE COMPENSATION -
Employment Contracts" regarding certain other compensation the named officer may
be entitled to upon certain specified events.
(2) These options were granted pursuant to Employment Agreements and/or
Merger Agreements.
(3) These Options were granted as performance bonus for fiscal year 1996
pursuant to Employment Agreements.
- 46 -
<PAGE>
Stock Options Granted in Last Fiscal Year
The following table set forth grants of stock options made during the
fiscal year ended June 30, 1997 to the employees of the Company.
Individual Grants
% of Total
Options/SARs
Number of Securities Granted to Exercise or
Underlying Options/ Employees in Base Price
Name SARs Granted (#) Fiscal Year ($/Share) Expiration Date
Douglas P. Morris -0- N/A N/A N/A
Reese Howell Jr. (1,4) 500,000 35.8% $3.00 (1)
Roger Davis (1,4) 500,000 35.8% $3.00 (1)
Larry Meek (2,4) 150,000 10.8% $3.00 (2)
Frank Lucchese (2,4) 150,000 10.8% $3.00 (2)
Other Employees (3) 45,000 3.2% $3.00 (3)
(1) These Options are granted as part of the Stock for Stock Exchange in
the acquisition of SLM and ADR and related employment agreements. They have an
expiration date of January 31, 2001 and January 31, 2007. 150,000 of the options
are time based and 350,000 of the options are performance based on a
profitability formula relating to SLM and ADR operations.
(2) These Options are granted pursuant to certain employment agreements and
have a July 17, 2003 expiration date.
(3) These Options are granted pursuant to certain employment agreements and
have expiration dates of May 15, 2000 through May 15, 2003.
(4) On June 29, 1997 the Company offered and various employees agreed to
cancel one half of their outstanding options in consideration of reducing the
Exercise Price from $3.00 to $1.00. Mr. Howell and Mr. Davis each canceled
250,000 share options. Mr. Meek canceled 355,000 options shares. Mr. Lucchese
canceled 145,000 options shares.
\
Aggregate Option Exercises and Number/Value of Unexercised Options
The following table provides information concerning the exercise of options
during the last fiscal year by persons named in the Summary Compensation Table,
the number of unexercised options
- 47 -
<PAGE>
held by such persons at the end of the last fiscal year, and the value of such
unexercised options as of such date:
<TABLE>
<CAPTION>
Total Number of Value of Unexercised
Shares Acquired Values Unexercised Options In-the Money Options
Name on Exercise (1) Realized ($) at 6/30/97 (1.2) at 6/30/97 (1.2)
- -----------------------------------------------------------------------------------------------------------
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Douglas P. Morris -0- -0- 100,000 0 $ 0 $ 0
Larry Meek -0- -0- 217,500 137,500 $ 0 $ 0
Frank Lucchese -0- -0- 57,500 87,000 $ 0 $ 0
Reese Howell, Jr. -0- -0- 0 250,000 $ 0 $ 0
</TABLE>
1 An "In-the-Money" stock option is an option for which the market
price of the company's Common Stock underlying the option on June 30,
1997 exceeded the option exercise price. The value shown is calculated
by multiplying the number of unexercised options by the difference
between (i) the average of the bid and ask price for the Common Stock
on the NASDAQ Small Cap Market on June 30, 1997 of $1.00 and (ii) the
exercise price of the stock options of $1.00.
The Company has not granted any stock appreciation rights.
2 On June 29, 1997 the Company offered and various employees agreed to
cancel one half of their outstanding options in consideration of
reducing the Exercise Price from $3.00 to $1.00. Mr. Meek canceled
355,000 options shares. Mr. Lucchese canceled 145,000 options shares.
Mr. Howell canceled 250,000 option shares.
Compensation of Directors
During the year ended June 30, 1997 the Company paid no compensation to
directors except under employment agreements set forth above in the Summary
Compensation Table and below in "Employment Agreements."
Employment Agreements
The Company is currently a party to the following Employment
Agreements:
Douglas P. Morris. In July 1994, the Company and Mr. Morris entered into an
Employment Agreement for a five year term. The agreement provides for a first
year salary of $24,000 which will increase by ten percent per year. Under his
Employment Agreement Mr. Morris is required to devote only part-time to the
service of the Company. Mr. Morris has been granted options to purchase 100,000
shares of the Company's common stock. (See "Present Shareholders.")
- 48 -
<PAGE>
Larry D. Meek. On June 28, 1995, the Company and Mr. Meek entered into
a three year Employment Agreement. The agreement provides for a signing bonus of
$50,000 and a salary of $125,000 with annual cost of living adjustments not
greater than 10%. Mr Meek is eligible for bonuses in subsequent years subject to
the discretion of the Board of Directors. Mr Meek has been granted options to
purchase 560,000 shares at $3.00 of the Company's common stock. Mr. Meek was
granted 150,000 share options at $3.00 in July 1996. In June 1997, Mr. Meek
canceled 355,000 options shares in consideration of the reduction in the
Exercise Price from $3.00 to $1.00. The Company has agreed to use its best
effort to register the option shares on Form S-8.
Frank Lucchese. On June 28, 1995, the Company and Mr. Lucchese entered into
a three year Employment Agreement. The agreement provides for a salary of
$85,000 with annual cost of living adjustments not greater than 10%. Mr.
Lucchese is eligible for bonuses in subsequent years subject to the discretion
of the Board of Directors. Mr. Lucchese has been granted options to purchase
140,000 shares at $3.00 of the Company's common stock. Mr. Lucchese was granted
150,000 options on the Company's shares at $3.00 in July, 1996. In June 1997,
Mr. Lucchese canceled 145,000 option shares in consideration of the reduction in
the Exercise Price from $3.00 to $1.00. The Company has agreed to use its best
effort to register the option shares on Form S-8.
Martha Marroquin. On September 26, 1995, the Company and Ms. Marroquin
entered into a three year Employment Agreement. The agreement provides for a
salary of $45,000 with annual cost of living adjustments not greater than 10%.
Ms. Marroquin is eligible for bonuses in subsequent years subject to the
discretion of the Board of Directors. Ms. Marroquin has been granted options to
purchase 50,000 shares at $3.00 of the Company's common stock. In June 1997, Ms.
Marroquin canceled 25,000 option shares in consideration of the reduction of the
Exercise Price from $3.00 to $1.00. The Company has agreed to use its best
effort to register the option shares on Form S-8.
Reese Howell Jr. On January 31, 1997, the Company and Mr. Howell entered
into a five year Employment Agreement. The agreement provides for a salary of
$90,000 with annual cost of living adjustments not greater than 10%. Mr. Howell
is entitled to a bonus of 7.5% of pre-tax profits of SLM and ADR until such time
as his annual compensation reaches $150,000. After the $150,000 threshold is
met, Mr. Howell is entitled to an additional bonus of 1.5% of the pre-tax
profits of SLM and ADR. Mr. Howell has been granted time based and performance
based options to purchase 500,000 shares of the Company's stock at $3.00 per
share. The performance based options are contingent on the profitability of SLM
and ADR. In June 1997, Mr. Howell agreed to cancel 250,000 options shares in
consideration of the reduction in the Exercise Price from $3.00 to $1.00.
Roger Davis. On January 31, 1997, the Company and Mr. Davis entered into a
five year Employment Agreement. The agreement provides for a salary of $90,000
with annual cost of living adjustments not greater than 10%. Mr. Davis is
entitled to a bonus of 7.5% of pre-tax profits of SLM and ADR until such time as
his annual compensation reaches $150,000. After the $150,000 threshold is met,
- 49 -
<PAGE>
Mr. Davis is entitled to an additional bonus of 1.5% of the pre-tax profits
of SLM and ADR. Mr. Davis has been granted time based and performance based
options to purchase 500,000 shares of the Company's stock at $3.00 per share.
The performance based options are contingent on the profitability of SLM and
ADR. In June 1997, Mr. Davis agreed to cancel 250,000 option shares in
consideration of the reduction in the Exercise Price from $3.00 to $1.00.
Future Incentive Plans
The Company will likely adopt additional incentive compensation plans which
might include incentive stock options, pension plans, or a profit sharing plan.
The Company offers to employees a 401K plan. The Company made no contribution to
the plan for the year ending June 30,1997.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding shares of the
Company's common stock beneficially owned as of September 20, 1997 by: (i) each
officer and director of the Company; (including the officers and directors of
USCF, SLM, and ADR) (ii) all officers and directors as a group (including the
officers and directors of USCF, SLM, and ADR); and (iii) each person known by
the Company to beneficially own 5 percent or more of the outstanding shares of
the Company's common stock.
Douglas P. Morris(1)(2) 448,765 7.9%
515 Red Cypress Road
Cary, IL 60013
Howard D. Talks(1)(3) 451,384 7.9%
P.O. Box 250
Palm Beach, FL 33480
Larry D. Meek (1)(4) 375,401 6.6%
17W220 22nd St.. #420
Oakbrook Terrace, IL 60181
Frank Lucchese(1)(5) 161,028 2.8%
17W220 22nd St.. #420
Oakbrook Terrace, IL 60181
Reese Howell Jr. (1)(6) 805,500 14.1%
102 West 500 South #300
Salt Lake City, Utah 84101
- 50 -
<PAGE>
Roger Davis (1)(6) 794,500 13.9%
102 West 500 South #300
Salt Lake City, Utah 84101
Laurence J. Pino 308,257 5.4%
c/o Open University
Orlando, FL 33480
All Officers and Directors 2,875,550 50.4%
as a group (5 people)
- -----------
(1) Except as otherwise noted, each stockholder has sole voting and
investment power with respect to the shares beneficially owned. Each of the
above-listed persons is an officer and/or director of the Company and/or USCF,
SLM, and ADR.
(2) A total of 208,527 of these shares are owned by Mr. Morris. The
remaining 140,239 shares are owned by Hyacinth Resources. Inc., an affiliate of
Mr. Morris. The number of shares listed includes 100,000 shares which may be
issued upon the exercise of an option exercisable at a price of $1.00 per share.
(See "Management Employment Agreement).
(3) Mr. Talks and his wife Carol Hall are joint owners of these shares.
The total includes 100,000 shares which may be issued upon the exercise of an
option exercisable at a price of $1.00 per share.
(4) The total includes up to 355,000 shares which may be issued upon
the exercise of stock options granted in connection with Mr. Meek's employment
at an exercise price of $1.00 per share (See Management Employment Agreement).
(5) The total includes up to 145,000 shares which may be issued upon
the exercise of stock options granted in connection with Mr. Lucchese's
employment at an exercise price of $1.00 per share (See "Management Employment
Agreement).
(6) The total includes shares issued in the stock for stock exchange of SLM
and ADR, 304,500 shares to Mr. Howell and 295,500 shares to Mr. Davis,
respectively. In addition, 250,000 shares are being held in escrow for both Mr.
Howell and Mr. Davis based on a profitability operation formula of SLM and ADR.
The total also includes 250,000 shares for both Mr. Howell and Mr. Davis which
may be issued upon the exercise of an option at $1.00 per share. These shares
relate to certain employment agreements between Mr. Howell and Mr. Davis, 75,000
shares are time based option shares and 175,000 are performance option shares
based on a profitability formula of SLM and ADR. (See "Management Employment
Agreement")
(7) The company has 4,406,471 shares outstanding on September 15, 1996.
Options held by directors, officers, and others totaled 1,680,000 shares.
- 51 -
<PAGE>
Warrants and Options
There are currently outstanding various warrants and options which, if
exercised, will result in the issuance of additional shares of the Company's
common stock. There are outstanding warrants and options entitling the holders
to purchase 1,680,000 shares of the Company's common stock at prices ranging
from $1.00 to $3.50. (See "Footnote 8 to Financial Statements.")
Security Ownership of Management
See Item 4(a) above.
Changes in Control
No changes in control of the Company are currently contemplated.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Parents of Company
On January 31, 1997, the Company acquired Salt Lake Mortgage Corp. ("SLC")
and Advantage Realty Corp. ("ADR"). The Company issued 1,100,000 shares of its
common stock in connection with the acquisition of SLM and ADR. Reese Howell,
Jr. who is now an officer and director of the Company, was issued shares of the
Company's common stock, granted stock options and hired as an employee in
connection with such acquisition. Roger D. Davis, whose daughter is now a
director of the Company, was issued shares of the Company's common stock,
granted stock options and hired as an employee in connection with such
acquisition. A Form 8-K was previously filed in connection with such
acquisition. Neither Mr. Howell nor Mr. Davis were affiliated with the Company
prior to such acquisition.
The only parents of the Company, as defined in Rule 12b-2 of the
Exchange Act, are the officers and directors of the Company. For information
regarding the share holdings of the Company's officers and directors, see Item
11.
ITEM 13. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
A. The Exhibits which are filed with this Report or which are
incorporated herein be reference are set forth in the Exhibits Index which
appears on page 54.
B. The Company filed a Form 8-K on January 31, 1997 reporting the stock
for stock exchange in the SLM and ADR acquisition.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
- 53 -
<PAGE>
INDEX TO EXHIBITS
The following designated exhibits are, as indicated below, either filed
herewith or have heretofore been filed with the Securities and Exchange
Commission under the Securities Act of 1933 or the Securities Exchange Act of
1934 and are referred to and incorporated herein by reference.
Location on
Exhibit SEC Document
Number Exhibit Reference
3.1 Certificate of S-18 Registration
Incorporation Statement 33-37436-C
3.2 Bylaws S-18 Registration
Statement 33-374336-C
3.3 Amendment to Certificate of Form 10-KSB, 1995
Incorporation
10.1 Agreement and Plan of Merger - USCF Form 8-K July, 1994
10.2 Stock Option - Laurence J. Pino Form 10-KSB, 1994
10.3 Stock Option - Douglas P. Morris Form 10-KSB, 1994
10.4 Stock Option - Howard D. Talks Form 10-KSB, 1994
10.5 Form Indemnification Agreement Form 10-KSB, 1994
(Identical Agreement for all officers
and directors)
10.6 Employment Agreement-Larry Meek Form 10-KSB, 1995
10.7 Employment Agreement-Frank Lucchese Form 10-KSB, 1995
10.8 Loan and Security Agreement Form 10-KSB, 1996
10.9 Agreement and Plan of Merger Form 8-K filed February 18, 1997
10.10. Escrow Agreement Form 8-K filed February 18, 1997
10.11 Employment Agreement - Reese Howell, Jr. Form 8-K filed
February 18, 1997
10.12. Employment Agreement - Roger Davis Form 8-K filed February 18, 1997
10.13. Stock Option Agreement - Reese Howell, Jr. Form 8-K filed February
18, 1997
10.14 Stock Option Agreement - Roger Davis Form 8-K filed February 18,
1997
21.1 Subsidiaries of Registrant Form 10-KSB, 1996
- 54 -
<PAGE>
SIGNATURES
In accordance with Section 13 or I 5(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.
/s/ Douglas P. Morris
--------------------------
Date: October 3, 1997 By: Douglas P. Morris
President
/s/ Frank Lucchese
---------------------------
Date: October 29, 1997 By: Frank Lucchese
C.F.O.
In accordance with the Securities Exchange Act this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
Capacity Date
/s/ Douglas P. Morris
_______________________
Douglas P. Morris
Director October 3, 1997
/s/ Larry D. Meek
_______________________
Larry D. Meek
Director October 3, 1997
/s/ Frank Lucchese
_______________________
Frank Lucchese October 3, 1997
Director
- 55 -
EXHIBIT 21.1
Subsidiaries of Registrant
The Company's only Subsidiaries are:
1. U.S. Commercial Funding Corp., a Florida Corporation;
2. U.S. Commercial Funding Corp., an Illinois Corporation
3. Salt Lake Mortgage Corp., a Utah Corporation
4. Advantage Realty Corp., a Utah Corporation
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