U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1998
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.
(Names of Small Business Issuer as specified in its charter)
Illinois 36-3729989
--------------- ----------------
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
No.)
17W220 22nd St., Suite 420
Oakbrook Terrace, Il 60181
(Address of principal executive offices)
Issuer's telephone number, including area code: (630) 993-9010
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter periods that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x No
Common Stock outstanding at November 13, 1998 - 3,924,971 shares of $.001 par
value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
<PAGE>
FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
CELTIC INVESTMENT, INC.
For the Quarter Ended September 30, 1998
The following financial statements and schedules of the registrant and
it's consolidated subsidiaries are submitted herewith:
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--September 30, 1998 and
June 30, 1998 3
Condensed Consolidated Statements of Operations--for the three
Months ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows--for the three
Months ended September 30, 1998 and 1997
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General 7
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6(a). Exhibits 12
Item 6(b). Reports of Form 8-K 12
2
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
Sept 30, 1998 June 30, 1998
--------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents $ 2,829,005 $ 905,093
Receivables 22,352,757 6,597,960
Notes receivable 382,763 245,400
Construction Loans receivable 606,947 553,968
Prepaid expenses and other assets 188,857 109,981
Deferred Taxes 81,000 81,000
--------------- --------------
Total current assets 26,441,329 8,493,402
--------------- --------------
Furniture, fixtures and equipment, net of accumulated
depreciation 1999 $173,316; 1998 $162,126 92,150 94,327
Deferred finance fees, net of accumulated amortization 27,578 39,397
1999 $174,253; 1998 $ 162,434
Deferred Taxes 367,000 391,000
Goodwill, net of accumulated amortization in 1999 of
$90,027 ; 1998 $65,733 9,612,982 587,270
--------- -------
10,099,710 1,111,994
Total assets $ 36,541,039 $ 9,605,396
============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $ 17,517,026 $ 3,619,496
Due to factoring clients 5,548,555 1,489,063
Current portion of long-term debt 5,662 22,906
Accounts payable and accrued expenses 604,210 314,760
----------- -------------
Total current liabilities 23,675,453 5,446,225
----------- -------------
Long-Term Debt, less current portion 6,750,000 14,690
----------- -------------
Preferred stock, $100 par value: authorized
$10,000,000 shares: isuued and outstanding 19,795 1,905,665 0
Stockholders' equity:
Common stock, $.001 par value: authorized 25,000,000
shares: isuued and outstanding 3,924,971 3,925 3,906
Additional paid-in capital 5,094,536 5,076,054
Accumulated deficit (835,662) (871,767)
----------- -------------
Total stockholders' equity 4,262,799 4,208,193
Less notes receivable and interest receivable from
stockholders (52,878) (63,712)
----------- -------------
4,209,921 4,144,481
Total liabilities and stockholders' equity $ 36,541,039 $ 9,605,396
-------------- ==============
</TABLE>
See accompanying notes to condensed consolidated financial statements
3
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
<S> <C> <C> <C>
Revenues:
Factoring income $ 663,650 $ 471,546
Mortgage Origination Income 489,696 229,334
Interest 4,886 0
Other 9,277 0
---------------- ---------------
Total revenues 1,167,508 700,880
Interest expense 182,483 121,564
---------------- ----------------
Revenue after interest expense 985,025 579,316
Provision for credit losses 30,000 18,494
---------------- -----------------
Revenue after interest expense and provision
for credit losses 955,025 560,822
---------------- -----------------
Operating Expenses:
Salaries and employee benefits 346,248 231,863
Occupancy 154,027 110,549
Servicing costs 0 14,679
Professional fees 240,456 119,290
Amortization 24,294 11,600 24,294
Other 129,893 103,225
---------------- ------------------
Total operating expenses 894,918 591,206
Income (loss) from continuing 60,107 (30,384)
operations before income taxes ________________ __________________
Provision for income taxes 24,000 0
---------------- ------------------
Income (Loss) from continuing 36,107 (30,384)
Operations
(Loss) income from operations of 0 (45,087)
discontinued segment
---------------- ----------------
Net Income (loss) $ (36,107) $ (75,471)
Convertible Preferred Stock Dividends (15,335) 0
Net Income (loss) applicable to $ 20,772 ((75,471)
common shareholders ================= =================
Net income (loss per share; Basic:
Continuing Operations $ 0.01 $ (0.01)
Discontinued operation 0.00 (0.01)
----------------- ------------------
Net Income (loss) 0.01 (0.02)
================= ===================
Diluted:
Continuing Operations $ 0.01 $ (0.01)
Discontinued operation 0.00 (0.01)
----------------- ------------------
Net Income (loss) $ 0.01 $ (0.02)
================= ==================
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Three Months Ended
September 30, 1998 September 30, 1997
-------------------- --------------------
<S> <C> <C>
Cash flows from operating activities
Net income (loss) $ 20,772 $ (75,471)
Adjustments to reconcile net income
loss to net cash (used in)
operating activities:
Provision for credit losses 30,000 18,400
Depreciation 11,190 18,028
Amortization fo deferred finance fees 11,819 19,319
Amortization of Goodwill 24,294 11,600
Deferred Taxes 24,000 0
Changes in operating assets and liabilities:
(Increase) in receivables 196,169 (2,142,277)
Decrease (increase) in notes receivable 20,410 111,119
(Increase) decrease in construction loans receivable (52,979) 0
Increase (decrease) in mortgage loans held for sal 0 113,786
Increase (decrease) in prepaid expenses and
other assets (78,883) 30,285
(Decrease) increase in accounts payable and accrued
expenses 68,123 (13,576)
Increase in due to factoring clients 96,037 656,612
-------------------- --------------------
Net cash (used in) operating activities 370,952 (1,252,175)
-------------------- --------------------
Cash Flows From Investing Activities
Acquisitions, net of cash acquired (1,579,000)
Purchase of furniture, fixtures and equipment (5,834) (2,798)
-------------------- --------------------
Net cash provided by (used in) investing activities (1,584,834) (2,798)
-------------------- --------------------
Cash Flows From Financing Activities
Net proceeds from notes payable 1,228,319 1,199,647
Net proceeds from preferred stock 1,921,000
Net proceeds from common stock 18,500
Cash dividends paid to preferred shareholders (15,335)
Payments on long-term debt (14,690)
-------------------- --------------------
Net cash provided by financing activities 3,137,794 1,199,647
Net increase (decrease) in cash and cash equivalents 1,923,912 (55,326)
Cash and cash equivalents
Beginning 905,093 941,789
-------------------- --------------------
Ending $ 2,829,005 886,463
==================== ====================
Supplemental Disclosure of Cash Flow Information
Cash Paid for interest $ 170,664 $ 115,664
Supplemental Disclosure of non-cash investing and
financing activities
Details of businesses acquired in purchase transactions
Fair-Value of assets acquired $ 12,900,000
Goodwill 9,050,000
--------------------
Total purchase price 21,950,000
Liabilites assumed or created 19,729,000
Cash acquired (642,000)
--------------------
Net cash paid for acquisition $ 1,579,000
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE>
CELTIC INVESTMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------
1. Consolidation and Financial Statement Presentation
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments consisting of only normal recurring
adjustments necessary to present fairly its financial position as of September
30, 1998 and the results of its operations and cash flows for the three months
ended September 30, 1998 and 1997. The statements are condensed and therefore do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. The statements should
be read in conjunction with the consolidated financial statements and the
footnotes included in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 1998. The results of operations for the three months ended
September 30, 1998 are not necessarily indicative of the results to be expected
for the full year.
2. Earning per Share
Basic earnings per share pursuant to Statement pf Financial Accounting
Standards No. 128, "Earnings Per Share" (FAS 128) is determined using net income
adjusted for preferred stock dividends divided by weighted average common stock
outstanding. Diluted earning per share, as defined by FAS 128, is computed based
on the amount of income that would be available for each common share assuming
all dilutive potential common shares were issued. Such dilutive common shares
include stock options, and convertible preferred stock. Amounts used in the
determination of basic and diluted earnings per share for the quarter ended
September 30, 1998 and 1997 are shown in the table below.
In dollars, except shares
Quarter Ended
September 30,
1998 1997
--------------- --------------
Net income (loss) from
continuing operations $ 36,107 (30,384)
Less dividends accrued on
preferred stock (15,335) 0
Income available to common
shareholders $ 20,772 (30,384)
Weighted average shares
outstanding 3,918,804 3,906,471
Adjustment for dilutive
securities:
Assumed exercise of stock
options 689,442 130,341
Assumed conversation of
convertible preferred stock 659,833 0
Diluted common shares 5,268,079 4,036,812
6
<PAGE>
CELTIC INVESTMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
3. Segment Reporting Information and Discontinued Segments
Effective January 1, 1998 the Company adopted the Financial
Accounting Standards Board's Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information
(Statement 131). Statement 131 establishes standards for reporting information
about operating segments in interim and annual financial statements. Statement
131also establishes standard for related disclosure about products and services,
geographic areas, and major customers. The adoption of Statement 131 did not
affect results of operations or financial position but did affect the disclosure
of segment information. The Company's operations include three primary segments
that are strategic business units offering different products and services:
purchase of accounts receivable, mortgage brokerage and real estate brokerage.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies except that management evaluates
performance based on profit or loss before corporate expenses and income taxes.
Selected financial information by business segment for the quarter ended
September 30 is included under results of operations in Part 1 Item 2.
4. Reclassifications
Certain amounts have been reclassified in the prior year financial
statements to conform to the current year presentation.
5. Commitments and Contingencies
The Company has not entered into new agreements during the period that
contain any long term commitments or contingencies.
6. New Accounting Pronouncements
In June 1997, the FASB issued Statement 130, Reporting Comprehensive
Income which the company will adopt for the year ended June 30, 1999. 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 impact of this compliance with this
statement will not impact the consolidated financial position , net income or
cash flows of the Company.
During 1998 the FASB issued Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, which establishes new standards for
reporting information about derivatives and hedging. It is effective for periods
beginning after June 15, 1999 and will be adopted by the Company as of July 1,
2000. The Company expects that adoption of this Standard will have no effect on
its consolidated financial position, results of operations or on disclosures
within the financial statements as they currently do not engage in the use of
derivative instruments or other hedging activities.
7. Acquisition and Preferred Stock Issuance
Acquisition of Goodman Factors: On September 21,1998 the Corporation
completed the purchase of 100 percent of the common stock of Goodman Factors,
Inc. for approximately $21,500,000 in cash, notes, and assumption of
liabilities. The Company funded the transaction by borrowing $4,500,000 in term
debt, issuing $3,750,000 in notes payable to former Goodman stockholders, using
$1,750,000 proceeds from the sale of preferred stock and the assumption of
7
<PAGE>
$11,500,000 in liabilities of Goodman. The acquisition will be recorded
under the purchase method of accounting.
Issuance of preferred stock: In July 1998, the Company began offering
100,000 shares of 9 percent Cumulative Redeemable Series A Preferred Stock.
Holder of the preferred shares will be entitled to receive cumulative
preferential cash contributions at an annual rate of 9 percent of the
liquidation preference of $100 per share, accruing from the date of original
issuance and payable quarterly in arrears on the last day of each calendar
quarter each year commencing September 30, 1998.
The preferred shares are redeemable at the option of the Company, in whole
or in part, from time to time after June 30, 1999 at $100 per preferred share
plus any accumulated and unpaid dividends thereon. However, redemption is not
permitted unless the Company's common stock is trading at $3.00 per share or
greater. The preferred shares are, at option of the holder of the shares,
convertible into shares of the Company's common stock at $3.00 per share subject
to certain adjustments.
In the event of dissolution of the Company, the holders of the preferred
will be entitled to a liquidation preference for each preferred share of $100
plus any accumulated unpaid dividends thereon to the date of payment, subject to
certain limitations. The Company has received net cash proceeds after the
offering expenses of $1,921,000 and issued 19,795 preferred shares through
September 30, 1998.
Pro Forma Information: The Company's consolidated results of operations
include Goodman Factors from September 22, 1998 through September 30, 1998. The
pro forma information below presents combined results of operations as if the
acquisition had occurred at the beginning of fiscal 1997. The pro forma
information reflects adjustments which include interest and dividend expense
related to the assumed financing of the cash considerations paid for the
acquisition; the amortization of goodwill; and costs associated with the
integration of the acquisition into the Company. Adjustment has also been made
to the salaries paid to the management of Goodman Factors that are in excess of
the agreed to amounts under the new management agreement. The pro forma results
do not necessarily represent the results which would have occurred if the
acquisition had taken place on the date and basis assumed.
Three months ended
September 30,
1998 1997
---- ----
Total operating revenue $2,616,032 $1,843,000
Net income $ 156,472 $ 184,000
Earning per share
Basic $ .04 $ .05
Diluted $ .03 $ .04
8
<PAGE>
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
Celtic Investment, Inc., ("the Company") is a diversified financial
service holding company. The Company has four wholly owned subsidiaries. The
three operating subsidiaries are U.S. Commercial Funding Corp. (USCF), Goodman
Factors, Inc. (GF), and Salt Lake Mortgage Corp. (SLM). The fourth subsidiary,
Advantage Realty, Inc. (ADR) during the period ending June 30th, 1998
discontinued its' operations due to lack of profitability. USCF and GF are 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 and GF purchase of accounts receivable has historically been
true purchases of assets and not loan transactions. SLM is a mortgage broker
with operations in the states of Utah, Nevada, Colorado, and California. SLM
originates residential mortgage loans for clients seeking home ownership,
"rate-term" refinances, "cash-out" refinancing, and second mortgages. These
operating 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
operation 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 GF subsidiary was acquired by the Company on September 21st, 1998. The
Company acquired 100% of the GF capital common stock for approximately
$21,500,000 in cash, notes, and assumption of certain liabilities. The Company
financed the transaction by borrowing $4,500,000 in term debt, issuing
$3,750,000 in notes payable to former GF stockholders, and used $1,750,000 from
equity capital received from the proceeds of a preferred stock private placement
offering. As part of the transaction, the Company assumed $11,500,000 of GF's
liabilities.
GF has been in the factoring business for approximately twenty-six years.
Over the last three years it has averaged approximately $120,000,000 in annual
receivable purchases. GF's receivable portfolio averages between $12,000,000 and
$17,000,000. GF has earned approximately $5,000,000 per year in factoring fee
income over the last three years. GF has approximately 160 client accounts. The
majority of GF's clients are located in the Dallas/Fort Worth, Texas area. The
majority of the clients are in manufacturing, distribution, or service type
industries.
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 categorized by the Company's subsidiaries for the three months
ended September 30, 1998 and 1997. This discussion should be read in conjunction
with the consolidated financial statement and notes thereto (in thousands). The
Company adopted certain Financial Accounting Standards regarding operating
subsidiaries referred to as "segments." The discussion below includes only two
operating segments. Factoring Operations which includes the operations of USCF
and GF. Since, GF was acquired on September 21, 1998, only eight (8) days of
operations are recorded in this report. As such, the GF results are included
with USCF's operations. In future reports, GF will be identified as its own
operating segment. The second segment is SLM.
9
<PAGE>
CELTIC INVESTMENT, INC.
CONDENSED SUBSIDIARY STATEMENT OF OPERATIONS
(UNAUDITED)
$000's
Three Months Ended
September 30
1998 1997
______________________
Revenues
Factoring Operations 678 471
SLM 490 229
----- -----
Total Revenue 1168 700
Operating Expense
Factoring Operations Interest 182 122
Factoring Operations 391 297
SLM 427 276
Corporate (Celtic) 106 37
----- -----
Total Operating Expense 1106 732
Operating Profit (Loss)
Factoring Operations 103 67
SLM 63 -60
Corporate (Celtic) -106 -37
----- -----
Income (loss) from continuing
operations before income taxes 60 -30
Provision for income taxes 24 0
Income (Loss) from continuing
operations 36 -30
(Loss) income from operations of
discontinued segment 0 -45
------ -----
Net Income (Loss) 36 -75
------ -----
Convertible Preferred Dividends -15 0
------ -----
Net Income (Loss) Applicable to Common 21 -75
Shareholders ====== =====
Revenues
Factoring operations revenues increased $207,000 (44%) to $678,000 for the
three months ended September 30, 1998 compared to $471,000 for the three months
ended September 30, 1997.
10
<PAGE>
USCF revenues increased by $60,000 for the three months ending September 30,
1998, a 13% increase from the three months ending September 30, 1997. The eight
(8)days of operations of GF resulted in the remaining increase of $148,000 in
revenue from the comparable period.
SLM revenues increased by $261,000 (114%) to $490,000 for the three month
period ending September 30, 1998 compared to $229,000 for the three months ended
September 30th, 1997. This significant increase is the direct result of a more
favorable interest rate environment, the hiring of additional sale personnel and
a revised marketing strategy. The lower interest rates have positively impacted
"rate term" refinancing and "cash-out" refinancing of residential mortgages
which is the major reason for the significant revenue growth.
Operating Expense
Interest expense totaled $182,000 for the three months ending September
30, 1998 compared to $122,000 for the three months ending September 30, 1997.
The primary reason for this increase was the combined factoring operations
useage of the secured line of credit. As of September 30, 1998, the amount
outstanding on the line of credit was $15,600,000 compared to $3,900,000 on
September 30, 1997. The increase in the use of the line of credit has resulted
in the increase in interest expense.
Factoring operations' operating expense, not including interest, for the
three months ending September 30, 1998 totaled $391,000, an increase of $94,000
( 32%) from the three months ending September 30, 1997. The primary reasons for
this increase are as follows: First, during the three months ending September
30, 1998, factored accounts receivable volume increased by 44% over the three
months ended September 30, 1997. This increase in volume increases expense
categories to compensate for the increase in volume of purchase accounts
receivable. In addition, the acquisition of GF proportionately increased
expenses including: salaries and benefits, commissions, and supplies and
postage. Second, USCF accrued $30,000 in credit losses for the three months
ending September 30, 1998 compared to $18,400 for the comparable period, an
increase of $11,600.
SLM operating expenses were $427,000 for the three months ending September
30, 1998, and increase of $132,000 (55%) from the three months ending September
30, 1997. This expense increase is a direct result of the increase in revenue of
114%, compared to the prior period. The major expense categories impacted by
this revenue growth are: Direct loan processing expense increased $50,000;
Occupancy expense increased $37,000, and Salaries increased $9,000. Legal fees
increased from $1,000 to $18,000, an increase of $17,000 from the comparable
period. This increase is a result of a litigation matter between SLM and a
former employee.
The Company's corporate expense was $106,000 for the three months ending
September 30, 1998, an increase of $69,000 (186%) from the three months ending
September 30, 1997. This expense increase is a direct result of the overall
growth of the Company. The major expense categories impacted by this growth are:
Profession fees (legal and accounting) increased $40,000 and Salaries increased
$22,000.
Operating Profit (Loss)
Factoring operations had an increase in operating profit of $36,000 to
$103,000 for the three month period ending September 30, 1998, compared to
$67,000 for the three months ending September 30, 1997. This profit increase is
a result of the volume increase in factored accounts receivable including the
profitable operations of GF during the eight (8) days of the reporting period.
SLM had an operating profit of $63,000 for the three months ending
September 30, 1998. This is compared to an operating loss of ($60,000) for the
three months ending September 30, 1997. This is a $123,000 total positive
turnaround. The reason for the turnaround results from the overall significant
growth of revenue in the current period.
11
<PAGE>
The consolidated net income for three months ending September 30, 1998
totaled $ 60,000 compared to a net loss of ($75,000) for the three months ended
September 30, 1997. This is a $135,000 positive turnaround. The consolidated
profit is attributed to the continued profitability of the factoring operations,
and most significantly the turnaround of SLM. In addition, the discontinued
segment operations of ADR have had a positive impact on the Company's overall
profitability.
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 the purchase volume of accounts receivable, expansion of
the mortgage brokerage operation, and provide financing for any potential
acquisition/merger activity. Inasmuch as the Company's operations in the past
were limited to USCF operations, the existing equity capital and line of credit
were sufficient. The acquisition of GF substantially impacts the capital
requirements of the Company. In order to expand USCF's and GF's ability to
purchase receivables on a meaningful basis and implement the Company's overall
business plan, the Company will need to access additional equity and debt
capital. There can be no assurance that additional capital will be available as
needed.
USCF entered into a rediscount line of credit agreement with Capital
Business Credit, a division of Capital Factors Inc. of Los Angeles, California.
In December 1997 the line of credit was successfully renegotiated with
significant improvement in terms. Specifically, the line of credit was increased
from $6,000,000 to $15,000,000. The Company is a guarantor to this agreement and
has agreed to subordinate certain interests with regard to the agreement. In
August 1998, USCF successfully renegotiated the line of credit to provide a
maximum of $23,000,000 to purchase clients' accounts receivable for the combined
entities of USCF and GF.
In July, the Company began offering 100,000 shares of 9% Cumulative,
Redeemable Preferred stock. Holders of the preferred shares will be entitled to
receive cumulative preferential cash contributions at an annual rate of 9% of
the liquidation preference of $100 per preferred share, accruing from the date
of the original issuance and payable quarterly in arrears on the last day of
each calender quarter of each year, commencing September 30, 1998. As of
September 30, 1998 there were total cash proceeds received from the sale of the
preferred stock of $1,964,165, resulting in the issuance of 19,642 shares of the
preferred stock. Total dividends paid through September 30, 1998 is $15,000.
The preferred shares are redeemable at the option of the Company, in whole
or in part, from time to time, after June 30, 1999, at $100 per preferred share
plus any accumulated and unpaid dividends thereon. However, redemption is not
permitted unless the Company's common stock is trading at $3.00 per share or
greater. The preferred shares are, at the option of the holder of the shares,
convertible into shares of the Company's common stock at $3.00 per share subject
to certain adjustments. In the event of the dissolution of the Company, the
holders will be entitled to a liquidation preference for each preferred share of
$100 plus any accumulated and unpaid dividends thereon to the date of payment,
subject to certain limitations.
At September 30, 1998, the Company had total assets of $36,541,039 and
total liabilities of $30,425,453. This compares to the total assets of
$9,605,396 and total liabilities of $5,460,915 at June 30, 1998. Cash at
September 30, 1998, totaled $2,829,005 compared to $905,093 at June 30, 1998.
The significant increase in these respective categories results from the
acquisition of GF. GF's assets totaled $20,092,142, and the liabilities totaled
$20,023,212. The increase in cash is a result of the proceeds received from the
sale of the preferred stock and cash on the balance sheet of GF.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions and professional
fees, will be approximately $150,000 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
12
<PAGE>
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.
Year 2000
The year 2000 ("Y2K") issue is the result of computer programs using a
two-digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1997, the Company developed a three-phase program for Y2K information systems
compliance. Phase I is to identify those systems with which the Company has
exposure to Y2K issues. Phase II is the development and implementation of action
plans to be Y2K compliant in all areas by January 1999. Phase III to be
completed by Mid-1999, is the final testing of each major area of exposure to
ensure compliance. The Company has identified the major areas determined to be
critical for successful Y2K compliance. (1) financial and informational system
applications, and (2) third party relationships.
The Company, in accordance with Phase I of the program conducted an
internal review of all systems and contacted all software suppliers to determine
major areas of exposure to Y2K issues. In the financial and information system
area, a number of applications have been identified as Y2K compliant due to
their recent implementation. The Company's core financial and reporting systems
are Y2K compliant. In the third-party area, the Company has communicated with
the primary vendors and has determined that all are making significant progress
toward their Y2K compliance.
Although the Company expects all of its systems to be Year 2000 compliant
by January 31, 1999, there can be no assurance that all business software
providers will be functional by January 31, 1999. The Company's cost to comply
with Year 2000 initiative is not expected to be significant.
Forward-looking Statements
The foregoing discussions in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain forward-looking
statements, within the meaning of section 27a of the Securities Act of 1933 and
section 21e of the Securities Act, which reflect Management's current views with
respect to the future events and financial performance. Such forward looking
statements may be deemed to include, among other things, statements relating to
anticipated growth, and increased profitability, as well as to statements
relating to the Company's strategic plan, including plans to develop and
increase factored receivables, loan originations, and to selectively acquire
other companies. These forward-looking statements are subject to certain risks
and uncertainties, including, but not limited to, future financial performance
and future events, competitive pricing for services, costs of obtaining capital
as well as national, regional and local economic conditions. Actual results
could differ materially from those addressed in the forward looking statement.
Due to such uncertainties and risks, readers are cautioned not to place undue
reliance on such forward-looking statements, which speak only of the date
hereof.
13
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceeding. On April 29, 1998, USCF obtained a consent
default judgement from Vencor International Inc. in the amount of
$500,983.04.
Item 2. Changes in Securities. The Company has issued through September
30th, 1998 a total of 19,795 shares of the Convertible Preferred
$100 par value stock.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders . None.
Item 5. Other Information. None.
Item 6.(a) Exhibits. None.
Item 6.(b) Reports on Form 8-K. On September 21, 1998, the
Company's, wholly owned subsidiary USCF, acquired all of the
issued and outstanding shares of Goodman Factors Inc. This was
reported on an 8-K filed October 5, 1998.
14
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
CELTIC INVESTMENT, INC.
Date: November 16, 1998 /s/ Douglas P. Morris
---------------------
By: Douglas P. Morris
President and Principal Executive Officer
Date: November 16, 1998 /s/ Frank Lucchese
------------------
By: Frank Lucchese
Principal Financial Officer
15
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CELTIC INVESTMENT, INC.'S FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. ($000)
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> 2,829
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 2,829
<SECURITIES> 0
<RECEIVABLES> 23,570
<ALLOWANCES> (228)
<INVENTORY> 271
<CURRENT-ASSETS> 26,442
<PP&E> 266
<DEPRECIATION> (174)
<TOTAL-ASSETS> 36,541
<CURRENT-LIABILITIES> 23,675
<BONDS> 0
0
1,906
<COMMON> 5,098
<OTHER-SE> (888)
<TOTAL-LIABILITY-AND-EQUITY> 36,541
<SALES> 1,167
<TOTAL-REVENUES> 1,167
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 895
<LOSS-PROVISION> 30
<INTEREST-EXPENSE> 182
<INCOME-PRETAX> 60
<INCOME-TAX> 24
<INCOME-CONTINUING> 36
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 36
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
</TABLE>
