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 March 31,1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-14189
CELTIC INVESTMENT, INC.
(Name of Small Business Issuer as specified in its charter)
Delaware 36-3729989
___________________________ _______________
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification
No.)
17W220 22nd St., Suite 420
Oakbrook Terrace, Il 60181
(Address of principal executive offices)
Issuer's telephone number, including area code: (630) 993-9010
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: $.001
Par Value Common Stock
Check whether the Issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes x/ No
.
Common Stock outstanding at May 13, 1997 - 4,406,471 shares of $.001 par value
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
1
FORM 10-QSB
FINANCIAL STATEMENTS AND SCHEDULES
CELTIC INVESTMENT, INC.
For the Quarter Ended March 31, 1997
The following financial statements and schedules of the registrant and its
consolidated subsidiaries are submitted herewith:
Part I - Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheet--March 31, 1997 and
June 30, 1996 3
Condensed Consolidated Statements of Operations--for the three months
ended March 31, 1997 and 1996 4
Condensed Consolidated Statements of Operations--for the nine
months ended March 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows--for the nine
Months ended March 31, 1997 and 1996 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General 8
U.S. Commercial Funding Corporation 9
Salt Lake Mortgage/Advantage Realty 11
Part II - Other Information
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6(a). Exhibits 13
Item 6(b). Reports of Form 8-K 13
2
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
March 31, 1996 June 30, 1996
-------------- ------------
Cash $ 313,445 $ 450,864
Receivables 4,859,795 3,746,347
Furniture, fixtures and equipment, net of
accumulated depreciation 140,277 61,803
Goodwill 1,384,992 0
Deferred finance fees, net of accumulated
amortization 100,993 158,951
Prepaid Expenses and other assets 226,694 7,713
-------------- ------------
Total assets $ 7,026,196 $ 4,425,678
=============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 277,000 263,804
Due to factoring clients 1,197,398 1,321,829
Note Payable - line of credit (Capital Factors) 1,155,176 0
--------------- -------------
Total liabilities 2,629,574 1,585,633
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 4,406 3,306
Additional paid-in capital 5,778,679 4,232,904
Accumulated deficit (1,323,248) (1,324,889)
--------------- -------------
Total stockholders' equity 4,396,622 2,911,321
Less notes receivable and interest receivable from
stockholders (63,215) (71,276)
--------------- -------------
4,459,837 2,840,045
--------------- -------------
Total liability and stockholders' equity $ 7,026,196 $ 4,425,678
=============== =============
See accompanying notes to consolidated financial statements
3
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
March 31, 1997 March 31, 1996
---------------- ------------------
Revenues:
Factoring income $ 260,232 $ 307,001
Mortgage Origination Income 169,682 0
Interest 51,892 16,268
Other 8,885 0
---------------- -------------
Total revenues 490,691 323,269
Interest expense 70,869 14,944
---------------- -------------
Income after interest expense 419,822 308,325
Operating Expenses:
Salaries and employee benefits 207,314 95,072
Occupancy 47,164 27,604
Servicing costs 21,820 70,221
Professional fees 49,854 52,331
Goodwill amortization 15,562 0
Other 120,212 51,793
--------------- --------------
Total operating expenses 461,926 297,021
Net Income (loss) $ (42,104) $ 11,034
=============== ==============
Primary earnings per share $ ( 0.01) $ 0.00
=============== ==============
Fully diluted earnings per share $ ( 0.01) $ 0.00
=============== ==============
Weighted average shares outstanding 4,183,731 3,306,471
=============== ==============
See accompanying notes to consolidated financial statements.
4
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996
----------------- -----------------
Revenues:
Factoring income $ 894,552 $ 888,170
Mortgage Origination Income 169,682 0
Interest 63,248 31,771
Other 85,502 1,058
----------------- -----------------
Total revenues 1,212,984 920,999
Interest expense 135,789 14,944
----------------- -----------------
Income after interest expense 1,077,195 906,055
Operating Expenses:
Salaries and employee benefits 474,065 339,993
Occupancy 97,157 79,914
Servicing costs 63,537 199,466
Professional fees 172,848 281,281
Goodwill amortization 15,562 0
Other 252,385 207,227
----------------- -----------------
Total operating expenses 461,926 1,107,881
Net Income (loss) $ 1,641 (201,826)
================= =================
Primary earnings per share 0.00 $ (0.07)
================= =================
Fully diluted earnings per share 0.00 $ (0.07)
================= =================
Weighted average shares outstanding 3,703,193 2,778,438
================= =================
See accompanying notes to consolidated financial statememnts
5
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Nine Months Ended Nine Months Ended
March 31, 1997 March 31, 1996
---------------- ---------------
Cash flows from operating activities
Net income (loss) $ 1,641 $ (201,825)
Adjustments to reconcile net income loss
to net cash (used in)
operating activities:
Allowance for losses
Depreciation 18,907 13,388
Amortization of Goodwill 161,883
Amortization of deferred finance fees 57,958
Changes in operating assets and liabilities:
(Increase) decrease in account payables (1,113,448) (1,723,330)
Increase in accounts payable & accrued liabilities 13,196 (103,470)
Increase (decrease) in payables due to
factoring clients (124,431) 945,041
(Increase) in other assets (210,920) (201,454)
--------------- ---------------
Net cash (used in)
operating activities (1,195,214) (1,271,650)
--------------- ---------------
Cash flows from investing activities -
Purchase of furniture, fixtures and equipment (97,381) (3,421)
Sale of furniture, fixtures, and
equipment 0 2,565
--------------- -------------
Net cash (used in)/ investing activities (97,381) (856)
--------------- -------------
Cash flows from financing activities:
Proceeds from offering of secured notes
Advances from note payable 1,155,176 0
Repurchase and cancellation of shares 0 (49,049)
--------------- -------------
Net cash provided by financing
activities 1,155,176 450,951
--------------- -------------
Decrease in cash during the period (137,419) (821,555)
Cash at beginning of period 450,864 2,117,618
--------------- -------------
Cash at end of period $ 313,442 $ 994,458
=============== =============
See accompanying notes to consolidated financial statements
6
CELTIC INVESTMENT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
--------------------------
1. General
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments consisting of only normal recurring
adjustments necessary to present fairly its financial position as of March 31,
1997 and the results of its operations for the nine months ended March 31, 1997
and 1996 and cash flows for the nine months ended March 31, 1997 and 1996. The
statements are condensed and therefore do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. The statements should be read in conjunction with the
consolidated financial statements and the footnotes included in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 1996. The results of
operations for the nine months ended March 31, 1997 and 1996 are not necessarily
indicative of the results to be expected for the full year.
2. Summary of Significant Accounting Policies
Per Share Data
Net Income or (Loss) per common share data is based on the weighted
average number of common shares outstanding during each year after considering
exercise of stock options. The 1997 Primary and Fully diluted net income per
share has taken the exercise of stock options and warrants into consideration.
In computing the 1996 Net (Loss) per share, stock options and warrants are not
considered because they have an anti-dilutive effect.
Reclassifications
Certain amounts have been reclassified in the 1996 financial statements to
conform to the 1997 presentation.
3. Commitments and Contingencies
The Company has entered into employment agreements with Salt Lake Mortgage
officers that expire in January 2002. Under the terms of the agreements, the
Company has agreed to pay approximately $ 875,000 in compensation for the
remainder of the agreement's terms.
The Company has entered into an operating lease agreement for office space
beginning December 1, 1996 through November 30, 1999. The lease commitment is
approximately $40,000 for Year 1, $55,000 for Year 2, and $56,000 for Year 3.
The Company's Salt Lake Mortgage subsidiary has entered into an operating lease
for office space through April 30, 2001. The lease commitment is approximately
$22,974 for Year 1, $69,456 for Year 2, $72,139 for Year 3, $73,446 for Year 4,
and $74,802 for Year 5.
8
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
General
The Company commenced operations in the business of purchasing accounts
receivable in July 1994 when it acquired USCF. For accounting purposes, the
acquisition of USCF was treated as a reverse merger, with USCF treated, for
accounting purposes only, as the acquiring or surviving company. Prior to the
acquisition transaction, the Company had conducted no business operations and
its activities were limited to the sale of its securities to raise its initial
capital. USCF was formed in April, 1994 but did not commence operations until
July 1994. From July 1994 through September 30, 1994, the Company devoted most
of its efforts to commencing active operations in the accounts receivable
business.
The Company organized USCF Illinois as a wholly owned subsidiary in March
1995. USCF Illinois was formed to conduct operations in the business of
purchasing accounts receivables on a recourse basis.
The Company (through USCF) typically purchases accounts receivable for
between 70% and 80%of face amount depending upon the size, age, and type of
accounts being purchased. The difference between the face amount of the
receivable and the purchase price of the receivable known is the discount. The
Company's discount typically ranges from 2.5% to 7.0%. The Company's revenues
are derived primarily from discounts. The Company's revenues are, to a great
extent dependent upon the amount of capital available for the purchase of
accounts receivable.
On January 31, 1997 the Company finalized a merger with Salt Lake
Mortgage, a Salt Lake City based mortgage broker, and a real estate marketing
company, Advantage Realty. The merger was a stock for stock exchange
transaction. The Company issued 1,100,000 million shares of its stock for the
shares of Salt Lake Mortgage. Five Hundred Thousand of such shares are held in
escrow. The release of such shares is based on a formula consisting of a
required capital infusion and certain future pre-tax earnings.
Salt Lake Mortgage Corp was founded in 1993. Salt Lake Mortgage Corp
specializes primarily in conforming agency and government loan products, such as
FHA/VA loans. The company 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 A- and D credit
mortgages.
9
Liquidity and Capital Resources
The Company's USCF subsidiary capital requirements will increase as the
volume of purchased receivables increase although faster turnover of receivables
can mitigate some of those capital needs. Prior to May 1996 the Company relied
exclusively on cash proceeds from the sale of common stock to fund its
operations. On April 30, 1996 the Company entered into a agreement with Capital
Business Credit a division of Capital Factors Inc., of Los Angeles, California
for a $6,000,000 line of credit. In July 1996, the Company began borrowing under
this agreement. As of March 31, 1997, the Company had borrowed $1,155,176 under
this line of credit. The Company's Salt Lake Mortgage subsidiary will require
additional capital resources as it expands its operations. The company has begun
the efforts to procure additional equity and/or debt for Salt Lake Mortgage.
At March 31, 1997, the Company had total assets of $7,026,196 and total
liabilities of $2,629,574. This compares to the total assets of $4,425,678 and
total liabilities of $1,585,633 at June 30, 1996. The increase in total assets
and total liabilities is the direct result of increased factoring volume that
was financed utilizing the existing line of credit and the acquisition of Salt
Lake Mortgage/Advantage Realty. USCF added $1,113,448 in factored receivables in
this period. As of March 31, 1997 Salt Lake Mortgage had total assets of
$1,815,424 of which $1,384,992 related to Goodwill. The Company's USCF
subsidiary intends to continue to purchase receivables through existing cash and
through the use of the line of credit.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions, and professional
fees, will be approximately $130,000 for each of the next six months based upon
current operations. However, if operations increase, the Company may be required
to increase its staff which will increase its monthly general and administrative
expenses. The Company anticipates that existing working capital and the line of
credit will be adequate to fund its USCF operations and projected factoring
volume during the next twelve months. Salt Lake Mortgage expansion is dependent
on obtaining additional financing.
Results of Operations - U.S. Commercial Funding
Revenues
Total revenues increased 10% to $983,277 for the nine months ended March
31, 1997 compared to $893,742 for the nine months ended March 31, 1996. Total
revenue increased 4% to $320,459 for the quarter ending March 31, 1997 compared
to $308,773 for the quarter ending March 31,1996. The year to year nine month
gain is the result of higher factored receivable volume. For the quarter ending
March 31, 1997 January and February factored receivable volume was less that
expected as USCF customer's experienced slower business activity. January and
February revenue were lower than factored revenues of the prior year. However,
March volume increased to 21%, more in line with the fiscal year to date
increase. USCF also continues to be successful in purchasing outright factor's
client receivables and co-participating in purchasing other factors companies'
clients receivables.
10
Interest Expenses
For the nine months ended March 31, 1996, the USCF had interest expense of
$14,944 compared to interest expense of $135,247 for the nine months ended March
31, 1997. For the three months ending March 31, 1996 interest expense totaled
$14,944 compared to the three months ended March 31, 1997 interest expense of
$70,236. The increase in interest expense was the result of interest for usage
of the Line of Credit and the amortization of deferred financing costs relating
to the Line of Credit. As a result of anticipated increased usage of the
$6,000,000 line of credit, the Company anticipates that interest expense will
continue to increase during the fourth quarter of 1997.
Credit Losses
The USCF provided for no credit losses for the nine months ended March 31,
1996. USCF provided for $3650 in credit loss for the quarter ending March 31,
1997, the first credit loss in the last seven quarters. Management will make
provisions for credit losses based upon its continuing review of the USCF's
portfolio of invoices. Current allowance for credit losses is believed to be
adequate, however, there can be no assurance that provisions for credit losses
will be sufficient to cover any actual losses. Although the USCF intends to
minimize credit losses through adequate due diligence procedures, there is
always the possibility that it will incur credit losses.
Operating Expenses
USCF's operating expenses for the nine months ended March 31, 1997
decreased versus the nine months period ended March 31, 1996. Operating expenses
of $253,790 was 25% lower for the nine months period ended March 31, 1997. There
are three significant reasons for this reduction. First, legal expenses
involving certain lawsuits and the preparation of a debt placement memorandum
that occurred in the nine months ending March 31, 1996 were no longer required
resulting in approximately $132,000 lower legal expenses for the nine months
ending March 31, 1997. Second, lower travel and related expenses for the nine
months ended March 31, 1997 resulted in a decrease of $35,000 in travel expense.
The relocation of U.S.Commercial Funding Corporation to Illinois has resulted in
a reduction of travel expense. Third, outside portfolio servicing expenses were
approximately $136,000 less for the nine months ending March 31, 1997 than the
nine months ending March 31, 1996. The offset of the $55,000 lower servicing
expense is an increase in Salaries and related. This increase is the result of
the increase in factoring volume and replacing the outside servicing expense
with in house operations..
USCF total operating expenses for the three months ended March 31, 1997
decreased slightly to $256,906 from $261,111 for the three months ended March
31, 1996 or a reduction of 2% in operating expense. Offsetting the decreasing in
outside portfolio servicing expense of $48,000 was higher Personnel and related
expenses of approximately $40,000 for the quarter ending March 31, 1997.
11
Net Income (Loss)
Lower than expected January and February factor volume could not be offset
with on going reductions in USCF expenses and as a result a net operating loss
of $10,424 was incurred for the three months ending March 31, 1997 compared to a
operating profit $47,663 for the three months ending March 31, 1996. For the
nine months ending March 31, 1997 USCF reported operating profits $114,252 which
compares favorably to the operating loss of $90,176 for the nine month period
ending March 31, 1997.
Results of Operations - Salt Lake Mortgage/Advantage Realty
Revenue
Salt Lake Mortgage /Advantage Realty had total revenue of $170,232 for the
two month period ending March 31, 1997. The higher interest rate environment
slowed Salt Lake Mortgage's's loan origination volume. In addition to an
increasing interest rate environment, the greater Salt Lake City area has
experienced a slowdown in real estate sales, thereby decreasing the demand for
purchase money mortgages particularly in the seasonal months of January through
March.
Advantage Realty while continuing to expand its real estate listing
portfolio, realized less than expected real estate commission income due to a
slowing real estate market in the greater Salt Lake City area. While the real
estate market in the greater Salt Lake City area is still robust by national
standards a slowdown in appreciation compared to prior years has occurred which
has tended to increase the number of days average homes are on the market from
approximately 30 days to approximately 75 days.
Operating Expense
Total operating expenses of $ 205,474 for the two month period ending
March 31, 1997 were in line with management expectations. Salaries and
administrative expenses total $ 71,348, while expenses related to facilities
totaled $ 22,708, and Goodwill Amortization expense total $15,562. These
expenses are primarily fixed in nature, and are not expected to change
dramatically. In contrast commission expenses which total $59,247 and
advertising expenses which totaled $20,833 vary depending on the volume of
mortgage loan origination, and real estate sales income generated.
Net Income (Loss)
Salt Lake Mortgage/ Advantage Realty experienced a combined loss of
$35,242 during the two month period ending March 31,1997. As mentioned above
this loss was due to the cyclical nature of interest rates and homes sales which
had a negative effect on gross revenue.
12
Inflation
Business operations have not been materially affected by inflation during
the past year and the current fiscal year.
PART II - OTHER INFORMATION
Item 1. Legal Proceeding.
USCF obtained a default judgment on April 3, 1997 against Elaine Stubbs
d/b/a Computer Unlimited of Georgia and Continental Financial Group
in the amount of $133,169.
Item 2. Changes is Securities. None.
Item 3. Defaults Upon Senior Securities. None.
Item 4. Submission of Matters to a Vote of Security Holders . None.
Item 5. Other Information. None.
Item 6.(a) Exhibits. None.
Item 6.(b) Reports on Form 8-K. .
On January 31, 1997 the Company purchased Salt Lake Mortgage
and Advantage Realty in a stock for stock transaction.
This was reported on in an 8-K filed February 15, 1997.
13
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: May 13, 1997 /s/ Douglas P. Morris
---------------------
By: Douglas P. Morris
President and Principal Executive Officer
Date: May 13, 1997 /s/ Frank Lucchese
------------------
By: Frank Lucchese
Principal Financial Officer
14