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 December 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 February 13, 1997 - 3,906,471 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 December 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--December 31, 1997 and
June 30, 1997 3
Condensed Consolidated Statements of Operations--for the three
months ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Operations--for the six
months ended December 31, 1997 and 1996 5
Condensed Consolidated Statements of Cash Flows--for the six
Months ended December 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
Part II - Other Information
Item 1. Legal Proceedings 14
Item 2. Changes in Securities 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6(a). Exhibits 14
Item 6(b). Reports of Form 8-K 14
2
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
December 31, 1997 June 30, 1997
Cash $ 1,038,382 941,789
Receivables 8,758,067 5,890,308
Furniture, fixtures and equipment, net of
accumulated depreciation 133,492 145,218
Goodwill 653,470 676,670
Deferred finance fees, net of accumulated
amortization 73,036 111,674
Prepaid Expenses and other assets 710,115 158,825
---------------- ---------------
Total assets $11,366,562 $ 7,924,484
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued expenses 335,351 329,186
Due to factoring clients 2,896,317 1,404,072
Note Payable - line of credit (Capital Factors) 4,483,452 2,448,060
Long Term Debt 2,483 40,257
------------ --------------
Total liabilities 7,717,603 7,924,484
Commitments and contingencies
Stockholders' equity:
Preferred stock
Common stock 3,907 3,907
Additional paid-in capital 5,076,054 5,076,054
Accumulated deficit (1,368,634) (1,313,160)
------------- --------------
Total stockholders' equity 3,711,327 3,780,199
Less notes receivable and interest receivable from
stockholders (62,368) (63,892)
------------- --------------
3,648,959 3,716,307
------------- --------------
Total liability and stockholders' equity $11,366,562 $ 7,924,484
============= ==============
See accompanying notes to condensed consolidated financial statements
3
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
December 31, 1997 December 31, 1996
Revenues:
Factoring income $ 546,451 $ 307,001
Mortgage Origination Income 424,571 0
Realty Commission 85,488 0
Interest 15,252 7,113
Other 18,321 38,757
------------------- -----------------
Total revenues 1,090,083 349,542
Interest expense 174,377 40,764
------------------- -----------------
Income after interest expense 915,706 308,778
Operating Expenses:
Salaries and employee benefits 282,563 134,448
Occupancy 158,641 24,268
Servicing costs 17,329 23,487
Professional fees 177,543 58,461
Goodwill amortization 11,600 0
Other 248,033 66,861
------------------- -----------------
Total operating expenses 895,709 307,565
Net Income $ 19,997 $ 1,213
=================== =================
Basic earnings per share $ 0.01 $ 0.00
=================== =================
Diluted earnings per share $ 0.01 $ 0.00
=================== =================
Weighted average shares outstanding 3,906,471 3,536,271
=================== =================
See accompanying notes to condensed consolidated financial statements
4
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Six Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Revenues:
Factoring Income $ 1,017,998 $ 634,320
Mortgage Origination Income 653,905 0
Realty Commission 159,830 0
Interest 15,252 11,356
Other 18,319 76,617
----------------- -----------------
Total revenues 1,865,304 722,293
Interest expense 295,941 64,920
------------------ -----------------
Income after interest expense 1,569,363 657,373
Operating Expenses:
Salaries and employee benefits 558,419 266,751
Occupancy 284,121 49,993
Servicing costs 32,008 41,717
Professional fees 297,283 122,994
Goodwill amortization 23,200 0
Other 429,806 132,173
----------------- ----------------
Total operating expenses 1,624,837 613,628
Net Income (loss) $ (55,574) $ 43,745
================= ================
Basic earnings per share $ ( 0.01) $ 0.01
================= ================
Diluted earnings (loss) per share $ ( 0.01) $ 0.01
================= ================
Weighted average shares outstanding 3,906,471 3,536,537
================= ================
See accompanying notes to condensed consolidated financial statements
5
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
December 31, 1997 December 31, 1996
----------------- -----------------
Cash flows from operating activities
Net income (loss) $ (55,474) $ 43,745
Adjustments to reconcile net income (loss) to net cash
(used in) operating activities:
Depreciation 11,726 9,221
Amortization of Goodwill 23,200 0
Amortization of deferred finance fees 38,638 38,639
Changes in operating assets and liabilities:
(Increase) in receivables (2,746,719) (291,431)
(Increase) in loans payables ( 119,517) 0
Increase (Decrease) in accounts payable
and accrued liabilities 6,166 (116,047)
Increase (decrease) in payables due to
factoring clients 1,492,245 (5,244)
(Increase) in other assets (551,290) (9,858)
----------------- ------------------
Net cash (used in)
operating activities (1,901.025) (330,975)
----------------- ------------------
Cash flows from investing activities -
Purchase of furniture, fixtures
and equipment 0 (3,690)
----------------- ------------------
Net cash (used in) by
investing activities 0 (3,690)
----------------- ------------------
Cash flows from financing activities:
Proceeds from offering of
secured notes 0 0
Advances from note payable 1,997,618 524,654
----------------- ------------------
Net cash provided by financing
activities 1,997,618 524,654
----------------- ------------------
Increase in cash during the period 96,593 189,989
Cash at beginning of period 941,789 450,864
----------------- ------------------
Cash at end of period $ 1,038,382 640,853
================= ==================
See accompanying notes to condensed 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 December
31, 1997 and the results of its operations for the six months ended December 31,
1997 and 1996 and cash flows for the six months ended December 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, 1997. The
results of operations for the six months ended December 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
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earning per share. Statement 128
replaces the previously reported primary and fully diluted net income with basic
and diluted income per share. Unlike primary earning per share basic earning per
share exclude any dilutive effects of stock options, warrants, and convertible
securities. Dilutive earning per share is very similar to the previously
reported fully diluted earning per share. All earning per share amounts for all
periods have been presented, and where necessary, are restated to conform to the
Statement 128 requirements.
Reclassifications
Certain amounts have been reclassified in the 1996 financial statements to
conform to the 1997 presentation.
3. Commitments and Contingencies
The Company's Advantage Realty Inc. (ADR) subsidiary has entered into an
operating lease agreement for office space beginning September 1, 1997 through
October 31, 2000. The lease commitment is approximately $28,000 for Year 1,
$30,000 for Year 2, and $33,000 for Year 3.
7
PART 1 - ITEM 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Overview
The Company is a diversified financial services company engaged, through
its wholly owned subsidiaries, in the business of purchasing accounts
receivables, residential mortgage origination, and residential real estate
sales. The Company's subsidiary, U.S. Commercial Funding Corporation (USCF),
commenced operations in July, 1994. The Company's subsidiary Salt Lake Mortgage
Corporation (SLM), a residential mortgage loan originator, and the Company's
subsidiary Advantage Realty Inc. (ADR), a real estate brokerage operation were
acquired by the Company in January 31, 1997 in a merger transaction.
Results of Operations
The following discussion and analysis in the table below presents the
significant changes in financial conditions and results of continuing operations
of the Company and is categorized by the Company's Subsidiaries for the three
months and the six months ended December 31, 1997 and 1996. The discussion below
of SLM and ADR results of operations do not make a comparison to the same period
for the three or six months ending December 31, 1996 for the following reasons:
first, SLM and ADR were accounted for as one business entity through January 31,
1997 and were not acquired by the Company until January 31, 1997; and second,
expenses were handled on a cash basis rather than the current accrual method.
Both of these reasons distort the analysis of the comparative three and six
month periods.
8
CELTIC INVESTMENT INC.
CONDENSED SUBSIDIARY STATEMENT OF OPERATIONS
(Unaudited)
$000's
Three Months Ended Six Months Ended
December 31 December 31
Revenues 1997 1996 1997 1996
----- ---- ---- ----
USCF 575 350 1047 722
SLM 425 0 654 0
ADR 90 0 164 0
----- ----- ---- ----
Total Revenue 1090 350 1865 722
Operating Expense
Interest 174 41 296 65
USCF 353 260 650 532
SLM 345 0 620 0
ADR 141 0 260 0
Corporate (Celtic) 57 48 94 81
------ ------ ---- ----
Total Operating Expenses 1070 349 1920 678
Operating Profit (Loss)
USCF 69 49 136 125
SLM 59 0 (1) 0
ADR (51) 0 (96) 0
Corporate (Celtic) (57) (48) (94) (81)
----- ----- ---- ----
Operating Profit (Loss) 20 1 (55) 44
Income Tax 0 0 0 0
Net Income (Loss) 20 1 (55) 44
9
Revenues
USCF revenues totaled $575,000 for the three month period ending December
31, 1997, compared to $350,000 for the same period in 1996. USCF revenues
totaled $l,047,000 for the six month period ending December 31, 1997, compared
to $722,000 for the same period in 1996. This fifty-eight percent increase in
revenues results from a increase in the total volume of purchased receivables.
SLM revenues totaled $425,000 for the three month period ending December
31, 1997. SLM revenues totaled $654,000 for the six month period ending December
31 1997. Each month in this reporting period, the revenue has increased and
reflects a positive direction resulting from management changes and the overall
general mortgage loan origination market. The market is experiencing an increase
in refinance origination volume due to lower mortgage interest rates.
ADR revenues totaled $90,000 for the three month period ending December
31, 1997. ADR revenues totaled $164,000 for the six month period ending December
31 1997. Future revenue may significantly fluctuate in any give period depending
on real estate buy and sell activity on the broker listed properties and
independent contractor agents overall closing volume.
Operating Expense
Interest expense totaled $174,000 for the three month period ending
December 31, 1997, compared to $41,000 for the same period in 1996. Interest
expense for the six month period ending December 31, 1997 totaled $296,000
compared to $65,000 the same period in 1996. This increase in interest expense
relates to USCF increased use of the line of credit necessary to finance the
volume growth of purchased receivables.
USCF operating expense, not including interest expense, for the three month
period ending December 31, 1997 total $353,000, compared to $260,000 for the
same period in 1996. The operating expense totaled $650,000 for the six months
ending December 31, 1997, compared to $532,000 for the same period in 1996. This
expense includes: Salaries and related - $294,000, Occupancy - $27,000,
Commissions paid to referrals sources - $79,000, Legal fees - $60,000, and bad
debt accrual - $40,000. The increase in expenses in the comparative three and
six month periods ending December 31, 1997 are a result of the increased growth
of USCF purchased accounts receivables.
SLM's operating expense for the three months ending December 31, 1997
totaled $345,000. The operating expense for the six month period ending December
31, 1997 totaled $620,000. This total includes: Salaries and related - $162,000,
Occupancy - $194,000, and direct loan expenses including origination commission
- - $144,000.
10
ADR's operating expense for the three month period ending December 31,1997
totaled $141,000. The operating expense for the six month period ending December
31, 1997 totaled $260,000. This expense total includes: Salaries and related -
$81,000, Occupancy - $17,000, and Commissions to independent agents - $97,000.
The Company's corporate overhead expense totaled $57,000 for the three
month period ending December 31, 1997, compared to S48,000 for the same period
in 1996. The corporate overhead expense for the six month period ending December
31, 1997 totaled $94,000, compared to $81,000 for the same period in 1996. The
increase in expense for the comparative periods results from a cost of living
increase in the President's salary and increased professional fees.
Operating Profit (Loss)
USCF had a Operating profit of $69,000 for the three month period ending
December 31, 1997, compared to $49,000 for the same period in 1996. The
operating profit for the six month period ending December 31,1997 is $136,000,
compared to $125,000 for the same period in 1996. This profit increase is a
direct result of a continual increase in the volume of purchased receivables.
SLM had a operating profit of $59,000 for the three month period ending
December 31,1997, and a ($1,000) loss for the six month period ending December
31 1997. The profit (loss) numbers have steadily shown a month by month
improvement since the beginning of this Fiscal Year. This positive trend is a
result of management implementing certain changes in personnel, expanding into
two additional states, and the overall reduction in mortgage interest rates
which has increased mortgage refinance activities. It is also important to note
the profit (loss) numbers reflect a Goodwill expense of $23,000 and interest
charges of $35,000. This interest charge is for the use of the Company's capital
which was infused to finance the growth of SLM. The Company's Board of Directors
recently approved a change of policy which will treat the capital infusion on a
go forward basis as equity not debt.
ADR had a operating loss of ($51,000) for the three month period ending
December 31, 1997, and a operating loss of ($96,000) for the six month period
ending December 31,1997. The Company has taken measures to reduce overhead which
will lessen the future impact of the losses. However, the Company believes it is
in the best interests of its' shareholders to seek other alternatives such as
potential buyers for ADR or possibly close ADR as a operating entity.
The consolidated net income for the three month period ending
December 31,1997 totaled $20,000, compared to $1,000 for the same period in
1996. The consolidated net (loss) for the six month ending December 31, 1997
totaled ($55,000) compared to the net income of $44,000 for the same period in
1996. This difference is largely due to the loss of ($96,000) incurred in this
period by ADR.
11
Liquidity and Capital Resources
The company's capital requirement will most likely increase as each
of its subsidiaries grows and requires additional capital. The requirement for
additional capital would provide additional resources to increase volume of
purchased receivables, allow expansion of the mortgage operation, and provide
financing for any potential acquisition/merger activity. There can be no
assurance that additional capital will be available as needed.
In December, of 1997, USCF successfully re-negotiated its line credit
with Capital Business Credit. The most significant changes are: the maximum
credit line amount increased from $6,000,000 to $15,000,000, and the cost of
interest was lowered by two hundred basis points. USCF believes these changes
will be adequate to grow USCF's business and improve gross profit margins in the
foreseeable future.
At December 31, 1997 the Company had total assets of $11,365,562 and total
liabilities of $7,717,603. This compares to the total assets of $7,924,484 and
total liabilities of $4,221,575 at June 30, 1997. 'The increase in net assets
and liabilities is the direct result of the increased level of factoring
business activity, and the increased activities of SLM and ADR. Cash at December
31, 1997 totaled $1,038,382 compared to $941,789 at June 30, 1997. The Company
used this cash to fund additional receivable purchases, and to fund its ongoing
operations. The Company intends to continue to purchase receivables through
existing cash and through the use of the line of credit as well as expand its
mortgage origination operation by entering into selective funding projects.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions and professional
fees, will be approximately $95,000 for each month 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 is adequate to fund its projected factoring volume during
the next six months.
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.
12
Forward-looking Statements
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contain forward-looking
statements, within the meaning of section 27a of the Securities Act of 1933 and
section 2le 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 statements.
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
PART II - OTHER INFORMATION
Item 1 Legal Proceeding.
USCF obtained a default judgment on November 18, 1997
against Larry Shelter in the amount of $29,379.
USCF obtained a default judgment on December 12, 1997
against Sperry Vision Corp. in the amount of $116,462.
Item 2 Changes is Securities. None.
Item 3 Defaults Upon Senior Securities. None.
Item 4 Submission of Matters to a Vote of Security Holders. None.
Item 5. Other Information. None.
Item 6.(a) Exhibits. None.
Item 6.(b) Reports on Form 8-K. None.
14
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: February 13, 1998
/s/ Douglas P. Morris
By: Douglas P. Morris
President and Principal Executive Officer
Date: February 13, 1998
/s/ Frank Lucchese
By: Frank Lucchese
Principal Financial Officer
15