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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarter ended December 31, 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 February 13, 1999 - 3,924,971 shares of $.001
par value Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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1
FORM 10-QSB/A
FINANCIAL STATEMENTS AND SCHEDULES
CELTIC INVESTMENT, INC.
For the Quarter Ended December 31, 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-December 31, 1998 and
June 30, 1998 3
Condensed Consolidated Statements of Operations--for the three
Months ended December 31, 1998 and 1997 4
Condensed Consolidated Statements of Operations--for the six
Months ended December 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows--for the six
Months ended December 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations--General 10
Part II - Other Information
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6(a). Exhibits 16
Item 6(b). Reports of Form 8-K 16
2
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited)
ASSETS
Dec 31, 1998 June 30, 1998
------------- --------------
Cash and cash equivalents $ 746,077 $ 905,093
Receivables 24,556,749 6,597,960
Notes receivable 170,536 245,400
Construction Loans receivable 631,504 553,968
Prepaid expenses and other assets 131,477 109,981
Deferred Taxes 81,000 81,000
----------- ------------
Total current assets 26,317,343 8,493,402
----------- ------------
Furniture, fixtures and equipment, net of accumulated
depreciation 1999 $189,439; 1998 $162,126 76,028 94,327
Deferred finance fees, net of accumulated amortization 15,759 39,397
1999 $186,072; 1998 $ 162,434
Deferred Taxes 367,000 391,000
Goodwill, net of accumulated amortization in 1999 of
$251,321 ; 1998 $65,733 9,451,688 587,270
------------ ------------
9,910,475 1,111,994
------------ ------------
Total assets $36,227,818 $ 9,605,396
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Notes payable $16,045,455 $ 3,619,496
Due to factoring clients 6,822,905 1,489,063
Current portion of long-term debt 2,884 22,906
Accounts payable and accrued expenses 636,018 314,760
------------ -----------
Total current liabilities 23,507,262 5,446,225
------------ -----------
Long-Term Debt, less current portion 6,462,500 14,690
------------ -----------
Convertible Preferred stock, $100 par value:
authorized $10,000,000 shares: issued and
outstanding 23,295 2,081,470 0
Stockholders' equity :
Common stock, $.001 par value: authorized
25,000,000 shares: issued and outstanding
3,924,971 3,925 3,906
Additional paid-in capital 5,094,536 5,076,054
Accumulated deficit (869,507) (871,767)
------------ -----------
Total stockholders' equity 4,228,954 4,208,193
Less notes receivable and interest receivable from
stockholders (52,368) (63,712)
------------ -----------
4,176,586 4,144,481
------------ -----------
Total liabilities and stockholders' equity $ 36,227,818 $ 9,605,396
============ ===========
See accompanying notes to condensed consolidated financial statements
3
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Three Months Ended
Revenues: December 31, 1998 December 31, 1997
------------------ ------------------
Factoring income $ 1,866,853 $ 546,452
Mortgage Origination Income 454,545 424,571
Interest 2,169 15,252
Other 10,519 14,321
------------------ ------------------
Total revenues 2,334,086 1,000,596
Interest expense 709,266 174,377
------------------ ------------------
Revenue after interest expense 1,624,820 826,219
Provision for credit losses 127,200 22,672
------------------ ------------------
Revenue after interest expense and
provision for credit losses 1,497,620 803,547
------------------ ------------------
Operating Expenses:
Salaries and employee benefits 601,439 245,264
Occupancy 163,095 145,737
Servicing costs 0 17,329
Professional fees 294,151 176,178
Amortization 161,295 11,600
Other 311,483 136,730
------------------ ------------------
Total operating expenses 1,531,463 732,838
Income (loss) from continuing operations
before income taxes (33,843) 70,708
------------------ ------------------
Provision for income taxes 0 0
------------------ ------------------
Income (Loss) from continuing operations (33,843) 70,708
(Loss) income from operations of
discontinued segment 0 (50,711)
------------------ ------------------
Net Income (loss) (33,843) 19,997
------------------ ------------------
Convertible Preferred Stock Dividends (50,783) 0
Net Income (loss) applicable to common
shareholders $ (84,627) 19,997
================== ==================
Net income (loss per share):
Basic:
Continuing Operations $ (0.02) 0.01
Discontinued operation 0.00 0.00
------------------ ------------------
Net Income (loss) $ (0.02) $ 0.01
================== ==================
Diluted:
Continuing Operations (0.02) 0.01
Discontinued operation 0.00 ( 0.00)
================== ==================
Net Income (loss) $ (0.02) $ 0.01
================== ==================
See accompanying notes to consolidated financial statements
4
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
----------------- -----------------
Revenues:
Factoring income $ 2,530,809 $ 1,017,998
Mortgage Origination Income 944,240 653,905
Interest 6,749 15,252
Other 19,796 14,319
---------------- ----------------
Total revenues 3,501,594 1,701,474
Interest expense 891,749 295,941
---------------- ----------------
Revenue after interest expense 2,609,845 1,405,553
Provision for credit losses 157,200 41,166
---------------- -----------------
Revenue after interest expense and
for credit losses 2,452,645 1,364,367
---------------- -----------------
Operating Expenses:
Salaries and employee benefits 947,687 477,128
Occupancy 317,122 256,287
Servicing costs 0 32,008
Professional fees 534,722 295,468
Amortization 185,558 23,200
Other 441,295 239,952
--------------- --------------
Total operating expenses 2,426,384 1,324,043
Income (loss) from continuing
operations before income taxes 26,261 40,323
--------------- --------------
Provision for income taxes 24,000 0
--------------- ---------------
Income (Loss) from continuing
operations 2,261 40,323
(Loss) income from operations of
discontinued segment 0 (95,798)
--------------- ----------------
Net Income (loss) 2,261 (55,475)
Convertible Preferred Stock Dividends (74,798) 0
Net Income (loss) applicable to common
shareholders $ (72,537) $ (55,475)
================ ================
Net income (loss per share);
Basic:
Continuing Operations (0.02) (0.01)
Discontinued operation 0.00 0.00
----------------- ----------------
Net Income (loss) $ (0.02) $ (0.01)
================= ================
Diluted:
Continuing Operations $ (0.02) $ (0.01)
Discontinued operation 0.00 0.00
------------------ ----------------
Net Income (loss) $ (0.02) $ (0.01)
================= ================
See accompanying notes to consolidated financial statements
5
CELTIC INVESTMENT, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
Six Months Ended Six Months Ended
December 31, 1998 December 31, 1997
----------------- ------------------
Cash flows from operating activities
Net income $ (72,537) $ (55,474)
Adjustments to reconcile net income
to net cash (used in) operating activities:
Provision for credit losses 60,000 0
Depreciation 27,313 11,726
Amortization of deferred finance fees 23,638 38,638
Amortization of Goodwill 185,558 23,200
Deferred Taxes 24,000 0
Changes in operating assets and liabilities:
(Increase) in receivables (2,037,823) (2,746,719)
Decrease (increase) in notes receivable 233,147 (119,517)
(Increase) decrease in construction loans
receivable (77,536) 0
Increase (decrease) in mortgage loans held
for sale 0 0
Increase (decrease) in prepaid expenses and
other assets (21,495) (551,290)
(Decrease) increase in accounts payable and
accrued expenses 213,226 6,166
Increase in due to factoring clients 1,370,387 1,492,245
________________ ________________
Net cash (used in) operating activities (72,122) (1,901,025)
________________ ________________
Cash Flows From Investing Activities
Acquisitions, net of cash acquired (1,579,000) 0
Purchase of furniture, fixtures and
equipment (9,014) 0
________________ ________________
Net cash provided by (used in) investing
activities (1,588,014) 0
________________ ________________
Cash Flows From Financing Activities
Net proceeds from notes payable (578,827) 1,997,618
Net proceeds from preferred stock 2,156,267 0
Net proceeds from common stock 18,500 0
Cash dividends paid to preferred shareholders (74,798) 0
Payments on long-term debt (20,022) 0
________________ ________________
Net cash provided by financing activities 1,501,120 1,997,618
Net increase (decrease) in cash and cash
equivalents (159,016) 96,593
Cash and cash equivalents
Beginning 905,093 941,789
________________ ________________
Ending $ 746,077 $ 1,038,382
================ ================
Supplemental Disclosure of Cash Flow Information
Cash Paid for interest $ 891,749 $ 295,941
Supplemental Disclosure of non-cash investing and
financing activities
Details of businesses acquired in purchase
transactions
Fair-Value of assets acquired $ 12,900,000 0
Goodwill 9,050,000 0
________________ ________________
Total purchase price 21,950,000 0
Liabilities assumed or created 19,729,000 0
Cash acquired (642,000) 0
________________ ________________
Net cash paid for acquisition $ 1,579,000 0
See accompanying notes to consolidated financial statements
6
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 December
31, 1998 and the results of its operations and cash flows for the three months
and the six months period ended December 31, 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 and six moth period ended December 31, 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 three and six
month period ended December 31, 1998 and 1997 are shown in the table below.
In dollars, except shares
Three Months Ended Six Months Ended
December 31, December 31,
1998 1997 1998 1997
---- ---- ---- ----
Net income (loss) from
continuing operations $ (33,843) $ 70,708 $ 2,261 $ 40,323
Less dividends accrued on
preferred stock (50,783) 0 (74,798) 0
Income available to common
shareholders $ (84,627) $ 70,708 $(72,537) $ 40,323
Weighted average shares
outstanding 3,924,971 3,906,471 3,921,888 3,906,471
Adjustment for dilutive securities:
Assumed exercise of stock
options 281,172 211,000 516,599 175,833
Assumed conversation of
convertible preferred stock 776,500 0 718,716 0
Diluted common shares 4,982,643 4,117,471 5,157,203 4,082,304
7
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
131 also 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 December 31 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
$11,500,000 in liabilities of Goodman. The acquisition will be recorded under
the purchase method of accounting.
8
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 $2,081,000 and issued 23,295 preferred shares through
December 31, 1998.
Pro Forma Information: The Company's consolidated results of operations
include Goodman Factors from September 22, 1998 through December 31, 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 Six months ended
December 31, December 31,
1998 1997 1998 1997
---- ----- ---- ----
Total operating revenue $2,334,086 $ 2,234,136 $ 4,950,118 $ 4,077,136
Net income (loss) $ (33,843) $ 53,590 $ 122,629 $ 237,590
Earning per share
Basic $ (.01) $ .01 $ .03 $ .06
Diluted $ (.01) $ .01 $ .02 $ .06
9
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 currently operating subsidiaries are U.S. Commercial Funding Corp. (USCF),
Goodman Factors, Inc. (GF), and Salt Lake Mortgage Corp. (SLM). During the
period ending June 30th, 1998, the fourth subsidiary, Advantage Realty, Inc.
(ADR) 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. The private placement offering did not raise the amount of equity
capital required as the preferred financing methodology. This resulted in higher
than expected term debt and notes payable to GF stockholders.
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
and six months ended December 31, 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, a total of one
hundred (100) days of operations are recorded in this report. The second segment
is SLM.
10
CELTIC INVESTMENT, INC.
CONDENSED SUBSIDIARY STATEMENT OF OPERATIONS
(UNAUDITED)
$000's
Three Months Ended Six Months Ended
December 31 December 31
1998 1997 1998 1997
---- ---- ---- ----
Revenues
Factoring Operations 1,878 576 2,556 1,047
SLM 455 425 945 654
----- ----- ------ ------
Total Revenue 2,333 1,101 3,502 1,701
Operating Expense
Factoring Operations Interest 710 174 892 296
Factoring Operations 1,102 354 1,488 649
SLM 404 345 823 621
Corporate (Celtic) 162 57 267 94
----- ------ ------ ------
Total Operating Expense 2,378 930 3,470 1,920
Operating Profit (Loss)
Factoring Operations 68 69 176 135
SLM 59 58 122 -1
Corporate (Celtic) -161 -57 -267 -94
------ ------ ------- ------
Income (loss) from continuing
operations before income tax -34 70 26 40
Provision for income taxes 0 0 24 0
Income (Loss) from continuing
operations -34 70 2 40
(Loss) income from operations of
discontinued segment 0 -50 0 -95
------- ------- ------- ------
Net Income (Loss) -34 20 2 -55
------- ------- ------- ------
Convertible Preferred Dividends -51 0 -75 0
------- ------- ------- ------
Net Income (Loss) Applicable to Common -85 20 -73 -55
Shareholders ======= ======= ======== ======
11
Revenues
Factoring operations revenues increased $1,302,000 (226%) to $1,878,000
for the three months ended December 31, 1998 compared to $576,000 for the three
months ended December 31, 1997. Revenues increased $1,509,000 (144%) to
$2,556,000 for the six months ended December 31, 1998 compared to $1,047,000 for
the six months ended December 31, 1997. This significant increase is a direct
result of the acquisition of GF, and the one hundred (100) days of reporting
GF's financial results during the three and six month period ending December 31,
1998.
SLM revenues increased $30,000 (7%) to $455,000 for the three month period
ending December 31, 1998 compared to $425,000 for the three months ended
December 31, 1997. Revenues increased $291,000 ( 44% ) to $945,000 for the six
months ended December 31, 1998 compared to $654,000 for the six months ended
December 31, 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 $710,000 for the three months ending December 31,
1998 compared to $174,000 for the three months ending December 31, 1997.
Interest expense totaled $892,000 for the six months ending December 31, 1998
compared to $296,000 for the period ending December 31, 1997. The primary
reasons for this increase are two fold. First, combined factoring operations
usage of the secured line of credit. As of December 31, 1998, the amount
outstanding on the line of credit was $14,600,000 compared to $4,500,000 on
December 31, 1997. This significant increase in the secured line is a result of
the acquisition of GF. Second, the acquisition of GF, resulted in $4,500,000 in
high yield term debt and $3,750,000 in notes payable to former GF stockholders.
The total interest and success fee accrual expense for the term debt totaled
$250,000, and $95,000 in note payable interest for the three month period ending
December 31, 1998. This is a total of $345,000 in additional interest as a
result of the acquisition of GF.
Factoring operations' operating expense, not including interest, for the
three months ending December 31, 1998 totaled $1,102,000, an increase of
$748,000 ( 211%), compared to $354,000 for the three months ending December 31,
1997. Operating expense totaled $1,488,000 for the six months ending December
31, 1998, an increase of $839,000 (129%), compared to $649,000 for the six month
period ending December 31, 1997. A significant portion of this increase resulted
from the addition of the GF operations including: salaries and benefits,
commissions, occupancy, professional fees, supplies, and postage. These
categories increased expenses approximately $450,000 for the three month period
ending December 31, 1998. The Company's goodwill was increased significantly on
its' balance sheet due to the GF acquisition. Goodwill expense totaled $150,000
for the three month period ending December 31, 1998, compared to zero (0) for
the three month period ending December 31,1997. Factoring operations accrued
$125,000 in credit losses for the three months ending December 31, 1998 compared
to $19,000 for the comparable period, an increase of $106,000.
SLM operating expenses were $404,000 for the three months ending December
31 , 1998, an increase of $59,000 (17%) from the three months ending December
31, 1997. Operating expense totaled $823,000 for the six months ending December
31, 1998, an increase of $202,000 (33% ), compared to the six months ending
December 31, 1997. This expense increase is a direct result of the increase in
revenue, compared to the prior periods. The major expense categories impacted by
this revenue growth are: Salaries and benefits increased $57,000, direct loan
expense increased $80,000, occupancy increased $28,000, and legal fees increased
from $2,000 to $35,000, an increase of $33,000 from the comparable six month
period. This increase is a result of a litigation matter between SLM and a
former employee.
12
The Company's corporate expense was $161,000 for the three months ending
December 31, 1998 compared to $57,000 in the three month period ending December
31, 1997. An increase of $104,000 (182%). The corporate expense was $267,000 for
the six months ending December 31, 1998, compared to $94,000 in the six months
ending December 31, 1997. An increase of $173,000 (284%). This expense increase
is a direct result of the overall growth of the Company. The major expense
categories impacted by this growth are: Professional fees (legal, accounting and
acquisition related) increased $107,000, and salaries and benefits increased
$48,000.
Operating Profit (Loss)
Factoring Operating profit was $68,000 for the three month period ending
December 31, 1998, compared to $69,000 for the three months ending December 31,
1997. A decrease in operating profit in the comparable period of ($1,000).
Factoring Operating profit was $176,000 for the six month period ending December
31, 1998, compared to $135,000 for the six months ending December 31, 1997. An
increase in operating profit of $41,000 in the comparable period. This profit
increase is a result of the volume increase in factored accounts receivable
including the profitable operations of GF during the one hundred days (100) of
their operations in the reporting period. The profitability of the Factoring
operations is significantly effected by the interest expense of $345,000
relating to the term debt and note payables incurred in the acquisition of GF.
In addition, the goodwill amortization expense of $150,000 relating to the GF
acquisition is also negatively effecting profitability.
SLM had an operating profit of $59,000 for the three months ending
December 31, 1998. This is compared to an operating profit of $58,000 for the
three months ending December 31, 1997. Operating profit was $122,000 for the six
month period ending December 31, 1998, compared to ($1,000) for the six months
ending December 31, 1997. This is a $123,000 increase in the comparable period.
The reason for the turnaround results from the overall significant growth of
revenue in the current period. The discontinued ADR operations have also
contributed to overall profitability.
The consolidated net income for three months ending December 31, 1998
totaled ($34,000) compared to net income of $20,000 for the three months ended
December 31, 1997. This is a ($54,000) difference. The consolidated net income
for the six months ending December 31, 1998 totaled $2,000 compared to a loss
of($55,000) for the six months ended December 31, 1997. An increase in net
income of $57,000. The consolidated net income is positively effected by the
substantial revenue growth primarily from the acquisition of GF. This revenue
growth is not reflected in the net income because of the high term debt and note
payable interest costs and amortization of Goodwill as previously discussed. In
addition, the increased expenses of the Corporate overhead is also adversely
effecting net income.
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. 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.
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.
13
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 December 31, 1998. As of December
31, 1998 there were total cash proceeds received from the sale of the preferred
stock of $2,329,500 resulting in the issuance of 23,295 shares of the preferred
stock. Total dividends paid through December 31, 1998 is $75,000.
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 December 31, 1998, the Company had total assets of $36,227,818 and
total liabilities of $29,969,762. This compares to the total assets of
$9,605,396 and total liabilities of $5,460,915 at June 30, 1998. Cash at
December 31, 1998, totaled $746,077 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 decrease in cash is a result of principle payments on the term debt and
notes payables relating to the acquisition of GF. This amount totaled $387,500
for the three month period ending December 31, 1998. This amount was offset by
$235,267 net of commissions received from the sale of the preferred stock in the
reporting three month period.
The Company anticipates that its monthly general and administrative costs,
exclusive of depreciation and marketing expenses, commissions and professional
fees, will be approximately $170,000 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. The Company intends to attempt to obtain new financing with lower
interest rates or equity financing to replace the $4,500,000 in high yield term
debt with a lower cost of funds or equity. If the Company is successful in
refinancing the $4,500,000 amount, the Company anticipates earnings and cash
flow to increase. The continued interest and principle payments on the term debt
and notes payable incurred in the acquisition of GF will place the Company in a
negative operating cash position within the next sixty days. The Company is
attempting to raise additional debt and/or equity capital to reduce the expenses
relating to the term debt. There can be no assurance the Company will be
successful in this effort.
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
14
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. Effective January 31, 1999, the Company believes it
is compliant with Y2K.
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.
15
PART II - OTHER INFORMATION
Item 1. Legal Proceeding. None.
Item 2. Changes in Securities. The Company has issued through December 31,
1998 a total of 23,295 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 . On
December 17, 1998, the Company's Annual Meeting of
Shareholders has held. The only matter voted upon at the
Meeting was the election of directors. The results of voting
of directors is as follows:
Directors For Abstain
--------- --- -------
Douglas P. Morris 2,213,023 81,000
Howard D. Talks 2,213,023 81,000
Larry Meek 2,213,023 81,000
Reese Howell, Jr. 2,213,023 81,000
Robert Gregory 2,213,023 81,000
Item 5. Other Information. The Company has been notified by the NASDAQ
Stock Market that the Company does not currently meet the
requirements for a continued listing on The NASDAQ Smallcap Market.
The Company's failure to meet the continued listing requirements is
the result of the accounting treatment of the Goodman Factors
transaction. The Goodman Factors transaction resulted in a
significant increase in the Company's goodwill as set forth on its
balance sheet. Goodwill is a non-tangible asset. The NASDAQ
Smallcap Market requires that a company have net tangible assets of
at least $2,000,000 for continual listing. As a result of the
Goodman Factors transaction, the Company's total assets, revenues
and shareholders'equity increased significantly. However, under
generally accepted accounting treatment, significant goodwill was
created for balance sheet purposes.
NASDAQ notified the Company that it intends to delist the Company
from The NASDAQ Smallcap Market. The Company has asked for a hearing
before NASDAQ on this matter. As of February 11, 1999, no hearing has
been scheduled.
The loss of its NASDAQ Smallcap Market listing could have a
negative impact on liquidity in the Company's securities and
on the Company's ability to raise additional equity capital in
the future. There can be no assurance that the Company will be
able to maintain its NASDAQ Smallcap Market Listing.
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.
16
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: March 3, 1999 /s/ Douglas P. Morris
---------------------
By: Douglas P. Morris
President and Principal Executive Officer
Date: March 3, 1999 /s/ Frank Lucchese
------------------
By: Frank Lucchese
Principal Financial Officer
17