U. S. Securities and Exchange Commission
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 333-49736
BIRCH FINANCIAL, INC.
(Name of Small Business Issuer in its Charter)
NEVADA 91-2077659
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(State or Other Jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
15722 Kadota Street
Sylmar, California 91342
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(Address of Principal Executive Offices)
Issuer's Telephone Number: (800) 959-3701
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 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.
(1) Yes X No (2) Yes No X
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APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the Registrant's classes
of common stock, as of the latest practicable date:
March 31, 2001
32,083,048
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
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The Financial Statements of the Registrant required to be filed with
this 10-QSB Quarterly Report were prepared by management, and commence on the
following page, together with Related Notes. In the opinion of management,
the Financial Statements fairly present the financial condition of the
Registrant.
Birch Financial, Inc.
Consolidated Statement of Financial Conditions
(Unaudited)
ASSETS
12/31/00 3/31/01
Cash and Cash Equivalents 106,122 102,005
Premium Financing Receivable 3,211,173 3,665,567
Lease Financing Receivable 28,662 46,688
Premium Financing Cancellations Receivable 228,656 163,398
Organization Cost
(Net of Accumulated Amortization) 51,130 47,630
Prepaid Fees and Other Receivable 27,286 26,235
Total Assets 3,653,029 4,051,523
LIABILITIES AND EQUITY
Bank Overdraft 240,508 420,106
Unfunded Premium Financing Payable 532,454 616,561
Line of Credit Payable 2,141,941 2,286,889
Accrued Interest Payable 2,584 2,584
Incentive Bonus Payable 27,953 7,000
Management Fees Payable 24,000 6,000
Income Tax Liabilities 6,676 9,143
Other Accrued Expenses and Payable 12,154 10,523
Total Liabilities 2,988,270 3,358,806
Shareholders Equity
Common Stock 320,830 320,830
Additional Paid in Capital 220,321 220,321
Retained Earnings 123,608 151,566
Total Shareholder's Equity 664,759 692,717
Total Liabilities and Equity 3,653,029 4,051,523
Birch Financial, Inc.
Consolidated Income Statement
(Unconsolidated)
Three Months Ending
3/31/00 3/31/01
Interest Income - Premium Financing Contracts 87,202 130,326
Financing Charge - Equipment Lease 0 1,181
Interest Income - Bank Accounts 2,300 750
Total Interest Income 89,502 132,257
Interest Expenses 34,609 50,485
Net Interest Income 54,893 81,772
Provision for Loan Loss 5,329 2,184
Net Interest Income After Provision for Loss 49,564 79,588
Late Charge Income 14,727 15,503
Other Income (414) 2
Total Income 63,877 95,093
Operating Expenses
Depreciation and Amortization 3,274 3,500
License and Permit 0 125
Management Fee 6,000 6,000
Incentive Bonus 6,300 7,000
Office Expenses 20 0
Professional Fees 5,500 9,600
Third Party Administration Fee 21,991 27,449
Internet 0 900
Telephone 146 138
Travel Expenses 301 180
Other Expenses 923 583
Total Operating Expenses 44,455 55,475
Income Before Income Tax 19,422 39,618
Provision for Income taxes 6,020 11,660
NET INCOME 13,402 27,958
Birch Financial, Inc.
Consolidated Statement of Changes In Stockholders Equity
(Unaudited)
Common Paid In Retained Total
Stock Capital Earning Equity
Balance
As of December 31, 1999 320,830 220,321 44,238 585,389
2000 Operating Income 79,370 79,370
Balance
As of December 31, 2000 320,830 220,321 123,608 664,759
3 Months Ending 3/31/01
Operating Income 27,958 27,958
320,830 220,321 151,566 692,717
Birch Financial, Inc.
Consolidated Statement of Cash Flow
(Unaudited)
Three Months Ending
3/31/00 3/31/01
CASH FLOWS FROM OPERATIONS ACTIVITIES
Net Income 13,402 27,958
Reconciliation of Net Income to
Net Cash Used by Operating Activities:
Depreciation and Amortization 3,274 3,500
Provision for Bed Debts 5,329 2,184
Change in Cancellation Receivable 2,398 65,258
Change in Bonus Payable
and Management Fees Payable (29,375) (38,953)
Change in Prepaid Fees and Other Receivable (5,372) 1,051
Change in Unfunded Premium Financing (382,269) 84,108
Change in Tax Liabilities 6,020 2,467
Change in Accrued Expenses and Payable 7,855 2,092
Total Reconciliation (392,140) 121,707
Net Cash Provided (Used)
by Operating Activities (378,738) 149,665
CASH FLOWS FROM INVESTMENT ACTIVITIES
Decrease (Increase) in
Premium Financing and Lease Receivable (314,425) (478,328)
Organization Cost (15,001) 0
Net Cash Provided (Used) by Investing Activities (329,426) (478,328)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Line of Credit Payable 689,837 144,948
Increase in Bank Overdraft 93,624 179,598
Net Cash Provided (Used) by Financing Activities 783,461 324,546
Net Increase (Decrease) in Cash 75,297 (4,117)
Cash at Beginning of Year 82,515 106,122
Cash at End of Year 157,812 102,005
Birch Financial, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
1 Basis of Presentation
In the opinion of management, the accompanying unaudited financial statements
of Birch Financial, Inc., a Nevada corporation and subsidiaries (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-Q and Regulation S-X promulgated under the Securities Exchange Act of 1934.
Correspondingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. All normal, recurring adjustments considered necessary for a fair
presentation have been included. Preparing financial statements requires
management to make estimates and assumptions that affect the reported amounts
of assets, liabilities, revenues and expenses. Actual results may differ from
these estimates. The financial statements should be read in conjunction with
the annual audited financial statements and notes thereto included in the
Company's Registration Statement on Form SB-2, as amended, filed with
Securities and Exchange Commission . The results of operations for the three
months ended March 31, 2001 are not necessarily indicative of the results that
may be expected for the fiscal year ending December 31, 2001.
Item 2. Management's Discussion and Analysis or Plan of Operation.
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Plan of Operation
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Premium Finance Division.
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During the quarterly period ended March 31, 2001, we received
$130,326 in interest income from our LCIS premium financing contracts, and our
premium financing receivable with LCIS was $3,665,567, net of unearned
interest of approximately $96,000 and reserves for doubtful account of $3,000.
In January, 2001, we entered into a Revolving Credit and Security
Agreement (Insurance Premium Financing) with Ortiz Insurance Agency, Inc., of
Tustin, California. Ortiz is a general agent with five agencies selling its
products.
By December, 2001, we plan to expand our premium finance activities
with LCIS and Ortiz to $15 million. We base this projection on expected sales
by LCIS of $30.2 million, with about half of that amount being liability and
auto insurance. We expect to finance about 80% of these premiums, or
approximately $12.1 million. In addition, Ortiz expects premiums of $3
million in 2001. We believe we will finance about 80% of this amount, or
about $2.4 million. However, these figures are projections only, and we can
not guarantee that we will be able to reach these levels of revenue.
We are negotiating with other agencies to provide premium financing
for associations that they represent. However, we can not assure you that we
will be able to get these associations' business or that, if we do, we will be
able to finance this level of gross premiums.
We intend to renegotiate our line of credit with Safeco for all
contract financing to be provided at the prime interest rate instead of an
amount over the prime rate. If necessary, we should be able to increase the
Safeco line of credit from $3.5 million to $5 million.
Equipment Finance Division.
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We currently have over $46,000 in new loans or completed contracts.
We have had discussions with equipment dealers in Southern California. These
dealers sell about $10 million of equipment per year. One dealer alone wants
us to help finance about four machines per month, which we estimate will total
approximately $1,152,000 per year. In total, we hope to finance at least $5
million by December, 2001. However, we can not assure you that we will reach
any specific dollar amount.
We also intend to offer lines of credit to companies with "Class A"
credit ratings. We hope that this will generate about $2 million in
additional revenues, although we can not provide any guarantees in this
regard.
On April 23, 2001, which is subsequent to the period covered by this
Report, the Securities and Exchange Commission declared effective our
Registration Statement on Form SB-2, as amended. The Registration Statement
provides for the offer and sale of up to 5,000,000 shares of our common stock
at a price of $1.25, for aggregate gross proceeds of up to $6,250,000. We
have not yet commenced the offer and sale of these securities, pending
qualification in the State of California, where we anticipate making all or
most of any such offers and sales.
We believe that our equipment finance division will grow
substantially through December 31, 2001. We plan to use the net proceeds of
our registered offering, if any, for the operations of this division. We
expect additional funds to become available as we sell bundled loans to banks
and other financial institutions, retaining the servicing and loan fees.
The foregoing discussion contains forward-looking statements that
discuss, among other things, future expectations and projections regarding
future developments, operations and financial conditions. All forward-looking
statements are based on management's existing beliefs about present and future
events outside of management's control and on assumptions that may prove to be
incorrect. If any underlying assumptions prove incorrect, Birch Financial's
actual results may vary materially from those anticipated, estimated,
projected or intended. Our operations are subject to numerous risks that may
cause our actual results to differ materially from forward-looking statements.
These risks include, without limitation, the Risk Factors set forth in our
Registration Statement on Form SB-2, as amended, which may be accessed at the
Securities and Exchange Commission's web site: www.sec.gov.
Results of Operations.
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In the quarterly period ended March 31, 2001, we received total
interest income of $131,076, of which $130,326 came from our insurance premium
financing contracts and $750 came from interest on our bank accounts. Late
charge income totaled $15,503. We also received $1,181 in financing charges
from our equipment financing operations. We expect this figure to increase
substantially in 2001 as our equipment financing operations grow. We paid
interest expenses of $50,485 during the period and our total income was
$95,093.
Our principal operating expenses during the quarterly period ended
March 31, 2001, were $27,449 paid to AIS; a $7,000 bonus paid to our
President, Efraim Donitz; and $6,000 paid to Golden Oak and Oakwood. Total
operating expenses were $55,475. Our income before income tax totaled
$39,618. After provision for income taxes of $11,660, our net income during
the period was $27,958.
Many of our borrowers are involved in construction. That industry
is sensitive to economic cycles and to bad weather, so either condition would
likely have an effect on our revenues. However, because our borrowers'
operations include maintenance work and other work that is not very sensitive
to economic conditions, we believe that our operations are somewhat insulated
from an economic downturn.
Liquidity and Capital Resources.
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Our total assets as of March 31, 2001, were $4,051,523, as
compared to total assets of $3,653,029 at March 31, 2000. We believe that
our current assets will be sufficient to allow us to operate for the next 12
months. However, we depend heavily on our line of credit with Safeco to fund
our insurance premium financing loans. As of March 31, 2001, our payable
on the line of credit was $2,286,889. If we were to lose this line of credit
for any reason, our ability to fund these loans would be significantly
impaired and our income would be reduced.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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None; not applicable.
Item 2. Changes in Securities and Use of Proceeds.
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None; not applicable.
Item 3. Defaults Upon Senior Securities.
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None; not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
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None; not applicable.
Item 5. Other Information.
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None; not applicable.
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits.
Registration Statement on Form SB-2, as amended.*
(b) Reports on Form 8-K.
None.
* Incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
BIRCH FINANCIAL, INC.
Date: 5/14/01 By: /s/ Efraim Donitz
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Efraim Donitz, CEO, President,
Treasurer and Director
Date: 5/14/01 By: /s/ Nelson L. Colvin
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Nelson L. Colvin, Vice President,
Secretary and Director
Date: 5/14/01 By: /s/ Barry L. Cohen
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Barry L. Cohen, Chairman of the Board
of Directors
Date: 5/14/01 By: /s/ Keith L. Walton
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Keith L. Walton, Vice President and
Director
Date: 5/14/01 By: /s/ Ronald H. Dietz
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Ronald H. Dietz, Director
Date: 5/14/01 By: /s/ Lebo Newman
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Lebo Newman, Director