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 June 30, 2002 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- --------------- Commission File No. 333-49736 BIRCH FINANCIAL, INC. (Name of Small Business Issuer in its Charter) NEVADA 91-2077659 ------ ---------- (State or Other Jurisdiction of (I.R.S. Employer I.D. No.) incorporation or organization) 15722 Kadota Street Sylmar, California 91342 ------------------------- (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 X No --- --- --- --- 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: June 30, 2002 32,116,548 ---------- PART I - FINANCIAL INFORMATION Item 1. Financial Statements. - ------------------------------- 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. (Formerly known as United States Indemnity & Casualty, Inc.) CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 BIRCH FINANCIAL, INC. (Formerly known as United States Indemnity & Casualty, Inc.) Condensed Consolidated Balance Sheet June 30, 2002 June 30, 2002 ASSETS Current Assets Cash $ 100,283 Premium financing receivable, net 5,897,699 Premium financing cancellation receivable 182,373 Equipment financing receivable - current portion 144,104 Prepaids and late charges receivable 59,366 Total Current Assets 6,383,825 Other Assets Equipment financing receivable, net of current portion 433,115 Deferred tax asset 21,904 Total Other Assets 455,019 TOTAL ASSETS $ 6,838,844 Unaudited - see accompanying notes to financial statements BIRCH FINANCIAL, INC. (Formerly known as United States Indemnity & Casualty, Inc.) Condensed Consolidated Balance Sheet (continued) June 30, 2002 June 30, 2002 LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES Current Liabilities Bank overdraft $ 578,267 Unfunded premium financing payable 462,107 Line of credit 4,352,605 Management fees payable 26,898 Notes payable 478,338 Income taxes payable 53,516 Other accrued liabilities 18,931 Total Current Liabilities 5,970,662 TOTAL LIABILITIES 5,970,662 STOCKHOLDERS' EQUITY Common stock - 63,000,000 shares authorized at $0.01 par; 32,116,548 shares issued and outstanding 321,165 Paid in capital 252,986 Retained earnings 294,031 TOTAL STOCKHOLDERS' EQUITY 868,182 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,838,844 Unaudited - see accompanying notes to financial statements BIRCH FINANCIAL, INC. (Formerly known as United States Indemnity & Casualty, Inc.) Condensed Consolidated Statements of Income for the six months ended June 30, 2002 and 2001 Six months Six months ended ended June 30, June 30, 2002 2001 Financing Income Premium financing $ 381,473 $ 302,066 Equipment financing 19,104 4,160 Total Financing Income 400,577 306,226 Financing Expense Premium financing 151,751 94,671 Equipment financing 6,759 0 Total Financing Expense 158,510 94,671 Gross Profit 242,067 211,555 Selling, General and Administrative Expense 112,551 124,411 Operating Profit 129,516 87,144 Other Income Interest income 521 2,328 Total Other Income 521 2,328 Income Before Tax Provision 130,037 89,472 Provision for Income Taxes (53,516) (29,000) Net Income $ 76,521 $ 60,472 Net income per common share $ 0.00 $ 0.00 Weighted average common shares outstanding 32,116,548 32,083,048 Unaudited - see accompanying notes to financial statements BIRCH FINANCIAL, INC. (Formerly known as United States Indemnity & Casualty, Inc.) Condensed Consolidated Statements of Income for the three months ended June 30, 2002 and 2001 Three months Three months ended ended June 30, June 30, 2002 2001 Financing Income Premium financing $ 210,083 $ 156,235 Equipment financing 11,013 2,979 Total Financing Income 221,096 159,214 Financing Expense Premium financing 93,573 42,002 Equipment financing 4,332 0 Total Financing Expense 97,905 42,002 Gross Profit 123,191 117,212 Selling, General and Administrative Expense 59,015 68,936 Operating Profit 64,176 48,276 Other Income Interest income 480 1,578 Total Other Income 480 1,578 Income Before Tax Provision 64,656 49,854 Provision for Income Taxes (26,454) (17,340) Net Income $ 38,202 $ 32,514 Net income per common share $ 0.00 $ 0.00 Weighted average common shares outstanding 32,116,548 32,083,048 Unaudited - see accompanying notes to financial statements BIRCH FINANCIAL, INC. (Formerly known as United States Indemnity & Casualty, Inc.) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2002 and 2001 Cash Flows from Operating Activities: Six months Six months ended ended June 30, 2002 June 30, 2001 Net Income $ 76,521 $ 60,473 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 0 7,000 Decrease (increase) in prepaids & other receivables (57,409) 8,132 Increase (decrease) in unfunded premium financing payable (394,423) (124,147) Increase (decrease) in accounts payable & accrued liabilities 7,904 14,356 Increase (decrease) in management fees payable (28,896) (22,953) Increase (decrease) in income taxes payable 2,065 (6,676) Net Cash Provided by/(Used for) in Operating Activities (394,238) (63,815) Cash Flows from Investing Activities: Increase in premium financing receivable (1,753,909) (756,612) Increase in equipment financing receivable (340,926) (127,866) Net Cash Used for Investing Activities (2,094,835) (884,478) Cash Flows from Financing Activities: Increase in bank overdraft 322,600 430,392 Increase in line of credit 1,717,244 481,479 Increase in notes payable 327,463 0 Net Cash Provided by Financing Activities 2,367,307 911,871 Net Increase in Cash (121,766) (36,422) Beginning Cash Balance 222,049 106,122 Ending Cash Balance $ 100,283 $ 69,700 Unaudited - see accompanying notes to financial statements PRELIMINARY NOTE The accompanying condensed consolidated financial statements have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. The interim financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the period. Certain information and disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2001. Item 2. Management's Discussion and Analysis or Plan of Operation. - -------------------------------------------------------------------- Plan of Operation - ----------------- Premium Finance Division. ------------------------- During the quarterly period ended June 30, 2002, we received $210,083 in interest income from our LCIS premium financing contracts, and our net premium financing receivable with LCIS was $5,897,699. By December, 2002, we plan to expand our premium finance activities with LCIS to $15 million. We base this projection on expected sales by LCIS of $40 million, with about half of that amount being liability and auto insurance. We expect to finance about 80% of these premiums, or approximately $18.1 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 have renegotiated our line of credit with Safeco for all contract financing to be provided at the prime interest rate, with a floor of 5.5%. We have increased the Safeco line of credit from $5 million to $7.5 million. Equipment Finance Division. --------------------------- At June 30, 2002, we had a total of $577,219 in equipment financing receivables. 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. We do not have a separate line of credit for our equipment financing operations. The amount that we are able to fund is limited to the amount of funds that we can borrow from a related party. In total, we hope to finance at least $750,000 by December, 2002. 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. We believe that our equipment finance division will grow substantially through December 31, 2002. We expect 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. Results of Operations. - ---------------------- In the quarterly period ended June 30, 2002, we received total financing income of $221,096, of which $210,083 came from our insurance premium financing contracts and $11,013 came from equipment financing. During the quarterly period ended June 30, 2001, these amounts were $159,214; $156,235; and $2,979, respectively. Financing expenses during the quarterly periods ended June 30, 2002, and June 30, 2001, were $97,905 and $42,002, respectively. Selling, general and administrative expenses decreased to $59,015 during the June 30, 2002 quarter, from $68,936 in the year-ago period. Our net income before income tax totaled $64,656 in the quarterly period ended June 30, 2002, as compared to $49,854 in the June 30, 2001, quarter. After provision for income taxes of $26,454 and $17,340, our net income during the June 30, 2002, and 2001, periods was $38,202, and $32,514, respectively. 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. - -------------------------------- Our total assets as of June 30, 2002, were $6,838,844. 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 June 30, 2002, our payable on the line of credit was $4,352,605. 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. - ---------------------------- None; not applicable. Item 2. Changes in Securities and Use of Proceeds. - ---------------------------------------------------- None; not applicable. Item 3. Defaults Upon Senior Securities. - ------------------------------------------ None; not applicable. Item 4. Submission of Matters to a Vote of Security Holders. - -------------------------------------------------------------- None; not applicable. Item 5. Other Information. - ---------------------------- None; not applicable. Item 6. Exhibits and Reports on Form 8-K. - ------------------------------------------- (a) Exhibits. None. (b) Reports on Form 8-K. None. 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: 8/8/02 By: /s Efraim Donitz --------- ----------------------------------- Efraim Donitz, CEO, President, Treasurer and Director Date: 8/8/02 By: /s/ Nelson L. Colvin --------- ----------------------------------- Nelson L. Colvin, Vice President, Secretary and Director Date: 8/8/02 By: /s/ Barry L. Cohen --------- ----------------------------------- Barry L. Cohen, Chairman of the Board of Directors Date: 8/8/02 By: /s/ Keith L. Walton --------- ----------------------------------- Keith L. Walton, Vice President and Director Date: 8/8/02 By: /s/ Ronald H. Dietz --------- ----------------------------------- Ronald H. Dietz, Director Date: 8/8/02 By: /s/ Lebo Newman --------- ----------------------------------- Lebo Newman, Director CERTIFICATION PURSUANT TO 18 U.S.C.SECTION 1350 AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Birch Financial, Inc. (the "Company") on Form 10-QSB for the period ending June 30, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Efraim Donitz, Chief Executive Officer, President and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: 8/8/02 /s/ Efraim Donitz ------------ ----------------------------- Efraim Donitz, Chief Executive Officer, President and Treasurer