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 September 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:
September 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
September 30, 2002
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Condensed Consolidated Balance Sheet
September 30, 2002
September 30, 2002
ASSETS
Current Assets
Cash $ 279,154
Premium financing receivable, net 6,142,361
Premium financing cancellation receivable 215,637
Equipment financing receivable - current portion 189,627
Prepaids and late charges receivable 77,820
------------
Total Current Assets 6,904,599
Other Assets
Equipment financing receivable, net of current portion 546,391
Deferred tax asset 21,904
------------
Total Other Assets 568,295
TOTAL ASSETS $ 7,472,894
============
Unaudited - see accompanying notes to financial statements
1
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Condensed Consolidated Balance Sheet
(continued)
September 30, 2002
September 30, 2002
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Bank overdraft $ 117,750
Unfunded premium financing payable 1,794,208
Line of credit 3,788,491
Management fees payable 68,000
Notes payable 628,241
Income taxes payable 109,629
Other accrued liabilities 18,157
-----------
Total Current Liabilities 6,524,476
-----------
TOTAL LIABILITIES 6,524,476
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 374,267
-----------
TOTAL STOCKHOLDERS' EQUITY 948,418
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,472,894
===========
Unaudited - see accompanying notes to financial statements
2
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Condensed Consolidated Statements of Income
for the nine months ended September 30, 2002 and 2001
Nine months Nine months
ended ended
September 30, September 30,
2002 2001
Financing Income
Premium financing $ 586,233 $ 478,390
Equipment financing 33,890 14,418
----------- -----------
Total Financing Income 620,123 492,808
Financing Expense
Premium financing 140,465 123,157
Equipment financing 13,094 0
----------- -----------
Total Financing Expense 153,559 123,157
Gross Profit 466,564 369,651
Selling, General and
Administrative Expense 200,699 270,372
----------- -----------
Operating Profit 265,865 99,279
Other Income
Interest income 521 3,419
----------- -----------
Total Other Income 521 3,419
Income Before Tax Provision 266,386 102,698
Provision for Income Taxes (109,629) (37,000)
----------- -----------
Net Income $ 156,757 $ 65,698
=========== ===========
Net income per common share $ 0.00 $ 0.00
=========== ===========
Weighted average common
shares outstanding 32,116,548 32,084,909
=========== ===========
Unaudited - see accompanying notes to financial statements
3
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Condensed Consolidated Statements of Income
for the three months ended September 30, 2002 and 2001
Three months Three months
ended ended
September 30, September 30,
2002 2001
Financing Income
Premium financing $ 204,760 $ 176,324
Equipment financing 14,786 10,258
------------- -------------
Total Financing Income 219,546 186,582
Financing Expense
Premium financing (11,286) 28,486
Equipment financing 6,335 0
------------- -------------
Total Financing Expense (4,951) 28,486
Gross Profit 224,497 158,096
Selling, General and
Administrative Expense 88,148 145,961
------------- -------------
Operating Profit 136,349 12,135
Other Income
Interest income 0 1,091
------------- -------------
Total Other Income 0 1,091
Income Before Tax Provision 136,349 13,226
Provision for Income Taxes (56,113) (8,000)
------------- -------------
Net Income $ 80,236 $ 5,226
============= =============
Net income per common share $ 0.00 $ 0.00
============= =============
Weighted average common
shares outstanding 32,116,548 32,088,631
============= =============
Unaudited - see accompanying notes to financial statements
4
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Condensed Consolidated Statements of Cash Flows
for the nine months ended
September 30, 2002 and 2001
Nine months Nine months
ended ended
September 30, 2002 September 30, 2001
Cash Flows from Operating Activities:
Net Income $ 156,757 $ 65,729
Adjustments to reconcile net income
to net cash provided by
operating activities:
Depreciation and amortization 0 51,130
Decrease (increase) in prepaids
& other receivables (75,863) (2,914)
Increase (decrease) in unfunded
premium financing payable 937,678 744,129
Increase (decrease) in accounts
payable & accrued liabilities 7,130 4,821
Increase (decrease) in management
fees payable 12,206 (22,953)
Increase (decrease) in income
taxes payable 58,178 (6,676)
------------ ------------
Net Cash Provided by/(Used for)
in Operating Activities 1,096,086 833,266
Cash Flows from Investing Activities:
Increase in premium
financing receivable (2,031,835) (1,111,839)
Increase in equipment
financing receivable (499,725) (213,052)
------------ ------------
Net Cash Used for
Investing Activities (2,531,560) (1,324,891)
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft (137,917) 102,167
Increase in line of credit 1,153,130 392,424
Increase in notes payable 477,366 0
Issuance of common stock 0 33,000
------------ ------------
Net Cash Provided by
Financing Activities 1,492,579 527,591
Net Increase in Cash 57,105 35,966
Beginning Cash Balance 222,049 106,122
------------ ------------
Ending Cash Balance $ 279,154 $ 142,088
============ ============
Unaudited - see accompanying notes to financial statements
5
BIRCH FINANCIAL, INC.
(Formerly known as United States Indemnity & Casualty, Inc.)
Notes to Condensed Consolidated Financial Statements
September 30, 2002
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 September 30, 2002, we received
$586,233 in interest income from our LCIS premium financing contracts, and our
net premium financing receivable with LCIS was $6,142,361.
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 September 30, 2002, we had a total of $189,627 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 loans, 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 September 30, 2002, we received total
financing income of $219,546, of which $204,760 came from our insurance
premium financing contracts and $14,786 came from equipment financing. During
the quarterly period ended September 30, 2001, these amounts were $186,582;
$176,324; and $10,258, respectively.
Financing expenses during the quarterly periods ended September 30,
2002, and September 30, 2001, were ($4,951) and $28,486, respectively.
Selling, general and administrative expenses decreased to $88,148 during the
September 30, 2002 quarter, from $145,961 in the year-ago period, due to
refunds received during the quarter from interest overcharges on our line of
credit and collection of previously written-off cancellations receivable.
Our net income before income tax totaled $136,349 in the quarterly
period ended September 30, 2002, as compared to $13,226 in the September 30,
2001, quarter. After provision for income taxes of $56,113 and $8,000, our
net income during the September 30, 2002, and 2001, periods was $80,236, and
$5,226, 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 September 30, 2002, were $7,472,894. 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 September 30,
2002, our payable on the line of credit was $3,788,491. 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.
Item 3. Controls and Procedures.
- ----------------------------------
(a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer/Treasurer has evaluated the Company's disclosure controls
and procedures within 90 days prior to the date of this report, and has
concluded that these controls and procedures are effective.
(b) Changes in Internal Controls. There were no significant
changes in the Company's internal controls or, to the Company's knowledge, in
other factors that could significantly affect its disclosure controls and
procedures subsequent to the evaluation date.
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: 11-12-02 /s/ Efraim Donitz
--------- -----------------------------------
Efraim Donitz, CEO, President,
Treasurer and Director
Date: 11-12-02 /s/ Nelson L. Colvin
--------- -----------------------------------
Nelson L. Colvin, Vice President,
Secretary and Director
Date: 11-12-02 /s/ Barry L. Cohen
--------- -----------------------------------
Barry L. Cohen, Chairman of the Board
of Directors
Date: 11-12-02 /s/ Keith L. Walton
--------- -----------------------------------
Keith L. Walton, Vice President and
Director
Date: 11-12-02 /s/ Ronald H. Dietz
--------- -----------------------------------
Ronald H. Dietz, Director
Date: 11-12-02 /s/ Lebo Newman
--------- -----------------------------------
Lebo Newman, Director
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Efraim Donitz, President, Chief Executive Officer and Treasurer of
Birch Financial, Inc., certify that:
1. I have reviewed this Quarterly report on Form 10-QSB of Birch
Financial, Inc.;
2. Based on my knowledge, this Quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this Quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the Registrant as of, and for, the periods presented in this
Quarterly report;
4. I am responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14)
for the Registrant and I have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the Registrant, including its
consolidated subsidiaries, is made known to me by others within
those entities, particularly during the period in which this
Quarterly report is being prepared;
b) evaluated the effectiveness of the Registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly report (the "Evaluation Date"); and
c) presented in this Quarterly report my conclusions about the
effectiveness of the disclosure controls and procedures based on
My evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to the
Registrant's auditors and the audit committee of Registrant's board of
directors (or persons performing the equivalent function);
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the Registrant's
ability to record, process, summarize and report financial data
and have identified for the Registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the Registrant's
internal controls; and
6. I have indicated in this Quarterly report whether or not there were
significant changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of our most
recent evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Dated: November 12, 2002 Signature: /s/ Efraim Donitz
------------------
Efraim Donitz
President, CEO and Treasurer