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, 2004
[ ] 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. 000-50145
BIRCH FINANCIAL, INC.
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(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 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:
August 10, 2004
32,109,848
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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.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
BIRCH FINANCIAL, INC.
Condensed Consolidated Balance Sheet
June 30, 2004
June 30,
2004
ASSETS
Current Assets
Cash $ 164,568
Premium financing receivable, net 9,962,879
Premium financing cancellation receivable 87,080
Equipment financing receivable-current portion 364,000
Other current assets 8,547
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Total Current Assets 10,587,074
Other Assets
Equipment financing receivable, net of current
portion 567,307
Deferred tax asset 9,605
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Total Other Assets 576,912
TOTAL ASSETS $11,163,986
===========
Unaudited-see accompanying notes to financial statements
1
BIRCH FINANCIAL, INC.
Condensed Consolidated Balance Sheet
(continued)
June 30, 2004
June 30,
2004
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Bank overdraft $ 476,699
Accounts payable 1,512
Unfunded premium financing payable 1,039,505
Line of credit 7,295,178
Notes payable 713,509
Security deposits payable 54,663
Income taxes payable 55,045
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Total Current Liabilities 9,636,111
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TOTAL LIABILITIES 9,636,111
STOCKHOLDERS' EQUITY
Common stock-63,000,000 shares authorized at $0.01
par; 32,109,848 issued and outstanding 321,098
Paid in capital 251,643
Retained earnings 955,134
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TOTAL STOCKHOLDERS' EQUITY 1,527,875
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $11,163,986
==========
Unaudited-see accompanying notes to financial statements
2
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Income
for the six months ended June 30, 2004 and 2003
Six Months Six Months
Ended Ended
June 30, June 30,
2004 2003
Financing Income
Premium financing $ 625,223 $ 528,462
Equipment financing 34,582 34,472
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Total Financing Income 659,805 562,934
Financing Expense
Premium financing 164,646 118,964
Equipment financing 14,237 14,571
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Total Financing Expense 178,883 133,535
Gross Profit 480,922 429,399
Selling, General and Administrative
Expense 102,177 188,125
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Operating Profit 378,745 241,274
Other Income
Interest income 1,551 0
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Total Other Income 1,551 0
Income before Tax Provision 380,296 241,274
Provision for Income Taxes (154,330) (99,295)
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Net Income $225,966 $141,979
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Net income per common share $ 0.01 $ 0.00
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Weighted average common shares
outstanding 32,109,848 32,109,848
========== ==========
Unaudited - see accompanying notes to financial statements
3
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Income
for the three months ended June 30, 2004 and 2003
Three Months Three Months
Ended Ended
June 30, June 30,
2004 2003
Financing Income
Premium financing $ 321,418 $ 285,134
Equipment financing 18,723 16,077
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Total Financing Income 340,141 301,211
Financing Expense
Premium financing 95,636 60,685
Equipment financing 6,896 7,571
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Total Financing Expense 102,532 68,256
Gross Profit 237,609 232,955
Selling, General and Administrative
Expense 52,379 89,081
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Operating Profit 185,230 143,874
Other Income
Interest income 576 0
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Total Other Income 576 0
Income before Tax Provision 185,806 143,874
Provision for Income Taxes (82,558) (59,211)
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Net Income $103,248 $ 84,663
======== ========
-------- --------
Net income per common share $ 0.00 $ 0.00
======== ========
Weighted average common shares
outstanding 32,109,848 32,109,848
========== ==========
Unaudited - see accompanying notes to financial statements
4
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Cash Flows
for the six months ended
June 30, 2004 and 2003
Six months Six Months
Ended Ended
June 30, June 30,
2004 2003
Cash Flows from Operating Activities:
Net Income $ 225,966 $ 141,979
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in prepaid & other receivables (8,547) (86,426)
Increase (decrease) in unfunded premium financing
payable 82,019 (757,908)
Increase (decrease) in accounts payable & accrued
liabilities (7,784) 218,996
Increase (decrease) in management fees payable (121,558) (12,993)
Increase (decrease) in security deposits payable 6,766 (9,500)
Increase (Decrease) in income taxes payable (9,428) 33,663
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Net Cash Provided by/(Used for) in Operating
Activities 167,434 (472,189)
Cash Flows from Investing Activities:
Increase in loans financing receivable (1,268,333)(2,304,718)
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Net Cash Used for Investing Activities (1,268,333)(2,304,718)
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft 56,679 (887,371)
Increase in line of credit 1,114,605 2,567,932
Increase (decrease) in notes payable (55,554) 1,045,068
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Net Cash Provided by Financing Activities 1,115,730 2,725,629
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Net Increase in Cash 14,831 (51,278)
Beginning Cash Balance 149,737 284,187
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Ending Cash Balance $ 164,568 $ 232,909
========= ==========
5
Unaudited - see accompanying notes to financial statements
BIRCH FINANCIAL, INC.
Notes to Condensed Consolidated Financial Statements
June 30, 2004
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, 2003.
6
Item 2. Management's Discussion and Analysis or Plan of Operation.
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Results of Operations.
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Three Months Ended June 30, 2004 and June 30, 2003.
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In the quarterly period ended June 30, 2004, we received total
financing income of $340,141, of which $321,418 came from our premium
financing contracts and $18,723 came from equipment financing. During
the quarterly period ended June 30, 2003, these amounts were $301,211;
$285,134; and $16,077, respectively. As with the quarterly period ended June
30, 2003, premium financing continues to represent approximately 95% of our
total financing income.
Financing expenses during the quarterly periods ended June 30,
2004, and June 30, 2003, were $102,532 and $68,256, respectively. Premium
financing expense rose to $95,636 from $60,685, due principally to a
cumulative correction by the Company's former lender, Safeco Capital Services,
in the amount of interest charged to the Company in 2003 and the first two
quarters of 2004. Equipment financing expense decreased somewhat, to $6,896
in the quarterly period ended June 30, 2004, from $7,571 in the year-ago
period.
Selling, general and administrative expenses were $52,379 during the
June 30, 2004 quarter, as compared to $89,081 in the quarterly period ended
June 30, 2003. This decrease is primarily the result of the termination of
our Consultant Agreement with Efco, Inc. in January, 2004, and the termination
of our prior administrative arrangement with Golden Oak Cooperative
Corporation in the same month. Our new arrangement with Golden Oak provides
for administrative fees to be charged to us at $35 per hour, with an annual
cap of $40,000 per year, as compared to a flat annual fee of $48,000 per year
under our prior arrangement. This has resulted in substantially reduced
administrative expenses.
After provision for income taxes of $82,558, net income was $103,248
in the quarterly period ended June 30, 2004, as compared to net income of
$84,663 in the June 30, 2003 quarter.
Six Months Ended June 30, 2004, and June 30, 2003.
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In the six months ended June 30, 2004, we received total financing
income of $659,805, of which $625,223 came from our premium financing
contracts and $34,582 came from equipment financing. During the six months
ended June 30, 2003, these amounts were $562,934; $528,462; and $34,472,
respectively.
Financing expenses during the six months ended June 30, 2004, and
June 30, 2003, were $178,883 and $133,535, respectively. Selling, general and
administrative expenses were $102,177 during the June 30, 2004 six month
period, and $188,125 in the period a year-ago. The principal reasons for
these fluctuations are as discussed above.
Our net income during the six months ended June 30, 2004, and 2003,
was $225,966, and $141,979, 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.
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Our total current assets as of June 30, 2004, were $10,587,074. We
believe that our current assets and our credit facility with First Bank will
be sufficient to allow us to operate for the next 12 months. However, we
depend heavily on our line of credit with First Bank to fund our insurance
premium financing loans. 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.
Forward-Looking Statements.
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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.
Item 3. Controls and Procedures.
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As of the end of the period covered by this Quarterly Report, we carried
out an evaluation, under the supervision and with the participation of our
President and Treasurer, of the effectiveness of our disclosure controls and
procedures. Based on this evaluation, our President and Treasurer concluded
that our disclosure controls and procedures are effective in timely alerting
them to material information required to be included in our periodic
Securities and Exchange Commission reports. It should be noted that the
design of any system of controls is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions, regardless of how remote. In addition, we reviewed our internal
controls over financial reporting, and there have been no changes in our
internal controls or in other factors in the last fiscal quarter that has
materially affected or is reasonably likely to materially affect our internal
control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
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None; not applicable.
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity
Securities.
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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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In July, 2004, which is subsequent to the period covered by this
Report, we terminated our line of credit with Safeco Capital Services and
entered into a new Loan Agreement with First Bank. This Loan Agreement
provides for a line of credit of up to $10,000,000 (as compared to $7,500,000
under our line of credit with Safeco), with an interest rate equal to the
greater of (i) 0.5% over the Prime Rate; and (ii) 5% per year (as compared to
the greater of (i) the Prime Rate; and (ii) 5.5% per year under the Safeco
line of credit).
Item 6. Exhibits and Reports on Form 8-K.
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(a) Exhibits.
31 302 Certification of Nelson L. Colvin
32 906 Certification.
(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: 8-11-04 /s Nelson L. Colvin
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Nelson L. Colvin, President,
Secretary and Director
Date: 8-11-04 /s/ Barry L. Cohen
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Barry L. Cohen, Chairman of the Board
of Directors
Date: 8-11-04 /s/ Keith L. Walton
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Keith L. Walton, Vice President and
Director
Date: 8-11-04 /s/ Ronald H. Dietz
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Ronald H. Dietz, Director
Date: 8-11-04 /s/ Lebo Newman
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Lebo Newman, Director