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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------- ---------------
Commission File No. 000-50145
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)
17029 Chatsworth Street, Suite 100
Granada Hills, California 91344
--------------------------------
(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:
October 22, 2004
32,109,848
----------
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.
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
BIRCH FINANCIAL, INC.
Condensed Consolidated Balance Sheet
September 30, 2004
September 30,
2004
ASSETS
Current Assets
Cash $ 197,837
Premium financing receivable, net 10,096,915
Premium financing cancellation receivable 101,509
Equipment financing receivable - current portion 396,000
Other current assets 2,672
-----------
Total Current Assets 10,794,933
Other Assets
Equipment financing receivable, net of current portion 677,447
Deferred tax asset 9,605
-----------
Total Other Assets 687,052
TOTAL ASSETS $11,481,985
===========
Unaudited - see accompanying notes to financial statements
F-2
BIRCH FINANCIAL, INC.
Condensed Consolidated Balance Sheet
(continued)
September 30, 2004
September 30,
2004
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Bank overdraft payable $ 253,358
Accounts payable 10,711
Unfunded premium financing payable 2,692,064
Line of credit 5,895,700
Notes payable 851,321
Security deposits payable 65,217
Income taxes payable 86,552
-----------
Total Current Liabilities 9,854,923
-----------
TOTAL LIABILITIES 9,854,923
STOCKHOLDERS' EQUITY
Common stock - 63,000,000 shares authorized at $0.01 par;
32,109,848 shares issued and outstanding 321,098
Paid in capital 251,643
Retained earnings 1,054,321
-----------
TOTAL STOCKHOLDERS' EQUITY 1,627,062
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $11,481,985
===========
Unaudited - see accompanying notes to financial statements
F-2
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Income
for the nine months ended September 30, 2004 and 2003
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
Financing Income
Premium financing $ 930,096 $ 784,129
Equipment financing 69,867 55,712
--------- ---------
Total Financing Income 999,963 839,841
Financing Expense
Premium financing 258,217 211,435
Equipment financing 22,542 22,535
--------- ---------
Total Financing Expense 280,759 233,970
Gross Profit 719,204 605,871
Selling, General and Administrative
Expense 155,112 266,836
--------- ---------
Operating Profit 564,092 339,035
Other Income
Interest income 2,221 127
--------- ---------
Total Other Income 2,221 127
Income Before Tax Provision 566,313 339,162
Provision for Income Taxes (241,160) (139,580)
--------- ---------
Net Income $ 325,153 $ 199,582
========= =========
Net income per common share $ 0.01 $ 0.01
========= =========
Weighted average common shares
outstanding 32,109,848 32,109,848
========== ==========
Unaudited - see accompanying notes to financial statements
F-3
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Income
for the three months ended September 30, 2004 and 2003
Three months Three months
ended ended
September 30, September 30,
2004 2003
Financing Income
Premium financing $ 304,873 $ 255,667
Equipment financing 35,285 21,240
---------- ----------
Total Financing Income 340,158 276,907
Financing Expense
Premium financing 93,571 92,471
Equipment financing 8,305 7,964
---------- ----------
Total Financing Expense 101,876 100,435
Gross Profit 238,282 176,472
Selling, General and Administrative
Expense 52,935 78,711
---------- ----------
Operating Profit 185,347 97,761
Other Income
Interest income 670 127
---------- ----------
Total Other Income 670 127
Income Before Tax Provision 186,017 97,888
Provision for Income Taxes (86,830) (40,285)
---------- ----------
Net Income $ 99,187 $ 57,603
========== ==========
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
F-4
BIRCH FINANCIAL, INC.
Condensed Consolidated Statements of Cash Flows
for the nine months ended
September 30, 2004 and 2003
Nine months Nine months
ended ended
September 30, September 30,
2004 2003
Cash Flows from Operating Activities:
Net Income $ 325,153 $ 199,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Decrease (increase) in prepaids & other
receivables (2,672) (37,770)
Increase (decrease) in unfunded premium
financing payable 1,734,578 1,486,733
Increase (decrease) in accounts payable &
accrued liabilities 1,415 194,842
Increase (decrease) in management fees
payable (121,558) 24,353
Increase (decrease) in security deposits
payable 17,320 15,246
Increase (decrease) in income taxes payable 22,079 73,948
---------- -----------
Net Cash Provided by/(Used for) in
Operating Activities 1,976,315 1,956,934
Cash Flows from Investing Activities:
Increase in loans financing receivable (1,558,938) (2,280,707)
---------- -----------
Net Cash Used for Investing Activities (1,558,938) (2,280,707)
Cash Flows from Financing Activities:
Increase (decrease) in bank overdraft (166,662) (506,818)
Increase (decrease) in line of credit (284,873) 730,134
Increase in notes payable 82,258 72,710
Issuance of common stock 0 0
---------- -----------
Net Cash Provided by Financing
Activities (369,277) 296,026
Net Increase in Cash 48,100 (27,747)
Beginning Cash Balance 149,737 284,187
---------- -----------
Ending Cash Balance $ 197,837 $ 256,440
========== ===========
Unaudited - see accompanying notes to financial statements
F-5
BIRCH FINANCIAL, INC.
Notes to Condensed Consolidated Financial Statements
September 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.
F-6
Item 2. Management's Discussion and Analysis or Plan of Operation.
- --------------------------------------------------------------------
Results of Operations.
- ----------------------
In July, 2004, Safeco, with whom we had a $7,500,000 line of credit,
advised us that it was leaving the premium finance industry. Accordingly, we
negotiated a new $10,000,000 line of credit with First Bank. As with our old
Safeco line of credit, the First Bank line of credit is at an interest rate of
1/2% over the prime lending rate. However, the First Bank loan has an
interest rate floor of only 5%, as compared to a floor of 5-1/2% on the Safeco
loan.
In the quarterly period ended September 30, 2004, we received total
financing income of $340,158, of which $304,873 came from our premium
financing contracts and $35,285 came from equipment financing. During
the quarterly period ended September 30, 2003, these amounts were $276,907;
$255,667; and $21,240, respectively.
Financing expenses during the quarterly periods ended September 30,
2004, and September 30, 2003, were $101,876 and $100,435, respectively.
Selling, general and administrative expenses were $52,935 during the September
30, 2004 quarter, and $78,711 in the year-ago period.
Our income before tax provisions totaled $186,017 in the quarterly
period ended September 30, 2004, as compared to $97,888 in the September 30,
2003, quarter. After provision for income taxes of $86,830 and $40,285, our
net income during the September 30, 2004, and 2003, periods was $99,187, and
$57,603, respectively.
In the nine months ended September 30, 2004, we received total
financing income of $999,963, of which $930,096 came from our premium
financing contracts and $69,867 came from equipment financing. During the
nine months ended September 30, 2003, these amounts were $839,841; $784,129;
and $55,712, respectively.
Financing expenses during the nine months ended September 30, 2004,
and September 30, 2003, were $280,759 and $233,970, respectively. Selling,
general and administrative expenses were $155,112 during the September 30,
2004 nine month period, and $266,836 in the period a year ago.
Our income before tax provisions totaled $566,313 in the nine months
ended September 30, 2004, as compared to $339,162 in the September 30, 2003,
period. After provision for income taxes of $241,160 and $139,580, our net
income during the September 30, 2004, and 2003, nine months ended was
$325,153, and $199,582, 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, 2004, were $11,481,985. 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
First Bank to fund our insurance premium financing loans. As of September 30,
2004, our payable on the line of credit was $5,895,700. 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.
- ---------------------------
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.
- ----------------------------------
Within 90 days prior to the date of this Quarterly Report and as of the
period covered thereby, we carried out an evaluation, under the supervision
and with the participation of our President, of the effectiveness of the
design and operation of our disclosure controls and procedures. Based on this
evaluation, our President 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, and there have been no
significant changes in our internal controls or in other factors that could
significantly affect those controls subsequent to the date of their last
evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
- ----------------------------
None; not applicable.
Item 2. Unregistered Sales of Equity 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.
- --------------------------------------------------------------
No matter was submitted to a vote of our stockholders during the
quarterly period ended September 30, 2004. However, on October 6, 2004, which
is subsequent to the period covered by this Report, our Board of Directors and
the holders of approximately 79.2% of our outstanding common stock voted to
amend our Articles of Incorporation to increase our authorized capital from
63,000,000 shares of $0.01 par value common stock to 200,000,000 shares of
$0.01 par value common stock and 10,000,000 shares of $0.01 par value
preferred stock having such rights and preferences as the Board of Directors
shall determine. On October 12, 2004, we filed with the Securities and
Exchange Commission a definitive information statement with respect to this
matter. The information statement was mailed to our stockholders on October
18, 2004. We expect to file a Certificate of Amendment with the Nevada
Secretary of State on or about November 8, 2004.
On October 6, 2004, our Board of Directors and majority stockholders
also voted to strike Section 2.11 from our Bylaws. Section 2.11 had provided
that stockholders may take actions without a meeting if all stockholders
entitled to vote on the matter consent in writing. This provision was deleted
because it was already addressed by Article VI of our Articles of
Incorporation. We filed a Current Report on Form 8-K with respect to this
matter on October 6, 2004. See Part II, Item 6 of this Quarterly Report.
Item 5. Other Information.
- ----------------------------
None; not applicable.
Item 6. Exhibits and Reports on Form 8-K.
- -------------------------------------------
(a) Exhibits.
31.1 - 302 Certification of Nelson L. Colvin
31.2 - 302 Certification of Keith L. Walton
32 - 906 Certification.
(b) Reports on Form 8-K.
Current Report on Form 8-K dated October 6, 2004, and filed
with the Securities and Exchange Commission on the same date.
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: 10-26-04 By: /s Nelson L. Colvin
--------- --------------------
Nelson L. Colvin, President,
CEO and Director
Date: 10-26-04 /s/ Barry L. Cohen
--------- -------------------
Barry L. Cohen, Chairman of the Board
of Directors
Date: 10-26-04 /s/ Keith L. Walton
--------- --------------------
Keith L. Walton, Vice President,
Secretary/Treasurer and Director
Date: 10-26-04 /s/ Ronald H. Dietz
--------- --------------------
Ronald H. Dietz, Director
Date: 10-26-04 /s/ Lebo Newman
--------- ----------------
Lebo Newman, Director