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, 2005
[ ] 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.
(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)
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
--- --- --- ---
Indicate by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange Act). Yes No X
--- ---
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, 2005
32,109,848
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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.
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2005
BIRCH FINANCIAL, INC.
INDEX TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PAGE
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED) 3
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) 4
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) 5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6-7
BIRCH FINANCIAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
September 30,
2005
ASSETS
Current Assets
Cash $ 132,575
Premium financing receivable, net 10,319,824
Premium financing cancellation receivable 173,383
Equipment financing receivable-current portion 440,860
Prepaid expense 4,338
-----------
Total current assets 11,070,980
Equipment financing receivable, net of current
portion 886,575
Deferred tax asset 2,715
-----------
Total assets $11,960,270
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Bank overdraft $ 360,979
Unfunded premium financing payable-related party 3,238,778
Line of credit 5,192,654
Notes payable-related party 998,023
Security deposits payable 86,316
Income taxes payable 11,893
Other accrued liabilities 16,230
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Total current liabilities 9,904,873
Stockholders' equity
Preferred stock: par value $.01; 10,000,000 shares
authorized; no shares issued and outstanding -
Common stock: par value $.01; 200,000,000 shares
authorized; 32,109,848 issued; 32,076,848 outstanding 321,098
Paid in capital 251,643
Retained earnings 1,515,656
Treasury stock: 33,000 shares at cost (33,000)
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Total Stockholders' Equity 2,055,397
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Total Liabilities and Stockholders' Equity $11,960,270
==========
Unaudited-see accompanying notes to financial statements
3
BIRCH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
Three Months Ended Nine Months Ended
September 30, September 30,
2005 2004 2005 2004
Financing income
Premium financing $ 328,383 $ 304,873 $1,009,209 $ 930,096
Equipment financing 26,333 35,285 80,505 69,867
--------- --------- ---------- ---------
Total financing income 354,716 340,158 1,089,714 999,963
Financing Expense
Premium financing 110,585 93,571 305,223 258,217
Equipment financing 10,074 8,305 30,599 22,542
--------- --------- ---------- ---------
Total financing expense 120,659 101,876 335,822 280,759
--------- --------- ---------- ---------
Gross profit 234,057 238,282 753,892 719,204
Selling, general and
administrative expense 65,726 52,935 180,292 155,112
--------- --------- ---------- ---------
Operating profit 168,331 185,347 573,600 564,092
Other income
Interest income - 670 11 2,221
--------- --------- ---------- ---------
Total other income - 670 11 2,221
--------- --------- ---------- ---------
Income before taxes 168,331 186,017 573,611 566,313
Provision for income taxes (65,781) (86,830) (232,744) (241,160)
--------- --------- ---------- ---------
Net income $ 102,550 $ 99,187 $ 340,867 $ 325,153
========= ========= ========== =========
Net income per common share $ 0.00 $ 0.00 $ 0.01 $ 0.01
Weighted average common shares
outstanding 32,084,381 32,109,848 32,101,266 32,109,848
Unaudited - see accompanying notes to financial statements
4
BIRCH FINANCIAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine months ended
September 30,
2005 2004
Cash Flows from operating activities:
Net income $ 340,867 $ 325,153
Adjustments to reconcile net income to net cash
provided by operations:
Changes in operating assets and liabilities:
Prepaid expense (2,176) (2,672)
Unfunded premium financing payable 2,521,293 1,734,578
Management fees payable - (121,558)
Security deposits payable 17,734 17,320
Income taxes payable (90,620) 22,079
Other accrued liabilities 8,499 1,415
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Net cash provided by operations 2,795,597 1,976,315
Cash flows from investing activities:
(Increase) in premium financing receivable (1,241,367)(1,368,210)
Decrease (Increase) in equipment financing
receivable (225,624) (190,728)
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Net cash used for investing activities (1,466,991)(1,558,938)
Cash flows from financing activities:
Bank overdraft (122,995) (166,662)
Line of credit (1,315,246) (284,873)
Notes payable-related party 171,033 82,258
Purchase of treasury stock (33,000) -
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Net cash used in financing activities (1,300,208) (369,277)
--------- ----------
Increase in cash 28,398 48,100
Cash, beginning of period 104,177 149,737
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Cash, end of period $ 132,575 $ 197,837
========= ==========
Supplemental disclosure of cash flow information
Cash paid for interest $ 335,822 $ 280,759
Cash paid for income taxes $ 330,933 $ 219,081
Unaudited - see accompanying notes to financial statements
5
BIRCH FINANCIAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
QUARTERLY FINANCIAL STATEMENTS
The accompanying unaudited 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
(consisting of normal recurring accruals) 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 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,
2004.
1. TREASURY STOCK
On July 21, 2005 the Company purchased 33,000 shares of its common stock
from private investors for a total of $33,000.
2. SUBSEQUENT EVENT
On October 10, 2005, Birch Financial, Inc., a Nevada corporation (the
"Company"); Landscape Contractors Insurance Services, Inc., a California
corporation ("LCIS"); and LCIS' wholly-owned subsidiary, LCIS
Acquisition Corp., a Nevada corporation (the "Merger Subsidiary"),
entered into an Agreement and Plan of Merger under which the Merger
Subsidiary is to be merged with and into the Company, with the Company
being the surviving corporation (the "Plan"). Upon the completion of
the merger contemplated by the Plan, the Company will become a wholly-
owned subsidiary of LCIS, and each of the Company's stockholders will
receive 7.32 shares of LCIS common stock in exchange for each share of
the Company's common stock.
The Plan has been authorized by the Boards of Directors of the Company
and LCIS and by Golden Oak Cooperative Association, a California
corporation that is the owner of approximately 52% of the Company's
issued and outstanding shares of common stock ("Golden Oak"). On
October 11, 2005, the Company filed with the Securities and Exchange
Commission a preliminary information statement on Schedule 14C,
disclosing the terms of the merger. The merger is scheduled to close 21
days after the date of mailing of a definitive information statement to
the Company's stockholders.
Golden Oak and the Company's Board of Directors have also authorized a
reverse split of the Company's outstanding shares of common stock on a
100,001-for-one basis, such that stockholders owning less than 100,001
shares of common stock will have their shares canceled and converted
into the right to receive consideration of $0.27 per share. The merger
is to be completed immediately after the completion of the reverse stock
split, which is also fully discussed in the Company's preliminary
information statement.
6
BIRCH FINANCIAL, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The purpose of the merger and the reverse stock split are to allow Birch
to terminate the registration of its common stock under the Securities
Exchange Act of 1934, as amended, and to become a "private company."
The Company's Board of Directors believes that going private will save
the Company the expenses of complying with the provisions of applicable
federal securities laws, rules and regulations, which are estimated at
approximately $72,000 annually. It will also permit the holders of less
than 100,001 shares of the Company's common stock to receive a premium
for their shares relative to the historical market price of the common
stock.
7
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 September 30, 2005, and 2004.
------------------------------------------------
In the quarterly period ended September 30, 2005, we received total
financing income of $354,716, of which $328,383 came from our premium
financing contracts and $26,333 came from equipment financing. During
the quarterly period ended September 30, 2004, these amounts were $340,158;
$304,873; and $35,285, respectively.
These increases in revenue are entirely due to increased gross sales
of insurance premium financing contracts in the third quarter of 2005, as
compared to the third quarter of 2004. The agents for whom we offer insurance
premium financing had increased sales in the 2005 period, and this increase
resulted in more insurance premium financing business for us.
Financing expenses during the quarterly periods ended September 30,
2005, and September 30, 2004, were $120,659 and $101,876, respectively.
Selling, general and administrative expenses were $65,726 during the September
30, 2005, quarter, and $52,935 in the year-ago period.
Our income before tax provisions totaled $168,331 in the quarterly
period ended September 30, 2005, as compared to $186,017 in the September 30,
2004, quarter. After provision for income taxes of $65,781 and $86,830, our
net income during the September 30, 2005, and 2004, periods was $102,550, and
$99,187, respectively.
Nine Months Ended September 30, 2005, and 2004.
-----------------------------------------------
In the nine months ended September 30, 2005, we received total
financing income of $1,089,714, of which $1,009,209 came from our premium
financing contracts and $80,505 came from equipment financing. During the
nine months ended September 30, 2004, these amounts were $999,963; $930,096;
and $69,867, respectively. As with the quarterly increases in revenue, the
revenue increases during the nine month period were due to increased gross
sales in our insurance premium financing operations.
Financing expenses during the nine months ended September 30, 2005,
and September 30, 2004, were $335,822 and $280,759, respectively. Selling,
general and administrative expenses were $180,292 during the September 30,
2005, nine months ended, and $155,112 in the year-ago period.
Our income before tax provisions totaled $573,611 in the nine months
ended September 30, 2005, as compared to $566,313 in the September 30, 2004,
period. After provision for income taxes of $232,744 and $241,160, our net
income during the September 30, 2005, and 2004, nine months ended was
$340,867, and $325,153, 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 assets as of September 30, 2005, were $11,960,270. 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 of St. Louis to fund our insurance premium financing loans. As of
September 30, 2005, our payable on the line of credit was $5,192,654. 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, our actual results
may vary materially from those anticipated, estimated, projected or intended.
Item 3. Controls and Procedures.
- ----------------------------------
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 the design and operation
of our disclosure controls and procedures. Based on this evaluation, our
President and Treasurer concluded that our disclosure controls and procedures
are effective at ensuring that information required to be disclosed or filed
by us is recorded, processed or summarized, within the time periods specified
in the rules and regulations of the Securities and Exchange Commission. 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.
- --------------------------------------------------------------
None; not applicable.
Item 5. Other Information.
- ----------------------------
On October 10, 2005, Birch Financial, Inc., a Nevada corporation
(the "Company"); Landscape Contractors Insurance Services, Inc., a California
corporation ("LCIS"); and LCIS' wholly-owned subsidiary, LCIS Acquisition
Corp., a Nevada corporation (the "Merger Subsidiary"), entered into an
Agreement and Plan of Merger under which the Merger Subsidiary is to be merged
with and into the Company, with the Company being the surviving corporation
(the "Plan"). Upon the completion of the merger contemplated by the Plan, the
Company will become a wholly-owned subsidiary of LCIS, and each of the
Company's stockholders will receive 7.32 shares of LCIS common stock in
exchange for each share of the Company's common stock.
The Plan has been authorized by the Boards of Directors of the
Company and LCIS and by Golden Oak Cooperative Association, a California
corporation that is the owner of approximately 52% of the Company's issued and
outstanding shares of common stock ("Golden Oak"). On October 11, 2005, the
Company filed with the Securities and Exchange Commission a preliminary
information statement on Schedule 14C, disclosing the terms of the merger.
The merger is scheduled to close 21 days after the date of mailing of a
definitive information statement to the Company's stockholders.
Golden Oak and the Company's Board of Directors have also authorized
a reverse split of the Company's outstanding shares of common stock on a
100,001-for-one basis, such that stockholders owning less than 100,001 shares
of common stock will have their shares canceled and converted into the right
to receive consideration of $0.27 per share. The merger is to be completed
immediately after the completion of the reverse stock split, which is also
fully discussed in the Company's preliminary information statement.
The purpose of the merger and the reverse stock split are to allow
Birch to terminate the registration of its common stock under the Securities
Exchange Act of 1934, as amended, and to become a "private company." The
Company's Board of Directors believes that going private will save the Company
the expenses of complying with the provisions of applicable federal securities
laws, rules and regulations, which are estimated at approximately $72,000
annually. It will also permit the holders of less than 100,001 shares of the
Company's common stock to receive a premium for their shares relative to the
historical market price of the common stock.
Item 6. Exhibits.
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Exhibits.
31 302 Certification of Nelson L. Colvin
31 302 Certification of Keith L. Walton
32 906 Certification.
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: 11/08/05 /s/Nelson L. Colvin
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Nelson L. Colvin
President
Date: 11/08/05 /s/ Barry L. Cohen
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Barry L. Cohen
Chairman of the Board of Directors
Date: 11/08/05 /s/ Keith L. Walton
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Keith L. Walton
Vice President, Secretary/Treasurer
and Director
Date: 11/08/05 /s/ Ronald H. Dietz
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Ronald H. Dietz
Director
Date: 11/08/05 /s/ Lebo Newman
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Lebo Newman
Director