SCHEDULE 14C INFORMATION
(Amendment No. 2)
Information Statement Pursuant to Section 14(c) of the Securities Exchange Act
of 1934
Check the appropriate box:
[X] Preliminary Information Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14c-
5(d)(2))
[ ] Definitive Information Statement
BIRCH FINANCIAL, INC.
(Name of Registrant as Specified in its Charter)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee computed on table below per Exchange Act Rules 14c-5(g) and 0-11.
(1) Title of each class of securities to which transaction applies: N/A.
(2) Aggregate number of securities to which transaction applies: N/A.
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined): N/A.
(4) Proposed maximum aggregate value of transaction: N/A.
(5) Total fee paid: N/A.
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $0.
(2) Form, Schedule or Registration Statement No.: N/A
(3) Filing Party: N/A
(4) Date Filed: N/A
Contact Persons: Leonard W. Burningham, Esq.
Branden T. Burningham, Esq.
Suite 205, 455 East 500 South Street
Salt Lake City, Utah 84111
Tel: 801-363-7411; Fax: 801-355-7126
BIRCH FINANCIAL, INC.
17029 Chatsworth Street, Suite 100
Granada Hills, California 91344
INFORMATION STATEMENT
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE
REQUESTED NOT TO SEND A PROXY
INTRODUCTION
This Information Statement is being furnished to the stockholders
of Birch Financial, Inc., a Nevada corporation (the "Company," "Birch," "we",
"our" or "us" or words or similar import), in connection with certain
corporate actions (the "Proposals") unanimously approved by our Board of
Directors, including all directors who are not employees of the Company.
Golden Oak Cooperative Corporation, a California corporation ("Golden Oak"),
which owns in excess of a majority of our outstanding voting securities, has
adopted a consent authorizing both of the Proposals. No other votes are
required or necessary to adopt and complete the Proposals.
The Proposals are as follows:
Proposal No. 1. To amend our Articles of Incorporation to effect a
reverse split of Birch's outstanding 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 the cash
consideration set forth herein (the "Reverse Stock Split").
Our Amended Articles of Incorporation will become effective on the later
of (i) the opening of business on _______, 2005; or (ii) a date that is at
least 21 days from the mailing of this Information Statement to our
stockholders (the "Effective Date").
Proposal No. 2. The Boards of Directors of Birch and Landscape
Contractors Insurance Services, Inc., a California corporation ("LCIS"), have
approved an Agreement and Plan of Merger dated October 10, 2005, including the
Plan of Merger set forth therein (the "Merger Agreement"), under which LCIS
Acquisition Corp., a Nevada corporation, a wholly owned subsidiary of LCIS
("Merger Subsidiary"), will merge with and into Birch, and Birch will continue
as a wholly-owned subsidiary of LCIS. If the merger described in the Merger
Agreement is consummated, following the consummation of the merger:
1. The Birch stockholders that remain following the proposed
Reverse Stock Split will exchange their Birch shares for LCIS
shares on a 7.32-for-one basis and will own approximately 31%
of the outstanding shares of LCIS immediately following the merger,
estimated to be 2,250 shares of LCIS common stock; and
2. On the closing date of the merger, LCIS will hold all of the
outstanding shares of Birch immediately following the merger.
These figures are based on the number of shares of each company
outstanding on October 10, 2005, or required to be issued upon closing of the
merger.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE TRANSACTIONS; PASSED
UPON THE MERITS OR FAIRNESS OF THE TRANSACTIONS; OR PASSED UP0N THE ADEQUACY
OR ACCURACY OF THE DISCLOSURE IN THIS DOCUMENT. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
APPROXIMATE DATE OF MAILING: _________, 2005.
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TABLE OF CONTENTS
SUMMARY TERM SHEET ..................................................... 4
Questions and Answers Regarding the Proposal to Amend our
Articles or Incorporation to Effect the Reverse Stock Split ........4
Questions and Answers about the Merger ............................ 9
SPECIAL FACTORS ........................................................10
Purpose of the Reverse Stock Split ................................10
Reasons for the Reverse Stock Split ...............................11
Effect of the Reverse Stock Split .................................12
Effects on Stockholders with Fewer Than 100,001 Shares
of Common Stock ...................................................12
Effects on Stockholders with 100,001 or More Shares of
Common Stock ......................................................13
Effects on the Company ............................................14
No Change in Par Value ............................................14
Material Federal Income Tax Consequences of the
Reverse Stock Split ...............................................14
Advantages of the Reverse Stock Split .............................15
Disadvantages of the Reverse Stock Split ..........................16
Alternatives to the Reverse Stock Split ...........................18
Fairness of the Reverse Stock Split ...............................18
PROPOSAL NO. 1: AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION
EFFECT THE REVERSE STOCK SPLIT .........................................20
General ...........................................................20
Dissenters' Appraisal Rights with Respect to the
Reverse Stock Split ...............................................22
Interest of Certain Persons in Matters to Be Acted Upon ...........25
Escheat Laws ......................................................26
Financial Information .............................................26
Management's Discussion and Analysis or Plan of Operation .........27
Combined Consolidated Pro Forma Balance Sheet .....................29
PROPOSAL TWO: THE MERGER ...............................................31
General ...........................................................31
What Birch Stockholders Will Receive ..............................31
Ownership of Birch and LCIS Following the Merger ..................32
Background of and Reasons for the Merger ..........................32
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Interests of the Directors, Executive Officers and
Affiliates of Birch and LCIS in the Merger ........................33
Material Federal Income Tax Consequences of the Merger ............34
Accounting Treatment of the Merger ................................35
Dissenters' Rights with Respect to the Merger .....................35
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS ................35
Business Experience ...............................................36
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF ...................38
Voting Securities .................................................38
Security Ownership of Principal Holders and Management ............38
Changes in Control ................................................39
MARKET INFORMATION ................................................39
Dividends .........................................................40
TRANSACTIONS WITH MANAGEMENT AND OTHERS ...........................40
VOTE REQUIRED FOR APPROVAL OF THE PROPOSALS .......................40
The Reverse Stock Split ...........................................40
The Merger ........................................................41
NOTICE ............................................................41
APPENDIX A: NEVADA DISSENTERS' RIGHTS STATUTE
APPENDIX B: AGREEMENT AND PLAN OF MERGER
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SUMMARY TERM SHEET
This summary term sheet describes the material terms of the Reverse
Stock Split and the merger. This summary term sheet may not contain all of
the information that is important to you. For a more complete description of
these transactions, you should carefully read this Information Statement,
including the appendices hereto.
Questions and Answers Regarding the Proposal to Amend Our Articles of
Incorporation to Effect the Reverse Stock Split.
- ------------------------------------------------
Q: What is the purpose of the transaction?
A: If approved, the transaction will enable the Company to go private and
thus terminate its obligations to file annual and periodic reports and make
other filings with the Securities and Exchange Commission (the "Commission").
The purpose behind the proposal and the benefits of going private include:
* eliminating the costs associated with filing documents with the
Commission under the Securities Exchange Act of 1934, as amended (the
"Exchange Act");
* eliminating the costs of compliance with the Sarbanes-Oxley Act of
2002 and related regulations;
* reducing the direct and indirect costs of administering
stockholder accounts and responding to stockholder requests; and
* affording stockholders holding fewer than 100,001 shares
immediately before the transaction the opportunity to receive cash for their
shares without having to pay brokerage commissions and other transaction
costs.
Q: What does "going private" mean?
A: Following the transaction, the Company will have fewer than 300
stockholders of record, and will be eligible to terminate the registration of
its common stock under the Exchange Act, and will become a "private company."
In this regard, the Company, by going private, will no longer have to file
periodic reports such as annual, quarterly, and other reports, with the
Commission, and its executive officers, directors, and 10% stockholders will
no longer be required to file reports relating to their transactions in the
Company's common stock. Additionally, any trading in our common stock will
occur only in the "Pink Sheets" or in privately negotiated sales.
Q: What will I receive in the transaction?
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A: If you own fewer than 100,001 shares of the Company's common stock
immediately before the Effective Date of the transaction, you will receive
$0.27 in cash, without interest, from the Company for each share that you own.
If you own 100,001 or more shares of the Company's common stock at the
effective time of the transaction, you will not receive any cash payment for
your shares in connection with the transaction, and you will hold one share of
the Company's common stock for every 100,001 shares that you held immediately
before the transaction.
Q: What if I hold shares in street name?
A: The Company intends to treat stockholders holding common stock in
street name through a nominee (such as a bank or broker) in the same manner as
stockholders whose shares are registered in their name. Thus, stockholders
holding less than 100,001 shares of Common Stock will be required to exchange
their shares for cash, even if all or a portion of those shares are held in
street name. However, nominees may have different procedures and stockholders
holding common stock in street name should contact their nominees.
Q: How will the Company be operated after the transaction?
A: Assuming that the Company has fewer than 300 stockholders after the
transaction, the Company will file a Form 15 to deregister its common stock
under federal securities laws. Upon such filing, the Company would no longer
be subject to the reporting and related requirements under the federal
securities laws that are applicable to public companies. The Company expects
its business and operations to continue as they are currently being conducted
and, except as disclosed in this information statement, the transaction is not
anticipated to have any effect upon the conduct of such business. As a result
of the transaction, stockholders who receive cash for their shares in the
transaction will no longer have a continuing interest as stockholders of the
Company and will not share in any future earnings and growth of the Company.
Also, any trading in our Common Stock will only occur in the "Pink Sheets" or
in privately negotiated sales, which will adversely affect the liquidity of
the common stock.
Q: What are the federal income tax consequences of the transaction to me?
A: The receipt of the cash in the transaction will be taxable for federal
income tax purposes. Stockholders who do not receive cash in the transaction
should not be subject to taxation as a result of the transaction.
Q: If I own fewer than 100,001 shares, is there any way I can continue to
be a stockholder of the Company after the transaction?
A: If you own fewer than 100,001 shares before the reverse stock
split, the only way you can continue to be a stockholder of the Company after
the transaction is to purchase, prior to the Effective Date, sufficient
additional shares to cause you to own a minimum of 100,001 shares on the
Effective Date. However, we cannot assure you that any shares will be
available for purchase, particularly in light of the extremely limited
historical trading volume for our common stock on the OTC Bulletin Board.
Q: Is there anything I can do if I own 100,001 or more shares, but would
like to take advantage of the opportunity to receive cash for my shares as a
result of the transaction?
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A: If you own 100,001 or more shares before the transaction, you can
only receive cash for all of your shares if, prior to the Effective Date, you
reduce your stock ownership to fewer than 100,001 shares by selling or
otherwise transferring shares. However, we cannot assure you that any
purchaser for your shares would be available.
Q: What happens if I own a total of 100,001 or more shares beneficially,
but I hold fewer than 100,001 shares of record in my name and fewer than
100,001 shares with my broker in "street name"?
A: An example of this would be that you have 40,001 shares registered in
your own name with our transfer agent, and you have 60,000 shares registered
with your broker in "street name." Accordingly, you are the beneficial owner
of a total of 100,001 shares, but you do not own 100,001 shares of record or
beneficially in the same name. If this is the case, as a result of the
transaction, you would receive cash for the 40,001 shares you hold of record.
You will also receive cash for the 60,000 shares held in street name if your
broker or other nominee accepts our offer for each beneficial owner of fewer
than 100,001 shares of common stock held in the broker's or nominee's name to
receive cash for fractional shares. If the broker or nominee does not accept
our offer, you would continue to own a beneficial fractional interest in a
share of our common stock. However, there will be no liquidity for such
fractional interest, and if the merger is completed as contemplated, the
merger value per Birch share will be less than the $0.27 per share pre-split
value.
Q: Should I send in my stock certificates now?
A: No. After the transaction is completed, we will send instructions
on how to receive any cash payments you may be entitled to receive. We expect
that cash payments will be mailed approximately six to eight weeks after the
Effective Date of the Reverse Stock Split.
Q: What happens if I sell shares before the Effective Date of the
Reverse Stock Split?
A: If you sell a sufficient number of shares so that you own fewer than
100,001 shares at the Effective Date of the transaction, you will receive
$0.27 cash for each share that you own immediately before the effective time.
Q: Am I entitled to dissenters' rights?
A: Under Nevada law, stockholders are not entitled to dissenter's rights
in connection with the transaction. However, the Company is granting you
these rights, as more fully discussed below.
Q: What are some of the advantages of the Reverse Stock Split?
A: The Board of Directors believes that the Reverse Stock Split will
have, among others, the following advantages:
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* The Company will terminate the registration of its Common Stock under
the Exchange Act, which will eliminate the significant tangible and intangible
costs of being a public company. We estimate that we will have tangible costs
savings of approximately $72,000 before taxes annually, consisting of: (i)
approximately $40,000 per year in legal fees and expenses that we have
historically incurred in connection with the preparation and filing of reports
required by the Exchange Act and with quotation of our common stock on the OTC
Bulletin Board, and with other legal requirements associated with being a
public company; (ii) approximately $12,000 in accounting fees associated with
the preparation of the annual and quarterly financial statements that are
included with our periodic reports; and (iii) approximately $20,000 per year
in audit and audit-related fees associated with the year-end financial
statements that are filed with the Commission with our Annual Reports on Form
10-KSB;
* Following the Reverse Split and the merger by which the Company will
become a privately-held entity, management will be able to focus its time and
resources on the business' long-term goals and objectives rather than spending
time and resources in ensuring compliance with applicable securities laws,
rules and regulations; and
* Stockholders holding fewer than 100,001 shares will be able to realize
complete liquidity at a premium to the market price and the net book value per
share of our common stock, and will do so through a transaction that will not
include brokerage commissions and fees.
Q: What are some of the disadvantages of the Reverse Stock Split?
A: The Board of Directors believe that the Reverse Stock Split will have,
among others, the following disadvantages:
* Stockholders owning less than 100,001 shares of the Company's common
stock will not have an opportunity to liquidate their shares at a time and for
a price of their choosing; instead, they will be cashed out and will no longer
be stockholders of the Company and will not have the opportunity to
participate in or benefit from any future potential appreciation in the
Company's value.
* Stockholders remaining in the Company following the Reverse Stock
Split will no longer have available all of the information regarding the
Company's operations and results that is currently available in the Company's
filings with the Commission. The transaction will result in the loss of
financial transparency for unaffiliated stockholders that remain stockholders
in the Company after the transaction. The Company will no longer be subject
to the liability provisions of the Exchange Act, and it will no longer be
subject to the provisions of the Sarbanes-Oxley Act. As a result, the
Company's officers will no longer be required to certify the accuracy of its
financial statements.
* Stockholders remaining in the Company following the Reverse Stock
Split will no longer be able to trade their securities on a public market,
resulting in a loss of liquidity for their shares.
* The elimination of a trading market for our common stock may result in
the Company having less flexibility in attracting and retaining executives and
other employees because equity-based incentives (such as stock options) tend
not to be viewed as having the same value in a private company.
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* The Company will be less likely to be able to use stock to acquire
other companies.
* It will be more difficult for the Company to access the public equity
markets.
See "Effect of the Reverse Stock Split."
Q: The Company has been publicly held since 1999; what are some of the
reasons for going private now?
A: Our Board of Directors believes that the Company currently derives no
material benefit from its public company status. In addition to the direct
financial burden from being a public company, the extremely thin trading
market in our common stock has not provided liquidity to our stockholders.
During the period from January 1, 2003, through July 1, 2005, a total of only
about 126,331 shares of our common stock were traded on the OTC Bulletin
Board. Furthermore, our stock was only traded on 40 days during this period,
with an average volume per trading day of only about 3,158 shares. As a
result of this infrequency in trading, we do not expect that we will be able
to use our stock as currency for acquisitions or other transactions in the
future. Additionally, the scarce trading volume results in substantial spikes
in the trading price when actual trades are made in the market.
Q: What are some of the factors supporting the Board of Directors'
determination to approve the Reverse Stock Split?
A: The Board based its determination to approve the Reverse Stock Split
on several factors. Importantly, the Board considered the relative advantages
and disadvantages discussed above and under "Reasons for the Amendment to the
Articles of Incorporation to Effect the Reverse Stock Split." The Board also
considered certain other factors, including:
* the Board's determination of the fairness of paying the Cashed Out
Stockholders $0.27 per pre-split share in light of the low recent market price
of the Company's common stock and the Company's low net book value per share.
See "Advantages of the Reverse Stock Split."
* the projected tangible and intangible cost savings to the Company by
terminating its public company status; and
* the fact that attempts of the Company's stockholders to achieve
liquidity in the existing trading market would be frustrated due to the low
average daily trading volume of the Company's common stock, with the result
that only a small number of shares could be purchased or sold without the risk
of significantly increasing or decreasing the trading price for our shares.
Q: What are the interests of the Company's directors and officers in the
Reverse Stock Split?
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A: As a result of the transaction, the Company estimates that its
directors and officers, collectively, will beneficially own approximately 25%
of the Company's outstanding common stock immediately before the Reverse Stock
Split and approximately 26% after the Reverse Stock Split. This small
increase is due to the fact that only an estimated 1,235,043 pre-split
shares of our common stock will be eliminated.
Q: What is the total cost of the Reverse Stock Split to the Company?
A: The Company estimates that the total cost of the Reverse Stock
Split to the Company will be approximately $368,461.61, of which the Company
will pay approximately $333,461.61 to cash out fractional shares and
approximately $35,000 of legal and accounting fees and other costs to effect
the Reverse Stock Split. This total amount could be larger or smaller if the
estimated number of fractional shares that will be outstanding after the
Reverse Stock Split changes as a result of purchases or sales of common stock
by unaffiliated stockholders. Birch will borrow these funds from LCIS
pursuant to an unsecured demand note bearing interest at 9% per annum. As of
the date hereof, the parties have not executed any such note, and we do not
expect to execute such a note until we actually receive the funds from LCIS.
We never intended for the Company to finance the Reverse Stock Split, as
the Company works on a revolving line of credit with First Bank. All income
to the Company goes into a lockbox and is used to pay down the line of credit.
Because the Company will become a wholly-owned subsidiary of LCIS following
the Reverse Stock Split and the merger, we felt it was most logical for LCIS
to provide the financing for the Reverse Stock Split. The other alternative
would be to receive the funds from Golden Oak, but since LCIS is a wholly-
owned subsidiary of Golden Oak, we do not believe that there would be any
practical difference between the two potential sources of funding.
Questions and Answers about the Merger.
---------------------------------------
Q: Why is Birch proposing to enter into the merger?
A: Approximately 90% of Birch's insurance premium financing revenue comes
from LCIS. If Birch were to lose this revenue source, it would lose its
viability as a business. In addition, Golden Oak owns the majority of each
company's common stock and each of Birch's directors also serves on the Board
of Directors of LCIS. Due to each of these factors our Board of Directors
believes it is more appropriate for Birch to operate as a wholly-owned
subsidiary of LCIS than as an independent publicly-held company.
Q: How is the merger being structured?
A: If all of the conditions to the merger are satisfied (or waived),
Merger Subsidiary will be merged into Birch, with Birch becoming a wholly-
owned subsidiary of LCIS and Birch's stockholders receiving in exchange for
their Birch shares, LCIS common stock.
Q: What are the tax consequences to the Birch stockholders of the
merger?
A: Birch stockholders who exchange their shares or LCIS common stock will
not recognize any gain or loss for United States federal income tax purposes.
Your tax basis in your total shares of LCIS common stock received in the
merger will equal your tax basis in your Birch stock.
Q: If I am a Birch stockholder, should I send in my stock certificates
now?
A: No. After the merger is completed, Birch will send written
instructions to its stockholders explaining how to exchange their stock
certificates.
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Q: When do you expect the merger to be completed?
A: We are working toward completing the merger as quickly as possible,
and we expect that it will be completed immediately after the completion of
the Reverse Stock Split.
Q: Where can I find more information about the merger?
A: Please contact:
Birch Financial, Inc.
17029 Chatsworth Street, Suite 100
Granada Hills, California 91344
Phone: 818-832-9664
Facsimile: 818-362-9872
Attention: Nelson Colvin
Golden Oak, which owns in excess of a majority of our outstanding voting
securities has agreed to vote in favor of the Reverse Stock Split and the
merger. No other votes are required or necessary to adopt and complete these
transactions.
Golden Oak is a cooperative corporation that is owned by the employee
members of LCIS. It provides safety products and administrative services to
LCIS' members. None of Golden Oak's directors or executive officers was
convicted in any criminal proceeding during the past five years (excluding
traffic violations or similar misdemeanors), or was a party to any judicial or
administrative proceeding during the past five years (except for matters that
were dismissed without sanction or settlement) that resulted in a judgment,
decree or final order enjoining that person from future violations of, or
prohibiting activities subject to, federal or state securities laws, or a
finding of any violation of federal or state securities laws.
SPECIAL FACTORS
Purpose of the Reverse Stock Split.
- -----------------------------------
The primary purpose of the Reverse Stock Split is to enable Birch to "go
private" and thus terminate its obligations to file annual and periodic
reports and make other filings with the Commission
(the "Commission"). The benefits of going private include:
* eliminating the costs associated with filing our periodic reports and
other documents with the Commission;
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* eliminating the costs of compliance with the Sarbanes-Oxley Act and
related regulations;
* reducing the direct and indirect costs of administering stockholder
accounts and responding to stockholder requests; and
* affording stockholders holding fewer than 100,001 shares immediately
before the Reverse Stock Split the opportunity to receive cash for their
shares without having to pay brokerage commissions and other transaction
costs.
By purchasing the shares of the holders of fewer than 100,001 shares, we
will:
* reduce the number of the Company's stockholders of record to fewer than
500 persons, which will allow us to terminate the registration of our common
stock under Section 12(g) of the Exchange Act, and suspend our duty to file
periodic reports with the Commission;
* eliminate the administrative burden and expense of maintaining small
stockholder accounts;
* permit these small stockholders to liquidate their shares of common
stock at a fair price, without having to pay brokerage commissions, as we will
pay all transaction costs in connection with the Reverse Stock Split; and
* cause minimal disruption to stockholders owning 100,001 or more shares
of common stock.
Reasons for the Reverse Stock Split.
------------------------------------
We incur direct and indirect costs in complying with the filing and
reporting obligations imposed on public companies by the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). The cost of compliance has
increased significantly with the implementation of the Sarbanes-Oxley Act of
2002. We also incur substantial indirect costs as a result of, among other
things, the executive time expended to prepare and review our public filings.
As we have relatively few executive personnel, these indirect costs can be
substantial.
In addition, management believes that many of the common benefits of
being a public company do not apply to Birch. For example:
* Despite our discussions with approximately eight to 10 broker dealers
in an attempt to locate a suitable market maker, there has never been an
established trading market for our common stock (During the 2-1/2 year period
from January 1, 2003, through July 1, 2005, there were approximately 40 trades
in our common stock, for total trading volume of 126,331 shares), resulting in
very limited liquidity for our investors;
* the vast majority of stockholders that acquired their shares when we
went public in 1999 continue to hold those shares, indicating a general lack
of desire to trade our common stock; and
* unlike most public companies, our operations are narrowly focused on
providing services to a sister corporation, with over 90% of our insurance
premium financing revenue coming from LCIS (Golden Oak owns a majority of our
outstanding shares and all of LCIS' outstanding shares).
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Effect of the Reverse Stock Split.
----------------------------------
General.
--------
If the Reverse Stock Split is consummated, we intend to apply for
termination of registration of our common stock under the Exchange Act as soon
as practicable after completion of the Reverse Stock Split. The Reverse Stock
Split is expected to reduce the number of stockholders of record of the
Company from approximately 537 to approximately 23. Upon the termination of
our reporting obligations under the Exchange Act, our common stock may be
eligible for listing and trading in the "Pink Sheets," as described below.
However, the completion of the Reverse Stock Split and the deregistration of
our common stock under the Exchange Act will likely cause the trading market
for shares of the common stock to be eliminated.
Effects on Stockholders With Fewer Than 100,001 Shares of Common Stock.
-----------------------------------------------------------------------
If the Reverse Stock Split is implemented, stockholders holding fewer
than 100,001 shares of common stock immediately before the Reverse Stock Split
("Cashed Out Stockholders"):
* will not receive a fractional share of common stock as a result of the
Reverse Stock Split;
* will instead receive cash equal to $0.27 per pre-Reverse Stock Split
share for each such share of common stock held immediately before the Reverse
Stock Split in accordance with the procedures described in this information
statement;
* will have no further ownership interest in Birch with respect to
cashed out shares, and will no longer be entitled to vote as stockholders;
* will not be required to pay any service charges or brokerage
commissions in connection with the Reverse Stock Split; and
* will not receive any interest on the cash payments made as a result of
the Reverse Stock Split.
Detriments of the Reverse Stock Split include:
* the Cashed Out Stockholders will be required to surrender their shares
involuntarily for a cash price that is determined by the Company;
* the Cashed Out Stockholders will not have the right to liquidate their
shares at a time and place of their choosing;
* the Cashed Out Stockholders will no longer have the right to
participate in the benefits of being corporate stockholders, such as voting on
Company proposals or sharing in any dividends that the Company may be able to
pay in the future;
* the Company will no longer be subject to the provisions of the
Sarbanes-Oxley Act or the liability provisions of the Exchange Act;
* the Company's officers will no longer be required to certify the
accuracy of the Company's financial statements; and
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* cash payments to Cashed Out Stockholders as a result of the Reverse
Stock Split will be subject to income taxation. For a discussion of the
federal income tax consequences of the Reverse Stock Split, please see the
section of this information statement entitled " Material Federal Income Tax
Consequences of the Reverse Stock Split."
If you would otherwise be a Cashed Out Stockholder as a result of your
owning less than 100,001 shares of our common stock, but you would rather
continue to hold common stock after the Reverse Stock Split and not be cashed
out, you may do so by taking either of the following actions:
(1) Purchase a sufficient number of additional shares of common stock
on the open market and have them registered in your name and consolidated with
your current record account, if you are a record holder, or have them entered
in your account with a nominee (such as your broker or bank) in which you hold
your current shares so that you hold at least 100,001 shares of common stock
in your record account immediately before the Effective Date of the Reverse
Stock Split; or
(2) If applicable, consolidate your accounts so that together you hold at
least 100,001 shares of common stock in one record account immediately before
the Effective Date of the Reverse Stock Split.
You will have to act far enough in advance so that the purchase of any
common stock and/or consolidation of your accounts containing common stock is
completed by the close of business prior to the Effective Date of the Reverse
Stock Split.
Effects on Stockholders With 100,001 or More Shares of Common Stock.
--------------------------------------------------------------------
If the Reverse Stock Split is implemented, stockholders, which we refer
to as Continuing Stockholders, holding 100,001 or more shares of common stock
immediately before the Reverse Stock Split:
* will have the number of shares of common stock held immediately after
the Reverse Stock Split reduced by a factor of 100,001 to one;
* will be the only persons entitled to vote as stockholders after the
consummation of the Reverse Stock Split; and
* will not receive cash for any portion of their shares (and will not
receive any other consideration, including options).
One of the purposes of the Reverse Stock Split is to terminate the
registration of our common stock under the Exchange Act. In this event, we
will no longer be required to file public reports of our financial condition
and other aspects of our business with the Commission. Unless otherwise
required by law, we do not currently intend to distribute any more financial
and other Company information to stockholders. As a result, stockholders and
brokers will have less access to information about the Company's business and
results of operations than they had prior to the Reverse Stock Split.
Nevertheless, we may decide in our sole discretion to provide certain
financial and other information on our website at some time in the future.
13
In addition, in the event that we terminate the registration of our
common stock under the Exchange Act, the common stock will cease to be
eligible for trading on any securities market except the "Pink Sheets," which
may not be available as a source of liquidity. In order for our common stock
to be quoted on the "Pink Sheets" (a centralized quotation service that
collects and publishes market maker quotes for securities), one or more
broker-dealers must act as a market maker and sponsor the common stock on the
"Pink Sheets." Following consummation of the Reverse Stock Split and the
absence of current information about the Company being filed under the
Exchange Act, there can be no assurance that any broker-dealer will be willing
to act as a market maker in the Common stock. There is also no assurance that
shares of the common stock will be available for purchase or sale after the
Reverse Stock Split has been consummated.
Effects on the Company.
-----------------------
If consummated, the Reverse Stock Split will affect the registration of
our common stock under the Exchange Act, as we intend to apply for termination
of such registration as soon as practicable after the Reverse Stock Split.
The Reverse Stock Split is intended to reduce the number of
stockholders of the Company to less than 35. Although we will be able to
deregister our common stock under the Exchange Act if we have fewer than 300
stockholders of record, the subsequent merger with LCIS' Merger Subsidiary
will be facilitated if we have 35 or fewer stockholders at the time of the
merger. This is because the exemption from registration provided by Rule 506
of Regulation D of the Commission will likely be available to LCIS when it
issues its shares to our Continuing Stockholders in exchange for their Birch
shares. If this exemption were not available, LCIS may have to register those
shares, which can be both expensive and time consuming.
The completion of the Reverse Stock Split and the deregistration of our
common stock under the Exchange Act will render the common stock ineligible
for listing or quotation on any stock exchange or other automated quotation
system. After the Reverse Stock Split, we may be able to list the Common Stock
in the "Pink Sheets." However, we do not intend to pursue that option, as we
expect that Continuing Stockholders holding a majority of the outstanding
post-Reverse Stock Split shares of our common stock will vote to make the
Company a wholly-owned subsidiary of LCIS, as outlined in Proposal 2, below.
Consequently, Continuing Stockholders should expect the public market for
shares of Common Stock to be eliminated.
We expect that upon the completion of the Reverse Stock Split, the shares
beneficially owned by our directors and executive officers will comprise
approximately 26% of the then-issued and outstanding shares of common stock,
compared to approximately 25% owned prior to the Reverse Stock Split. In
addition, Golden Oak, which currently owns approximately 52% of our
outstanding common stock, will own approximately 54% of our post-Reverse Stock
Split shares.
No Change in Par Value.
-----------------------
The par value of our common stock will remain $0.01 per share following
consummation of the Reverse Stock Split.
Material Federal Income Tax Consequences of the Reverse Stock Split.
--------------------------------------------------------------------
We have not decided to engage in the Reverse Stock Split as a result of
any tax consequences of the transaction. We believe that the Reverse Stock
Split will not result in material federal income tax consequences to the
Company. In addition, Continuing Stockholders who do not receive any cash as
a result of the Reverse Stock Split should not recognize any gain or loss as a
result of the Reverse Stock Split. A Continuing Stockholder's tax basis and
holding period in the common stock should remain unchanged after the Reverse
Stock Split. On the other hand, Cashed Out Stockholders generally will
recognize capital gain or loss for federal income tax purposes as a result of
the Reverse Stock Split. Such gain or loss will be measured by the difference
between the cash received by such Cashed Out Stockholder and the aggregate
adjusted tax basis in such Cashed Out Stockholder's stock.
14
Advantages of the Reverse Stock Split.
--------------------------------------
The following are some of the advantages that our Board of Directors
believe will be derived from the Reverse Stock Split. For a more detailed
list of the factors that our Board considered in determining the fairness of
this transaction, see the subheading "Fairness of the Reverse Stock Split,"
below.
(1) Opportunity for unaffiliated stockholders holding less than 100,001
shares of common stock to sell holdings at a premium.
Historical Market Prices - In connection with the Reverse Stock Split,
the Board of Directors has set the price to be paid to the cashed out
stockholders at $0.27 per share. This consideration represents: (i)a 59%
premium over the closing price for our common stock on July 1, 2005 (the most
recent practicable date prior to the announcement of the Reverse Stock Split)
which was $0.17 per share; (ii) an 86% premium over the average closing price
of the common stock over the 30 days prior to and including July 1, 2005,
which was $0.145 per share; (iii) a 77% premium over the one year average
closing price of the common stock, which was $0.152 per share; and (iv) a 0.3%
premium over the average closing price of our common stock during the period
from January 1, 2003, through July 1, 2005, which was $0.269 per share.
The foregoing calculations were derived from the trading history of the
Company's common stock during the period from January 1, 2003, through July 1,
2005. It should be noted that during this period: (i) there were only 40 days
during which any shares of the Company's common stock were traded at all; (ii)
a total of only 126,331 shares were traded; and (iii) the average trading
volume during these 40 trading days was only about 3,133 shares per day.
The following table summarizes certain indications of value, including
the aforementioned current and historical market prices of the common stock,
each as defined above. The column labeled "Percentage Premium" indicates the
percentage premium that the $0.27 cash out consideration represents in
relation to the applicable indication of value.
Dollar
Value Amount Premium
----- ------ -------
Most Recent Closing Price $ 0.17 59 %
Thirty Day Average Closing Price 0.145 86
One-year Average Closing Price 0.152 77
Two-and-one-half year Average Closing Price 0.269 0.3
Net book value per share at September 30,
2005* 0.064 322
Going concern value at September 30, 2005 0.1674 61
* Net book value consists of the Company's assets minus its liabilities,
as discussed below.
Net book value and liquidation value - As of September 30, 2005, the
Company's net book value (i.e., total assets minus total liabilities) was
$2,055,397, or approximately $0.064 per share. Because of the lack of
physical assets and intangible assets, the Company's liquidation value at
September 30, 2005, was also $2,055,397, or approximately $0.064 per share.
This valuation is indicative of the fairness of the price to be paid to the
Cashed Out Stockholders, as the latter represents a premium of approximately
322 percent over the former.
Going concern value - In December, 2005, John H. Jaques, Inc.
("Jaques"), prepared a Summary Stock Valuation of the Company, in which it
concluded that the Company's total value was $5,147,000, or $0.1674 per share
after the redemption of the Cashed Out Stockholders' shares, at September 30,
2005. This valuation takes into account the Company's tangible net worth
(i.e. book value) and its enterprise value (i.e., the value of its business
operations, client accounts working capital and any goodwill and covenants not
to compete). These components of value were valued at $1,695,000 and
$3,452,000, respectively. The going concern value of $0.1674 per share
further supports the fairness of the transaction because the $0.27 per share
to be paid to the Cashed Out Stockholders is a premium of approximately 61
percent over the going concern value.
(2) Significant cost and time savings for the Company.
15
By reducing the number of stockholders of record to less than 300 and
deregistering our common stock under the Exchange Act, we expect to save: (i)
approximately $40,000 per year in legal fees and expenses that we have
historically incurred in connection with the preparation and filing of reports
required by the Exchange Act and with quotation of our common stock on the OTC
Bulletin Board of the National Association of Securities Dealers, Inc. (the
"NASD"), and with other legal requirements associated with being a public
company; (ii) approximately $12,000 in accounting fees associated with the
preparation of the annual and quarterly financial statements that are included
with our periodic reports; and (iii) approximately $20,000 per year in audit
and audit-related fees associated with the year-end financial statements that
are filed with the Commission with our Annual Reports on Form 10-KSB. The
termination of reporting obligations will also alleviate a significant amount
of time and effort previously required of our executive officers to prepare
and review these ongoing reports and filings.
(3) Ability to control decision to remain a holder of common stock or to
liquidate common stock.
Another factor considered by the Board of Directors in determining the
fairness of the transaction to all unaffiliated stockholders, individually, is
that current holders of fewer than 100,001 shares of our common stock may
elect to remain stockholders of the Company following the Reverse Stock Split
by acquiring additional shares so that they own at least 100,001 shares of the
common stock immediately before the Reverse Stock Split. Conversely,
stockholders that own 100,001 or more shares of common stock who desire to
liquidate their shares in connection with the Reverse Stock Split at the
premium price offered may reduce their holdings to less than 100,001 shares by
selling shares prior to the Reverse Stock Split. Although it may be difficult
for a stockholder to purchase enough shares to retain or dispose of an equity
interest in the Company due to the limited trading market for the Common
Stock, some stockholders should be able to purchase a sufficient number of
shares. The Board of Directors considers the structure of the going private
transaction to be fair to unaffiliated stockholders individually, because it
allows them a measure of control over the decision of whether to remain
stockholders after the Reverse Stock Split or to receive the cash
consideration offered in connection with the Reverse Stock Split.
(4) No material change in percentage ownership of Continuing
Stockholders.
Because only an estimated 1,235,043 out of 32,076,846 shares of our
common stock will be eliminated as a result of the Reverse Stock Split, the
percentage ownership of Continuing Stockholders will be approximately the same
as it was prior to the Reverse Stock Split. For example, our directors and
executive officers currently beneficially own approximately 25% of our
outstanding common stock and will beneficially own approximately 26% of our
common stock following completion of the Reverse Stock Split. We believe that
structuring the transaction in a manner that preserves the approximate
percentage ownership of the Continuing Stockholders, whether affiliated or
unaffiliated, supports the fairness of the transaction to the unaffiliated
stockholders.
Disadvantages of the Reverse Stock Split.
-----------------------------------------
(1) Complete reduction of public sale opportunities.
Following the Reverse Stock Split and the deregistration of our common
stock under the Exchange Act, we anticipate that the public market for the
common stock will be eliminated altogether. Stockholders of the Company likely
no longer will have the opportunity to sell their shares of common stock in
any public market. While shares may be listed in the "Pink Sheets," any
public market for our common stock would probably be highly illiquid after the
suspension of our periodic reporting obligations.
Our Board of Directors believes that the foregoing disadvantage is
somewhat ameliorated by the extremely limited market for our common stock over
the past several years. For example, in the two-and-one-half year period from
January 1, 2003, through July 1, 2005, a total of 126,331 shares of our common
stock have been traded on the OTC Bulletin Board, and our shares have been
traded a total of 40 days during this period.
16
(2) Termination of publicly available information.
Upon terminating the registration of our common stock under the Exchange
Act, our duty to file periodic reports with the Commission will be suspended.
Information about our operations and financial results that is currently
available to the general public and our investors will not be available after
we have terminated the registration of our common stock. Upon the termination
of our filing obligations with the Commission, investors seeking information
about us will have to contact us directly to receive such information. We can
not assure you that we will provide the requested information to an investor.
While our directors acknowledge the circumstances in which such termination of
publicly available information may be disadvantageous to our stockholders,
they believe that the overall benefits to the Company of no longer being a
public reporting company substantially outweigh the disadvantages thereof,
and, accordingly, the Company believes that termination of publicly available
information does not outweigh the advantages of going private, which is in the
best interests of the Company's stockholders.
(3) Termination of public company obligations.
Once our common stock ceases to be registered under the Exchange Act, the
Company will no longer be subject to public company obligations, such as the
provisions of Sarbanes-Oxley or the liability provisions of the Exchange Act.
Although we will no longer be required to file financial statements with the
Commission or to provide such information to stockholders, any financial
statements we choose to provide will no longer be required to be certified by
the officers of the Company.
(4) Possible significant decline in the value of the common stock.
Because of the limited liquidity for our common stock (as described in
paragraph (1) above), the termination of the Company's obligation to make
public financial and other information expected to result following the
Reverse Stock Split and the deregistration of the Common Stock under the
Exchange Act (as described in paragraph (2) above), and the diminished
opportunity for stockholders of the Company to monitor the management of the
Company due to the lack of public information, Continuing Stockholders may
experience a significant decrease in the value of their shares of Common
Stock.
(5) Inability to participate in any future increases in the value of our
common stock.
Cashed Out Stockholders will have no further financial interest in the
Company with respect to their cashed out shares and thus will not have the
opportunity to participate in the potential appreciation in the value of such
shares. However, those unaffiliated stockholders who wish to remain
stockholders after the Reverse Stock Split can do so by acquiring additional
shares so that they own at least 100,001 shares of common stock immediately
before the Reverse Stock Split.
17
Alternatives to the Reverse Stock Split.
----------------------------------------
Our Board of Directors considered the feasibility of the reverse stock
split only as it related to the alternative of preserving the status quo. If
we were to maintain the status quo, we would continue to incur the expenses of
being a public reporting company without enjoying the benefits traditionally
associated with public company status. The Board of Directors believes that
maintaining the status quo is not in the best interests of the Company and
rejected this alternative.
We did not consider other alternatives, such as a traditional stock
repurchase program or a tender offer to unaffiliated stockholders, because of
the limited historical trading volume of our common stock and the lack of
assurance that a sufficient number of stockholders would participate in a
tender offer to ensure a sufficient reduction in the number of stockholders to
allow us to go private.
Fairness of the Reverse Stock Split.
------------------------------------
Based on their consideration of the following factors, our Board of
Directors and Golden Oak, our majority stockholder, and LCIS determined that
the Reverse Stock Split would be substantively and procedurally fair to the
Cashed Out Stockholders:
* The Reverse Stock Split was unanimously approved by the Board of
Directors, including all of its independent directors.
* The fact that all stockholders will have some ability to remain
stockholders of the Company by purchasing additional shares so that they own
at least 100,001 shares of Common Stock immediately before the effectiveness
of the Reverse Stock Split. Although it may be difficult for a stockholder to
purchase enough shares to retain an equity interest in the Company due to the
limited trading market for the Common Stock, some stockholders should be able
to purchase a sufficient number of shares to achieve this purpose.
* The fairness of the price offered to the Cashed Out Stockholders, as
discussed above under the subheading "Advantages of the Reverse Stock Split."
* The Reverse Stock Split has been structured in such a way that it can
be quickly implemented. The Company has access to sufficient financial
resources to complete the transaction expeditiously, and there are no unusual
requirements or conditions to its completion.
Our Board of Directors and Golden Oak and LCIS considered several
factors in determining that the Reverse Stock Split is substantively and
procedurally fair to those stockholders who will remain after the transaction
because they owned 100,001 or more shares prior thereto, whether or not these
Continuing Stockholders are deemed to be affiliates of the Company. Although
the transaction will result in the loss of the protections of the Exchange Act
for the Continuing Stockholders and the loss of the ability to trade the
Common Stock on the OTC Bulletin Board, our Board of Directors and Golden Oak
and LCIS have determined that the Reverse Stock Split is substantively and
procedurally fair to such stockholders for the following reasons:
* The Reverse Stock Split was unanimously approved by the Board of
Directors, including all of its independent directors.
* The Reverse Stock Split has been structured in such a way that it can
be quickly implemented. The Company has access to sufficient financial
resources to complete the transaction expeditiously, and there are no unusual
requirements or conditions to its completion.
* The Company and its stockholders currently receive little benefit from
our status as a public company due to our very small size, the lack of analyst
coverage and the very limited trading in our Common Stock.
* Terminating the Company's registration under the Exchange Act would
reduce its annual out-of-pocket expenses by approximately $72,000 and save
management considerable time and effort that is currently being expended to
comply with Exchange Act provisions.
18
* The percentage ownership held by each Continuing Stockholder will be
approximately the same as it was immediately prior to the Reverse Stock Split,
regardless of that person's status as an affiliate or non-affiliate of the
Company.
In determining the fairness of the Reverse Stock Split to the Cashed
Out Stockholders and the Continuing Stockholders, neither our Board of
Directors, Golden Oak nor LCIS assigned any specific weights to the above
factors.
The Reverse Stock Split is not structured so that approval of at least a
majority of unaffiliated stockholders is required. The Board of Directors
determined that any such voting requirement would usurp the power of the
holders of a majority of the Company's outstanding shares to consider and
approve the Reverse Stock Split as permitted under Nevada law and the
Company's organizational documents.
The Company has not retained any unaffiliated representative to act
solely on behalf of unaffiliated security holders for purposes of negotiating
the Reverse Stock Split. No independent committee of the Board has reviewed
the fairness of the Reverse Stock Split.
In December, 2005, we engaged John H. Jaques, Inc., ("Jaques") to prepare
a Summary Stock Valuation of the Company for purposes of determining the
fairness of the consideration to be paid to the Cashed Out Stockholders (the
"Valuation"). Jaques did not recommend the amount of consideration, but the
Company has used its Valuation in its analysis of the fairness of such
consideration. In this regard, our Board of Directors adopted Jaques'
conclusions and analysis as its own.
In preparing its Valuation, Jaques examined 3-3/4 years of the Company's
audited and unaudited financial statements, employee statistics, client
information, carrier information and a historical narrative. Jaques compared
this information to industry standards, norms and practices for similar
organizations. The Valuation was prepared in conformance with general
guidelines established by the Internal Revenue Service in Revenue Ruling 59-
60, and its subsequent modifications and amplifications.
Jaques analyzed the Company's tangible net worth (i.e., its book value)
and its enterprise value (i.e., the value of business operations, client
accounts, working capital and any goodwill and covenants not to compete). Two
factors involved in the determination of enterprise value were the Company's
earnings capacity (i.e., reasonable profit expectation) and inherent risk that
this earnings capacity may not be maintained over time.
Using these criteria, Jaques determined that the Company's tangible net
worth at September 30, 2005 was $1,695,000. This figure was obtained by
subtracting adjusted total liabilities of $10,265,335 from adjusted tangible
assets of $11,960,270.
Based on the Company's reported revenues, expense and pre-tax profit for
the trailing 12 months ended September 30, 2005, Jaques determined its pro
forma sustainable earnings to be $767,000. When multiplied by 4.5, which is
on the conservative end of the 4.5 to 6.5 range for value multiples applied to
acquisitions by insurance brokerages of related non-brokerage firms,
enterprise value was determined to be $3,452,000. When combined with the
Company's tangible net worth of $1,695,000, Jaques determined the Company's
total value to be $5,147,000. Based on 32,076,846 outstanding shares after
the redemption of the Cashed Out Stockholders' shares, Jaques arrived at a
value of $0.1674 per share.
19
The Valuation will be made available for inspection and copying at the
Company's principal executive offices during its regular business hours by any
interested equity security holder of Birch or any representative who has been
so designated in writing.
John H. Jaques, the founder of Jaques, is in his 27th year of consulting
in the insurance industry. His specialty services in the areas of agency
mergers, acquisitions, sales, perpetuation, family transfers, valuations and
buy-sell agreements, have been accessed by over 750 agencies since 1978.
Ownership transactions exceeding $175 million in agency commissions have been
completed over the last five years.
Mr. Jaques has a degree in finance from San Francisco State University,
has served as an officer for Fireman's Fund Insurance Companies, and has been
a producer. He has published numerous articles in industry trade journals,
has spoken at over 50 industry conventions or workshops, including the
National Conventions of the PIA and IIAA, and has written two workbooks for
use by agency managers: "A Guide to Agency/Broker Ownership Transfers"
published by the national IIAA, and "Producer Planning, Compensation and
Equity Options," marketed by the national PIA.
Jaques was selected to perform our stock valuation based on our positive
experience with prior consulting services that it had performed for us and for
LCIS. Jaques is paid a $3,000 monthly retainer for the purpose of providing
recommendations to Birch and LCIS on the value of their respective stock, and
to assist in providing analysis and recommendations on the going private
transactions. The fee is a flat monthly amount, is not tied to or dependent
on what the value of the stock may be, and is not contingent on the merger
occurring. Neither Mr. Jaques nor his firm owns any stock or other interest
in Birch or LCIS.
PROPOSAL NO. 1: AMENDMENT TO THE COMPANY'S ARTICLES OF INCORPORATION TO
EFFECT THE REVERSE STOCK SPLIT
General.
--------
At the Company's January 5, 2005, joint planning session, the
following directors and executive officers were appointed to serve on an ad
hoc committee to implement the privatization of the Company and its merger
with LCIS:
* John Alsdorf (Chairman of Golden Oak);
* Mickey Strauss (Chairman of LCIS):
* Barry Cohen (Chairman of Birch);
* Keith Walton (Treasurer/CFO of Birch);
* Nelson Colvin (President/CEO of Birch and Golden Oak); and
* Lebo Newman (director of all companies).
Also in attendance at the meeting were:
* Richard Angelo (Treasurer of Golden Oak);
* Ron Dietz (director of all companies);
* Frank Quaresma (director of all companies);
20
* Tim Nord (director of all companies);
* Ken Chase (director of Golden Oak and LCIS);
* Allen Chariton (director of LCIS);
* Steve Hartman (President/CEO of LCIS);
* Jerry Elson (former President of LCIS);
* Kim Logue Ayala (Vice President, Operations of LCIS);
* Barbara Alvarez (President, California Landscape Contractors
Association);
* John Jaques (consultant).
The committee met at a telephonic meeting held April 7, 2005. With the
exception of Mr. Newman, all of the committee members were in attendance.
Also in attendance were Messrs. Dietz, Quaresma and Jaques, as well as Birch
accountant Russ Anderson and Birch's securities attorneys, Leonard W.
Burningham and Branden T. Burningham.
The following points were discussed at the meeting:
* Since going public in late 1999, with the intent of raising enough
capital not to have to rely on its line of credit for funding its insurance
premium financing operations, the Company has not been able to sell an
appreciable number of shares. In addition, management had reviewed several
potential "market makers" for the Company's common stock, with no strong
recommendations being made. Several market makers expressed concerns that the
Company was too "closely held" and that potential major investors would be
reluctant to invest in a company that has such a large percentage of its
shares held my such a small number of stockholders. Other broker-dealers had
expressed a willingness to act as market makers, but the Company's management
believed that the expenses in this regard would be too high.
* Following any planned "going private" transaction, the Company's
management team will stay in place and the Company will continue to operate as
in the past.
* Golden Oak, LCIS and Birch provide various services to members of
the California Landscape Contractors Association ("CLCA"). For example,
Golden Oak provides safety and equity sharing programs; LCIS offers insurance
policies to CLCA members; and Birch offers insurance premium financing to CLCA
members. All of these services are available only to CLCA members. A reverse
split ratio of one for 100,001 would eliminate almost all Company stockholders
who are not CLCA members and who are thus ineligible to participate in the
programs offered by Golden Oak, LCIS and Birch. In addition, a one for
100,001 reverse split ratio would reduce the number of Continuing Stockholders
to 35 or fewer, which will make it more likely that LCIS will be able to rely
on the exemption from registration provided by Rule 506 of Regulation D of the
Commission when it issues it shares to the Continuing Stockholders in
connection with the merger. The availability of this exemption would allow
LCIS to issue these shares without registering them with the Commission,
thereby saving substantial time and expense. No other ratios were considered.
* The amount of the cash payment to the Cashed Out Stockholders was
determined based on several factors:
a. The average trading range of the Company's common stock over the
past year was between $0.12 and $0.17 per share.
b. The Company has been unable to sell its shares for more than
$0.25 per share, with the exception of the 33,000 shares that were sold at
$1.00 per share, and which the Company decided to buy back at the original
purchase price.
21
c. Offering a $0.02 premium over the $0.25 purchase price would
allow the Cashed Out Stockholders to recapture their investment, plus a small
premium.
Based on the foregoing, the Reverse Stock Split and the merger were
approved by the Company's Board of Directors at a meeting held on July 14,
2005. Based on the price being offered to the Cashed Out Stockholders and the
other factors discussed under the subheading "Fairness of the Reverse Stock
Split," above, our Board felt that the offer was substantively and
procedurally fair.
Our Board of Directors has unanimously authorized the Reverse Stock
Split, which will consist of an amendment of our Articles of Incorporation to
effect a reverse split of our outstanding 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 cash
consideration equal to $0.27 per pre-split share. The Reverse Stock Split
will take effect on the date that we file a Certificate of Amendment to our
Articles of Incorporation with the Secretary of State of Nevada, or on any
later date that we specify in the Certificate of Amendment. At that time,
each holder of 100,001 shares of our common stock immediately before the
Reverse Stock Split will receive one share of our common stock in exchange for
such pre-split shares, with fractional shares to be received in exchange for
blocks of shares that are not evenly divisible into 100,001. For example, a
stockholder holding 150,000 pre-split shares will receive 1.5 shares as a
result of the Reverse Split.
Any stockholder holding less than 100,001 shares of our common stock
immediately before the Reverse Stock Split will have the right to receive cash
in exchange for the resulting fractional share thereof and will no longer be a
stockholder of the Company. This cash payment will be equal to $0.27 for
every share of common stock held by such stockholder immediately prior to the
Reverse Stock Split.
As of September 12, 2005, the most recent practicable date prior to
the date of this Information Statement, there were 32,076,846 outstanding
shares of our common stock and approximately 526 stockholders of record. As
of that date, approximately 503 holders of record held less than 100,001
shares of common stock. As a result, we believe that the Reverse Stock Split
will reduce the number of record holders to approximately 23. The foregoing
figures take into account our recent buyback of a total of 33,000 shares from
11 stockholders to whom we had sold shares in a private placement in 2001, at
a price of $1.00 per share. In the interest of fairness to these
stockholders, we repurchased these shares at the original offering price of
$1.00 per share. Management believed that it would be unfair to these
stockholders to pay them only $0.27 per share in connection with the merger
when they had paid $1.00 per share and virtually all of our other stockholders
had either acquired their shares without cash consideration in connection with
the transaction by which we acquired Birch Financial, Inc., a Missouri
corporation in December, 1999, or prior to the date of that transaction.
Dissenters' Appraisal Rights with Respect to the Reverse Stock Split.
---------------------------------------------------------------------
Under Nevada law, Company stockholders who dissent from the Reverse Stock
Split are not entitled to any appraisal rights with respect to their shares.
However, in the interest of fairness and giving our stockholders additional
options with respect to the Reverse Stock Split, our Board of Directors has
determined to grant dissenter's rights of appraisal in this matter. If you
wish to dissent and you comply strictly with the applicable provisions of
Section 92A.440 of the Nevada Revised Statutes (the "NRS"), you will have the
right to dissent and be paid cash for the fair value of your shares of the
Company's common stock. To perfect these appraisal rights with respect to the
Reverse Stock Split, you must follow the required procedures precisely. A
copy of Sections 92A.300 to 92A.500 of the NRS is attached to this Information
Statement as Appendix A.
22
Sections 92A.300 to 92A.500 the NRS entitle any Company stockholder who
objects to the Reverse Stock Split and who follows the procedures prescribed
by Section 92A.440 to receive cash equal to the "fair value" of such
stockholder's shares of the Company. Set forth below is a summary of the
procedures relating to the exercise of such dissenters' rights. This summary
does not purport to be a complete statement of dissenters' rights and is
qualified in its entirety by reference to Sections 92A.300 to 92A.500 of the
NRS, which are reproduced in full as Appendix A to this Information Statement.
Any stockholder contemplating the possibility of dissenting from the
Reverse Stock Split should carefully review the text of Appendix A
(particularly the specified procedural steps required to perfect the
dissenters' rights, which are complex) and should also consult such
stockholder's legal counsel. Such rights will be lost if the procedural
requirements of Section 92A.440 of the NRS are not fully and precisely
satisfied.
The Company has granted dissenters' rights for any stockholder who
objects to the Reverse Stock Split and who meets the requisite statutory
requirements contained in the NRS. Under the NRS, any objecting stockholder
shall be entitled, once the Reverse Stock Split is consummated, to receive a
cash payment of the fair value of such stockholder's shares of Company stock
upon compliance with the applicable statutory procedural requirements. A
stockholder who does not so object will have no dissenters' rights with
respect thereto. A stockholder who does not satisfy each of the requirements
of Section 92A.440 of the NRS is not entitled to payment for such
stockholder's shares under the dissenters' rights provisions of the NRS and
will be bound by the terms governing the subject transaction.
The Company must send written notice to all objecting stockholders. The
notice must be sent no later than 10 days after the effectuation of the
Reverse Stock Split, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
23
(d) Set a date by which the Company must receive the demand for payment,
which may not be less than 30 nor more than 60 days after the date the notice
is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
Prior to the Effective Date of the Reverse Stock Split, a stockholder
exercising dissenters' rights retains all the other rights of a Company
stockholder. From and after such Effective Date, dissenting shareholders will
no longer be entitled to any rights of a Company stockholder, including, but
not limited to, the right to receive notice of meetings, to vote at any
meetings or to receive dividends, and will only be entitled to any rights to
appraisal as provided by the NRS.
After the Effective Date of the Reverse Stock Split, or upon receipt of a
valid demand for payment, whichever is later, the Company must remit to each
dissenting shareholder who complied with the requirements of the NRS the
amount that the Company estimates to be the fair value of such stockholder's
shares of common stock, plus interest accrued from the effective time of the
sale to the date of payment. The payment also must be accompanied by certain
financial data relating to the Company, the Company's estimate of the fair
value of the shares and a description of the method used to reach such
estimate, and a copy of the applicable provisions of the NRS with a brief
description of the procedures to be followed in demanding supplemental
payment. The dissenting stockholder may decline the offer and demand payment
for the fair value of the Company's stock. The dissenting shareholder waives
his right to demand payment unless he notifies the Company of his demand in
writing within 30 days after the Company makes or offers payment for his
shares.
If demand for payment remains unsettled, the Company shall, within 60
days after receiving the demand, file in court a petition requesting that the
court determine the fair value of the Company's stock. If the proceeding is
not filed within the 60 day period, the Company shall pay each dissenter whose
demand remains unsettled the amount demanded.
The court may appoint one or more appraisers to receive evidence and make
recommendations to the court on the amount of the fair value of the shares.
The court shall determine whether the dissenting shareholder has complied with
the requirements of Section 92A.440 of the NRS and shall determine the fair
value of the shares, taking into account any and all factors the court finds
relevant.
Costs of the court proceeding shall be determined by the court and
assessed against the Company, except that part or all of the costs may be
assessed against any dissenting shareholders whose actions in demanding
supplemental payments are found by the court to be arbitrary, vexatious or not
in good faith.
If the court finds that the Company did not substantially comply with the
relevant provisions of the NRS, the court may assess the fees and expenses, if
any, of attorneys or experts as the court deems equitable against the Company.
Such fees and expenses may also be assessed against any party in bringing the
proceedings if the court finds that such party has acted arbitrarily,
24
vexatiously or not in good faith, and may be awarded to a party injured by
those actions. The court may award, in its discretion, fees and expenses of
an attorney for the dissenting shareholders out of the amount awarded to such
shareholders, if any.
A stockholder of record may assert dissenters' rights as to fewer than
all of the shares registered in such stockholder's name only if he or she
dissents with respect to all shares beneficially owned by any one beneficial
stockholder and notifies the Company in writing of the name and address of
each person on whose behalf he or she asserts dissenters' rights. The rights
of such a partial dissenting shareholder are determined as if the shares as to
which he or she dissents and his or her other shares were registered in the
names of different shareholders.
Interest of Certain Persons in Matters to Be Acted Upon.
--------------------------------------------------------
The Company's executive officers and directors have interests in the
Reverse Stock Split that are in addition to, or different from, the
stockholders generally. These interests may create potential conflicts of
interest and include the following:
* Eight of our 10 directors and executive officers hold 100,001 or more
shares and will, therefore, retain shares of common stock after the Reverse
Stock Split;
* After the Reverse Stock Split, the directors and officers of the
Company will continue to hold the offices and positions they held immediately
prior to the Reverse Stock Split. Accordingly, any compensation agreements in
effect prior to the Reverse Stock Split will remain in effect after the
Reverse Stock Split;
* The stockholders who own 100,001 or more shares of our common stock
on the Effective Date of the Reverse Stock Split, including eight of the
Company's 10 directors and executive officers, will slightly increase their
percentage ownership interest in the Company because only an estimated
1,235,043 shares of common stock will be eliminated as a result of the Reverse
Stock Split. Based on information and estimates of record ownership and shares
outstanding and other ownership information and assumptions as of July 1,
2005, the beneficial ownership percentage of the Company's directors and
executive officers will increase from approximately 25% to approximately 26%;
* The legal exposure for board members of public companies has increased
significantly, especially in the aftermath of the Sarbanes-Oxley Act. While
there are still significant controls, regulations and liabilities for
directors and executive officers of private companies, the legal exposure for
the Company's directors and executive officers will be reduced after the
Reverse Stock Split.
Certain persons who own in excess of a majority of our outstanding voting
securities have agreed to vote in favor of the Reverse Stock Split. No other
votes are required or necessary to adopt and complete the Reverse Stock Split.
25
Escheat Laws.
-------------
The unclaimed property and escheat laws of each state provide that under
circumstances defined in that state's statutes, holders of unclaimed or
abandoned property must surrender that property to the state. Cashed Out
Stockholders whose shares are eliminated and whose addresses are unknown to
us, or who do not return their stock certificates and request payment,
generally will have a limited period of time after the transaction in which to
claim the cash payment. For example, with respect to Cashed Out Stockholders
whose last known addresses are in Delaware, as shown by the Company's records,
the period is five years. Following the expiration of that five-year period,
Delaware law would likely cause the cash payments to escheat to the State of
Delaware. For stockholders who reside in other states or whose last known
addresses, as shown by our records, are in states other than Delaware, such
states may have abandoned property laws which call for either (i) such state
to obtain custodial possession of property that has been unclaimed until the
owner reclaims it; or (ii) escheat of such property to the state. Under the
laws of such other jurisdictions, the "holding period" or the time period
which must elapse before the property is deemed to be abandoned may be shorter
or longer than as set forth under Delaware law.
Financial Information.
----------------------
26
BIRCH FINANCIAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004
[WITH REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM]
BIRCH FINANCIAL, INC.
Table of Contents
Page
Report of Independent Registered Public Accounting Firm 1
Consolidated Balance Sheet - December 31, 2004 2-3
Consolidated Statements of Income for the years ended December 31,
2004 and 2003 4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 2004 and 2003 5
Consolidated Statements of Cash Flows for the years ended December 31,
2004 and 2003 6
Notes to Consolidated Financial Statements 7-14
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Stockholders
Birch Financial, Inc.
Granada Hills, California
We have audited the accompanying consolidated balance sheet of Birch
Financial, Inc. (a Nevada corporation) and subsidiaries as of December 31,
2004, and the related consolidated statements of income, stockholders' equity,
and cash flows for the years ended December 31, 2004 and 2003. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with the standards established by
the Public Company Accounting Oversight Board (PCAOB). Those standards
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. The
Company has determined that it is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audit
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company's internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Birch Financial,
Inc. and subsidiaries as of December 31, 2004, and the results of their
operations and their cash flows for the years ended December 31, 2004 and
2003, in conformity with accounting principles generally accepted in the
United States of America.
/s/ Mantyla McReynolds
Mantyla McReynolds
March 15, 2005
Salt Lake City, Utah
BIRCH FINANCIAL, INC.
Consolidated Balance Sheet
December 31, 2004
December 31,
2004
ASSETS
Current Assets
Cash - Note 1 $ 104,177
Premium financing receivable, net - Note 1 9,137,080
Premium financing cancellation receivable - Note 2 114,760
Prepaid expense 2,162
Equipment financing receivable - current portion -
Notes 1 & 4 411,249
-----------
Total Current Assets 9,769,428
Other Assets
Equipment financing receivable, net of current
portion - Notes 1 & 4 690,562
Deferred tax asset - Note 3 2,715
-----------
Total Other Assets 693,277
TOTAL ASSETS $10,462,705
===========
See accompanying notes to financial statements
F-2
BIRCH FINANCIAL, INC.
Consolidated Balance Sheet
(continued)
December 31, 2004
December 31,
2004
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Current Liabilities
Cash overdraft $ 483,974
Accounts payable 7,731
Unfunded premium financing payable - Related Party
- Note 2 717,485
Line of credit - Note 5 6,507,900
Notes payable - Related Party - Note 2 826,990
Security deposits payable 68,582
Income taxes payable 102,513
-----------
Total Current Liabilities 8,715,175
-----------
TOTAL LIABILITIES 8,715,175
STOCKHOLDERS' EQUITY - Note 6
Preferred stock - 10,000,000 shares authorized at
$0.01 par; no shares issued and outstanding 0
Common stock - 200,000,000 shares authorized at
$0.01 par; 32,109,848 shares issued and outstanding 321,098
Paid in capital 251,643
Retained earnings 1,174,789
-----------
TOTAL STOCKHOLDERS' EQUITY 1,747,530
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $10,462,705
===========
See accompanying notes to financial statements
F-3
BIRCH FINANCIAL, INC.
Consolidated Statements of Income
for the years ended December 31, 2004 and 2003
Year Year
ended ended
December 31, December 31,
2004 2003
Financing Income
Premium financing $1,244,738 $1,098,139
Equipment financing 105,443 70,085
---------- ----------
Total Financing Income 1,350,181 1,168,224
Financing Expense
Premium financing 342,764 275,144
Equipment financing - Related Party - Note 2 33,094 30,568
---------- ----------
Total Financing Expense 375,858 305,712
Gross Profit 974,323 862,512
Selling, General and Administrative Expense 216,961 355,309
---------- ----------
Operating Profit 757,362 507,203
Other Income
Interest income 2,260 5,027
---------- ----------
Total Other Income 2,260 5,027
Income Before Tax Provision 759,622 512,230
Provision for Income Taxes (314,001) (213,752)
---------- ----------
Net Income $ 445,621 $ 298,478
========== ==========
Net income per common share $ 0.01 $ 0.01
========== ==========
Weighted average common shares outstanding 32,109,848 32,109,848
========== ==========
See accompanying notes to financial statements
F-4
BIRCH FINANCIAL, INC.
Consolidated Statements of Stockholders' Equity
for the years ended
December 31, 2004 and 2003
Additional Total
Number of Common Paid-in Retained Stockholders'
Shares Stock Capital Earnings Equity
Balance,
December 31, 2002 32,109,848 $321,098 $251,643 $ 430,690 $1,003,431
Net income for 2003 298,478 298,478
---------- -------- -------- ---------- ----------
Balance,
December 31, 2003 32,109,848 321,098 251,643 729,168 1,301,909
Net income for 2004 445,621 445,621
---------- -------- -------- ---------- ----------
Balance,
December 31, 2004 32,109,848 $321,098 $251,643 $1,174,789 $1,747,530
========== ======== ======== ========== ==========
See accompanying notes to financial statements
F-5
BIRCH FINANCIAL, INC.
Consolidated Statements of Cash Flows
for the years ended
December 31, 2004 and 2003
Year Year
ended ended
December 31, December 31,
2004 2003
Cash Flows from Operating Activities:
Net Income $ 445,621 $ 298,478
Adjustments to reconcile net income to net cash
provided by operating activities:
Decrease (increase) in prepaids & other
receivables (2,162) 0
Decrease (increase) in deferred tax asset 6,890 10,602
Increase (decrease) in unfunded premium
financing payable (240,001) 199,578
Increase (decrease) in accounts payable &
accrued liabilities (1,565) (1,506)
Increase (decrease) in management fees payable -
related party (121,558) 37,496
Increase (decrease) in security deposits payable 20,685 19,643
Increase (decrease) in income taxes payable 38,040 (1,159)
----------- ----------
Net Cash Provided from Operating Activities 145,950 563,132
Cash Flows from Investing Activities:
Increase in premium financing receivable (421,626) (2,150,779)
Increase in equipment financing receivable (219,092) (54,221)
----------- ----------
Net Cash Used for Investing Activities (640,718) (2,205,000)
Cash Flows from Financing Activities:
Increase (decrease) in cash overdraft 63,954 (467,338)
Increase in line of credit 327,327 1,901,579
Increase in notes payable - Related Party 57,927 73,177
----------- ----------
Net Cash Provided by Financing Activities 449,208 1,507,418
Net Increase (decease) in Cash (45,560) (134,450)
Beginning Cash Balance 149,737 284,187
----------- ----------
Ending Cash Balance $ 104,177 $ 149,737
=========== ==========
Supplemental Disclosure Information:
Cash paid during the year for interest $ 375,858 $ 313,907
Cash paid during the year for income taxes $ 269,071 $ 138,677
See accompanying notes to financial statements
F-6
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 Summary of Significant Accounting Policies
Nature of Operations
The Company incorporated under the laws of the State of Nevada on April
20, 1983, as Import Dynamics, Inc. between April 30, 1985 and April 17,
1991, the Company changed its name to Peak Performance Products, Inc.,
LumaLure Manufacturing, Inc., Sairam Technologies, Ltd., and Balanced
Environmental Services Tech, Inc. On July 16, 1993, the Company changed
its name to United States Indemnity & Casualty, Inc. The Company ceased
operations in 1993 and was inactive until December 1999, when the Company
acquired Birch Financials, Inc. a Missouri corporation (Birch MO), in
exchange for 31,553,948 shares of its common stock. The Company then
changed its name to Birch Financial, Inc.
Birch MO was incorporated on February 25, 1999 in the State of Missouri.
Immediately after its incorporation, Birch MO acquired 100% of the
outstanding stock of Birch Financial, Inc., a California corporation
(Birch CA), in exchange for its own stock. Neither the Company nor Birch
MO has significant assets or business activities. The consolidated
financial statements primarily reflect the financial position, results
of operations and cash flows of Birch CA.
Birch CA was incorporated in the State of California on June 13, 1994.
Its primary business is that of insurance premium financing. Birch CA
finances insurance premiums that are brokered by the majority
shareholders of the Company. The premium financing contracts are
typically financed for a period of nine months and are collateralized by
insurance policies with a term of twelve months. The Company is also
engaged in equipment financing. Equipment financing contracts are
financed for a period of one to five years and are collateralized by
equipment.
Accounting Method
The accompanying consolidated financial statements have been prepared in
accordance with U.S. generally accepted accounting principles. The
following is a summary of the more significant of such policies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Birch Financial, Inc. and its 100% owned subsidiaries, Birch MO and
Birch CA. All significant intercompany balances and transactions are
eliminated.
F-7
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 Summary of Significant Accounting Policies (continued)
Statement of Cash Flows
Cash is comprised of cash on hand or on deposit in banks. The Company
had $104,177 and $149,737 at December 31, 2004 and 2003. At times
during the year the Company maintains more than $100,000 in one bank.
Cash is only insured by the Federal Deposit Insurance Corporation (FDIC)
up to $100,000. Funds in excess of $100,000 are not insured by the FDIC
or any other Federal agency. As of the balance sheet date the Company
had $96,177 in a single bank. Cash overdraft consists of outstanding
checks that have not yet cleared the bank.
Deferred Income Taxes
The Company complies with Statement of Financial Accounting Standard
(SFAS) No. 109, "Accounting For Income Taxes," which requires the asset
and liability method of accounting for income taxes. The asset and
liability method requires that the current or deferred tax consequences
of all events recognized in the financial statements are measured by
applying the provisions of enacted tax laws to determine the amount of
taxes payable or refundable currently or in future years. See Note 3
below.
Net Income Per Common Share
Net income per common share is based on the weighted average number of
shares outstanding during the periods shown. The Company had no common
stock equivalents outstanding at December 31, 2004 and 2003.
Use of Estimates
The preparation of financial statements in conformity with U.S.
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
F-8
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 Summary of Significant Accounting Policies (continued)
Financing Income
Interest income on premium financing contracts is computed based on the
method stipulated in the contracts, which in all cases is the "Rule of
78's" method. The difference between the Rule of 78's method of interest
recognition and the effective interest method required by U.S. generally
accepted accounting principles for the period covered by these financial
statements has been determined to be immaterial.
Interest income on equipment financing contracts is computed based on
the effective interest method. Late charges are recognized as income
when payment for such charges is received. Recoveries of loans and
receivables previously charged off are recognized as income when
received.
Receivables
The Company complies with SOP 01-06, "Accounting by Certain Entities
(Including Entities with Trade Receivables) That Lend to or Finance the
Activities of Others" ("SOP 01-06"). SOP 01-06 addresses disclosures on
accounting policies relating to trade accounts receivable. Premium
financing receivables, which have a term of not more than nine months,
are stated at outstanding principal balance, net of direct charge-offs
and allowance for uncollectible accounts. Charge-offs are deducted from
receivables when they are deemed uncollectible. The allowance for
uncollectible accounts is calculated as the principal amounts 180 days
past due, that amount being $6,055 at December 31, 2004. Management
believes this method to be adequate based on the Company's history
coupled with the Company's ability to cancel insurance contracts for
non-payment and receive early termination refunds directly from the
insurance company.
The Company accounts for impaired loans in accordance with Statement of
Financial Accounting Standards (SFAS) No. 114 "Accounting by Creditors
for Impairment of a Loan" as amended by SFAS 118. These standards
require that all creditors value loans at the loan's fair market value
if it is probable that the creditor will be unable to collect all
amounts due according to the terms of the loan agreement. Equipment
financing receivables, which have a term of one to five years, are
stated at outstanding principal balance, net of allowance for
uncollectible accounts, which approximates fair value. Management has
not included an allowance for uncollectible equipment financing
receivables due to a history of no credit losses on such loans. These
loans are secured by equipment and the Company has security deposits in
the amount of $68,582 at December 31, 2004.
The interest rates earned on the premium financing receivables as of the
balance sheet date range from 9% for larger premiums to 23% for smaller
premiums. The interest rates earned on the equipment financing
receivables as of the balance sheet date range from 3% to 3.5% above
prime, which was 5.25% on the balance sheet date.
F-9
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 Summary of Significant Accounting Policies (continued)
Web Site Development Costs
The Company accounts for web site development costs in accordance with
Emerging Issues Task Force (EITF) No. 00-2. Accordingly, all costs
incurred in the planning stage are expensed as incurred, costs incurred
in the web site application and infrastructure development stage are
accounted for in accordance with Statement of Position (SOP) 98-1 which
requires the capitalization of certain costs that meet specific
criteria, and costs incurred in the day to day operation of the web site
are expensed as incurred.
Recently Issued Financial Accounting Standards
In December 2004, the FASB issued SFAS No. 123R, Share-based Payment.
This standard is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and its related implementation
guidance. SFAS No. 123R requires the measurement of the cost of
employees services received in exchange for an award of the entity's
equity instruments based on the grant-date fair value of the award. The
cost will be recognized over the period during which an employee is
required to provide service in exchange for the award. No compensation
cost is recognized for equity instruments for which employees do not
render service. The Company will adopt SFAS No. 123R on July 1, 2005,
which will require stock-based compensation expense to be recognized
against earnings for the portion of outstanding unvested awards, based
on the grant date fair value of those awards calculated using a Black-
Scholes pricing model under SFAS 123 for pro forma disclosure. The
Company is currently evaluating to what extent the entity's equity
instruments will be used in the future for employees services and the
transition provisions of this standard; therefore, the impact to the
Company's financial statements of the adoption of SFAS No. 123R cannot
be predicted with certainty.
In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, Inventory Pricing, to clarify that
for abnormal amounts of idle facility expense, freight, handling costs,
and wasted material (spoilage), should be expensed as incurred and not
included in overhead. In addition, this Statement requires the
allocation of fixed production overheads to the costs of conversion be
based on the normal capacity of the production facilities. The
provisions in SFAS No. 151 are effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. The Company is
currently assessing the impact of SFAS no. 151 on its consolidated
financial statements.
F-10
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 1 Summary of Significant Accounting Policies (continued)
Recently Issued Financial Accounting Standards (continued)
In December 2004, the FASB issued Staff Position No. FAS 109-1,
Application of FASB Statement No. 109, Accounting for Income Taxes, to
the tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004 (the "Act") that provides a tax
deduction on qualified production activities. Accordingly FASB indicated
that this deduction should be accounted for as a special deduction in
accordance with FASB Statement No. 109. The Company will comply with the
provisions of FSP 109-1 effective January 1, 2005, and does not believe
that the adoption of this FASB Staff Position will have a material
impact on the Company's financial statements.
In December 2004, the FASB issued Staff Position No. FAS 109-2,
Accounting for Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004 ("the Act"). The
Act introduced a special one-time dividends received deduction on the
repatriation of certain foreign earnings to a U.S. taxpayer, provided
certain criteria are met. FAS 109-2 provides accounting and disclosure
guidance for the repatriation provision, and was effective immediately
upon issuance. The Company does not believe that the adoption of FAS
109-2 will have a material impact on the Company's financial statements.
NOTE 2 Related Party Transactions
The Company obtains its premium financing business largely through an
entity that has the same management and directors as the Company. As of
December 31, 2004 and 2003, the company had an unfunded premium
financing payable due to this related party of $717,485 and $957,486,
respectively.
F-11
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 2 Related Party Transactions (continued)
The Company had a premium financing cancellation receivable due from the
same related party of $114,760 and $342,093 at December 31, 2004 and
2003. The cancellation receivable is a result of the early termination
of insurance policies for which the premium has been paid in full.
The Company borrowed funds from a related party to fund its equipment
financing business. At December 31, 2004, the Company had notes payable
to the related party totaling $826,990, due on demand and bearing
interest at 5.25%. During 2004, the company paid this related party for
administration fees in the amount of $24,800.
F-11
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 2 Related Party Transactions (continued)
The Company was obligated to pay a management fee bonus to a management
company controlled by its executive officer. The fee was based on the
Company's net income before tax and certain other expenses. The fee was
payable annually following the year in which it was earned. The
obligation to this party terminated during 2003. For the years ended
December 31, 2004 and 2003, the Company accrued $0 and $121,558, and
paid $121,558 and $84,062 to the management company, respectively.
During 2003, the Company also paid a fixed management fee to the same
entity in the amount of $4,000 per month. The management services
received included the use of administrative employees and systems as
well as office space.
NOTE 3 Accounting for Income Taxes
In accordance with SFAS 109, the Company has recorded a provision for
income taxes of $314,001 and $213,752 for the years ended December 31,
2004 and 2003. Income tax liabilities per initial tax returns for the
same periods totaled $304,293 and $203,150. A deferred tax asset has
been recorded due to timing differences, namely amortization and bad
debt expense, of the current year, not currently deductible for income
tax purposes. No valuation allowance has been recorded because
management believes that there is a greater than 50% likelihood that the
deferred tax asset will be fully realized in future years. The deferred
tax asset has been calculated as follows:
December 31, 2004
Deferred federal deductions at 34% rate $2,059
Deferred state deductions at 10.84% rate 656
------
Total deferred tax asset $2,715
======
F-12
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 3 Accounting for Income Taxes (continued)
Income tax expense differs from amounts computed by applying the
statutory Federal rate to pretax income as follows:
Years ended December 31,
2004 2003
Expected Federal tax on net income before
taxes (34%) $ 258,183 $ 174,158
Expected state tax on net income before
taxes (10.84%) 82,343 55,526
Effect of:
Benefit from state tax deduction on
Federal taxable income (30,562) (18,090)
Temporary differences and other 4,036 2,158
--------- ---------
Actual tax provision $ 314,001 $ 213,752
========= =========
NOTE 4 Equipment Financing Receivable
Scheduled principal reductions of the Company's long-term equipment
financing receivable at December 31, 2004 are as follows:
2005 $ 411,249
2006 340,268
2007 195,165
2008 105,438
2009 49,691
Thereafter 0
---------
$1,101,811
=========
F-13
BIRCH FINANCIAL, INC.
Notes to Consolidated Financial Statements
December 31, 2004
NOTE 5 Line of Credit Arrangement
The Company has a $10,000,000 line of credit with a bank for its normal
operating needs. Borrowing under this line is due on demand, bears
interest at the bank's prime lending rate (5.25% at December 31, 2004)
plus 0.5%, and is collateralized by the Company's premium financing
receivable. As of December 31, 2004 and 2003, the balance due under the
line was $6,507,900 and $6,180,573. According to the debt covenants,
should the Company's premium financing receivable balance fall below the
outstanding principle balance, at any given time, funds are immediately
callable by the creditor in the amount necessary to bring the principle
balance equal to the receivable balance. The Company is in compliance
with this covenant as of December 31, 2004.
NOTE 6 Equity Transactions
On November 8, 2004 the Company amended its Articles of Incorporation to
increase authorized common shares from 63,000,000 to 200,000,000. Par
value remained unchanged at $0.01. The Company also authorized
10,000,000 shares of preferred stock, par value $0.01, having such
rights and preferences as the Board of Directors shall determine. The
change in authorized shares did not require any adjustment to the
financial statements.
F-14
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
----------
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)
----------
Total Stockholders' Equity 2,055,397
----------
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
---------- ----------
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)
---------- ----------
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) -
--------- ----------
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
--------- ----------
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
Management's Discussion and Analysis or Plan of Operation.
- ----------------------------------------------------------
Results of Operations.
- ----------------------
Calendar year ended December 31, 2004.
--------------------------------------
In the calendar year ended December 31, 2004, we received total
financing income of $1,350,181, of which $1,244,738 came from our insurance
premium financing contracts; $105,443 came from equipment financing; and
$2,260 came from interest on our bank accounts. During the calendar year
ended December 31, 2003, total financing income was $1,168,224, with
$1,098,139 coming from insurance premium financing; $70,085 coming from
equipment financing; and $5,027 coming from interest on bank accounts.
These increases in revenue are entirely due to increased gross sales
in 2004, as compared to 2003. The agents for whom we offer insurance premium
financing had increased sales in 2004, and this increase resulted in more
insurance premium financing business for us. In addition, the landscape
contractors for whom we offer equipment financing purchased more equipment in
2004, which resulted in more equipment financing revenue for us. These
increased purchases are the result of new and improved equipment arriving on
the market and the sharp rise in the California housing market. As housing
prices continue to rise, homeowners move less and spend more money on
improvements to their existing houses. This creates more demand for landscape
contracting services and hence more demand for landscaping equipment and
financing services.
We began our equipment financing operations during the second
quarter of 2000. We paid total financing expenses of $375,858 during the
period, for gross profit of $974,323.
Our selling, general and administrative expenses during the calendar
year ended December 31, 2004, totaled $216,961. Our income before income tax
totaled $759,622. After provision for income taxes of $314,001, our net
income during the period was $445,621.
The rates charged for financing are based on the cost of the Line of
Credit we receive from First Bank. Our loan agreement states that we pay .5
percent over prime with a minimum of 5.5 percent. As prime went to 5.25%
December 15, 2004, there was no need to make any major adjustments for that
year. We have since modifed our interest rates as they have been increasing at
..25% per month. The new rate schedule has been modified and should be
effective for the rest of the 2005 at a minimum. Also rates for equipment
financing are view with each loan.
Calendar year ended December 31, 2003.
--------------------------------------
In the calendar year ended December 31, 2003, we received total
financing income of $1,168,224, of which $1,098,139 came from our insurance
premium financing contracts; $70,085 came from equipment financing; and $5,027
came from interest on our bank accounts. We paid total financing expenses of
$305,712 during the period, for gross profit of $862,512.
Selling, general and administrative expenses totaled $355,309 during
the calendar year ended December 31, 2003. Our income before income tax
totaled $512,230. After provision for income taxes of $213,752, our net
income during the period was $298,478.
We have established an equipment financing line of credit of up to
$1 million for Golden Oak, at the prime rate.
27
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 December 31, 2004, were $9,769,428, as
compared to total assets of $9,872,275 at December 31, 2003. Net premium
financing receivables were $9,137,080 at December 31, 2004, as compared to
$8,488,121 at December 31, 2003. The current portion of our equipment
financing receivables at December 31, 2004, was $411,249, versus $286,953 at
December 31, 2003. These increases reflect our increased sales during the
2004 calendar year.
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
December 31, 2004, our payable on the line of credit was $6,507,900. 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.
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.
28
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.
- --------------------------------
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.
The following combined consolidated pro forma balance sheet reflects all
of the transactions contemplated by the merger as though they had been
effectuated as of September 30, 2005.
LANDSCAPE CONTRACTORS INSURANCE SERVICES, INC.
BIRCH FINANCIAL, INC.
COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
ASSETS
Current Assets
Cash in banks and on hand $10,508,788
Certificates of deposit 2,400,000
Available for sale securities 226,977
Advances to parent company 366,869
Loan receivable 75,851
Accounts receivable 14,712,815
Other current assets 14,915
------
Total current assets $28,306,215
Property and Equipment-net 342,342
Other Assets
Accounts receivable-long-term 886,575
Cash surrender value of officer's
life insurance 63,362
Investment-partnership 3,614
Security deposit 2,575
Deferred tax 2,715 958,841
----- -------
Total Assets $29,607,398
==========
29
LANDSCAPE CONTRACTORS INSURANCE SERVICES, INC.
BIRCH FINANCIAL, INC.
COMBINED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2005
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Accounts payable $11,932,964
Line of credit 5,192,654
Notes payable 998,023
Rebates payable 6,392,466
Security deposits 86,316
Accrued liabilities 140,244
Income tax payable 294,322
Note payable- parent 82,259
------
$25,119,248
Shareholders' Equity
Common stock-no par value
Authorized 32,209,848 shares
Issued 32,114,848 shares 326,098
Additional paid-in capital 251,643
Retained earnings 3,943,409
Treasury stock (33,000 shares) (33,000)
-------
Total Shareholders' Equity 4,488,150
---------
Total Liabilities and Shareholders' Equity $29,607,398
==========
Ratio of Earnings to Fixed Charges.
- -----------------------------------
Nine months Fiscal year Fiscal year Fiscal year
ended 9/30/05 ended 12/31/04 ended 12/31/03 ended 12/31/02
------------- -------------- -------------- --------------
Reported Pre-
tax Profit $ 573,611 $ 759,622 $ 512,230 $ 352,249
Add: Interest
Expense
("Fixed
Charges") 335,822 375,858 305,712 214,782
------- ------- ------- -------
Earnings Before
Interest and
Taxes $ 909,433 $1,135,480 $ 817,942 $ 577,031
"Fixed Charges"
(Interest) 335,822 375,858 305,712 214,782
Ratio of Earnings
to Fixed Charges 2.71 3.02 2.68 2.69
30
Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure.
- -----------
During the past two fiscal years, there have been no changes in our
independent auditors.
PROPOSAL TWO: THE MERGER
General.
--------
Our Board of Directors has unanimously approved a merger in which LCIS
Acquisition Corp., a Nevada corporation ("Merger Subsidiary"), a wholly-owned
subsidiary of LCIS, will be merged with and into Birch, with Birch emerging as
the surviving corporation and as a wholly-owned subsidiary of LCIS. At the
closing of the merger, all of the current officers and directors of Birch will
remain in the capacities in which they served prior to the closing, and LCIS's
present directors and executive officers will continue to serve in their pre-
merger capacities. Both Birch and LCIS will also retain their current
Articles of Incorporation and Bylaws.
The merger will be completed upon filing of Articles of Merger with the
Secretary of State of Nevada. We expect that this will occur immediately
after the filing of the Certificate of Amendment by which we will effectuate
the Reverse Stock Split. The Merger Agreement is attached as Appendix B to
this Information Statement and is incorporated herein by reference. We
encourage you to read the Merger Agreement because it is the legal document
that governs the merger.
What Birch Stockholders Will Receive.
-------------------------------------
Birch's Continuing Stockholders will receive 7.32 shares of LCIS for
every post-split share that they own immediately before the closing of the
merger. Cashed Out Stockholders will not receive any LCIS shares in
connection with the merger, because their Birch shares will already have been
cashed out as part of the Reverse Stock Split.
As a result of the merger, all of the outstanding shares of Birch common
stock (other than dissenting shares) will be converted into a total of 2,250
shares of LCIS common stock, which will represent approximately 31% of the
outstanding shares of LCIS common stock following the merger.
31
The numbers set forth above are calculated based upon 5,000 outstanding
shares of LCIS common stock immediately prior to the date of the merger. If
that number changes before the closing of the merger, the per-share
consideration will be changed accordingly.
LCIS will issue its shares in reliance on the exemption from
registration provided by Rule 506 of Regulation D of the Commission and
Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act").
All shares of LCIS common stock received in the merger will be
"restricted securities," as defined in Rule 144 promulgated under the
Securities Act, and will be subject to restrictions on transfer and will bear
appropriate legends evidencing the restrictions on transfer required by
governing securities laws. Furthermore, because there is no public market for
LCIS' common stock, we expect that Birch stockholders who exchange their Birch
shares for LCIS shares will have virtually no liquidity for the shares that
they receive in the merger.
LCIS has never paid cash dividends. It expects to pay a dividend to
Golden Oak during 2005, but management of LCIS does not expect that the Birch
stockholders will participate therein. LCIS does not have any plans to pay
any additional dividend in the foreseeable future.
Ownership of Birch and LCIS Following the Merger.
-------------------------------------------------
Following the completion of the merger, LCIS will own all of the
outstanding shares of Birch, and Birch's former Continuing Stockholders will
own approximately 31% of LCIS. Golden Oak, which currently owns 100% of LCIS'
outstanding shares, will own approximately 69% of its outstanding shares
immediately after the closing of the merger. These figures are calculated
based upon 7,250 shares of LCIS common stock being outstanding immediately
after the merger. If the number of outstanding shares changes between that
date and the closing date, the per-share consideration will be changed
accordingly.
Background of and Reasons for the Merger.
-----------------------------------------
There is a long-standing and close relationship between Birch and LCIS.
For example, LCIS provides Birch with approximately 90% of its insurance
premium financing revenue. If it were to lose LCIS' business, Birch's Board
of Directors does not believe that Birch would have a viable business. In
addition, Golden Oak owns a majority of both companies' pre-merger outstanding
shares. It owns all of LCIS' shares and approximately 52% of Birch's common
stock. In addition, all of our directors also serve on LCIS' Board of
Directors. Due to these factors, our Board of Directors does not believe that
Birch merits its status as a public company independent of LCIS. We also
believe that both companies' accounting would be simplified, and that
potential conflicts of interest among their directors and officers would be
reduced, if Birch were to become a wholly-owned subsidiary of LCIS.
Furthermore, due to the overlap of both companies' Boards of Directors, each
company has a full understanding of the other's operations and history. We
believe that this will virtually eliminate the potential for unforeseen
problems resulting from the merger.
32
The Boards of Directors of Birch and LCIS have unanimously approved the
Merger Agreement. In addition to the foregoing factors, the respective boards
considered the following material factors in reaching their determinations:
* The long-term interests of each company and its stockholders;
* Each company's extensive knowledge of the business, earnings,
operations, financial condition and prospects of the other, and of both
companies on a combined basis;
* The terms of the Merger Agreement, including the fact that the merger
will likely qualify as a tax-free reorganization for federal income tax
purposes;
* The projected relative ownership interests of Birch's Continuing
Stockholders and Golden Oak in LCIS immediately following the merger; and
* The likelihood that the merger will be consummated.
The discussion above sets forth the material information and factors
considered by the companies' respective Boards of Directors in their
consideration of the Merger Agreement. In view of the wide variety of factors
considered, the boards did not find it practicable to, and did not make
specific assessments of, quantify or otherwise attempt to assign relative
weights to the specific factors considered in reaching their determinations.
These determinations were made after consideration of all of the factors as a
whole. In addition, each board and individual members of each board, may have
given different weights to different factors.
Interests of the Directors, Executive Officers and Affiliates of Birch
and LCIS in the Merger.
- -----------------------
The directors, executive officers and affiliates of Birch and LCIS have
interests in the merger that are in addition to, or different from, those of
Birch's stockholders generally. These interests may create potential conflicts
of interest and include the following:
* After the merger, Birch's directors and executive officers will
continue to hold the offices and positions they held immediately prior to the
merger. Accordingly, any compensation agreements in effect prior to the merger
will remain in effect after the merger;
* Due to the exchange ratio of Birch shares for LCIS shares, Birch's
former stockholders will have a lower percentage interest in LCIS, both
individually and in the aggregate, than they held in Birch immediately prior
to the merger, and Golden Oak will continue to own a controlling interest in
LCIS.
33
Material Federal Income Tax Consequences of the Merger.
-------------------------------------------------------
The following discussion summarizes the principal United States federal
income tax consequences of the proposed merger of Merger Subsidiary and Birch
and the exchange of shares of Birch's common stock for shares of LCIS' common
stock under the Internal Revenue Code. It is not feasible to comment on all of
the federal income tax consequences of the merger. The following summary does
not include any discussion concerning the application of foreign, state or
local taxation laws and regulations to the merger. Each holder of Birch's
common stock should consult his own tax advisor regarding the tax consequences
of the proposed merger in light of such stockholder's own situation with
respect to the application and effect of any state, local or foreign income
and other laws.
Special tax consequences not described below may be applicable to
particular classes of taxpayers, including financial institutions, broker-
dealers, persons who are not citizens of the United States or which are
foreign corporations, foreign partnerships or foreign estates or trusts,
insurance companies, tax-exempt organizations, some retirement plans, and
persons who acquired their Birch stock through the exercise of an employee
stock option or otherwise as compensation.
The merger has been structured to qualify as a tax-free reorganization
under the provisions of section 368(a) of the Internal Revenue Code (the
"Code"). No rulings from the IRS as to the tax consequences of the merger or
any other matter discussed herein has been or will be requested. Thus, there
can be no assurance that the Internal Revenue Service will agree with the
interpretations of the Code and the regulations set forth below.
Subject to the limitations referred to herein, qualification of the
merger as a reorganization is expected to result in the following federal
income tax consequences:
* The merger will be treated for federal income tax purposes as a
reorganization meeting the requirements of section 368(a) of the Code;
* Birch, LCIS and Merger Subsidiary will each be a "party to the
reorganization," within the meaning of section 368(b) of the Code, with
respect to the Merger;
* No gain or loss will be recognized by Birch, LCIS or Merger Subsidiary
as a result of the merger;
* The basis of the common stock of Birch, as the corporation surviving
the merger, received by LCIS in the merger will, in the aggregate, be the same
as the aggregate basis for the common stock of Merger Subsidiary surrendered;
* No gain or loss will be recognized for federal income tax purposes by
the holders of the Birch common stock on their receipt of LCIS stock in
exchange for their Birch shares;
* The basis of the common stock of LCIS received by the holders of the
Birch common stock in the merger will, in the aggregate, be the same as the
aggregate basis for the Birch common stock surrendered;
* The holding period for federal income tax purposes of the LCIS common
stock received by the Birch stockholders will include the period during which
the exchanged Birch shares were held, assuming that the Birch stock was held
as a capital asset; and
34
* A Birch stockholder who exercises dissenter's rights and receives
payment of the fair market value of the shares, or who receives cash in lieu
of a fractional share, will be treated as having sold such stock to LCIS. Such
holder of Birch common stock will generally recognize a capital gain or loss
equal to the difference between (a) the basis he had in the shares sold or
would have had for the fractional share of common stock; and (b) the cash
received by the shareholder.
The foregoing summary of the tax consequences is not based on a private
letter ruling from the IRS nor does it have a binding effect on the IRS or the
courts. This discussion is based on the Code, regulations under the Code,
administrative rulings and court decisions as of the date of this document.
The Code, the regulations, and the interpretations thereof by the IRS and the
courts are subject to change, which may adversely affect the tax treatment of
the merger. Any change in the regulations and/or interpretation of the Code
may be given retroactive effect. The IRS may take a position contrary to the
description of the tax effects set forth above and, if the matter is
litigated, a court may reach a decision contrary to conclusions contained in
the summary.
The preceding material constitutes a discussion of the material income
tax consequences relating to the merger. This discussion is not intended as
tax advice. We urge Birch stockholders to consult their own tax advisors
concerning federal, state, local and foreign tax consequences to them of the
merger.
Accounting Treatment of the Merger.
-----------------------------------
In accordance with the intent that the merger qualify as a reorganization
within the meaning of Section 368(a)(1)(A) and (a)(2)(E) of the Internal
Revenue Code of 1986, as amended, the following summarizes the accounting
treatment of the merger. Birch's remaining stockholders, following the
Reverse Stock Split, will account for the shares of LCIS stock acquired in the
merger by debiting their LCIS investment account and crediting their Birch
investment account by the balance in their Birch investment account prior to
the exchange. LCIS will account for the merger by debiting its investment in
LCIS Acquisition Corp. and by crediting equity, split between common stock at
par value for the number of shares issued and the balance to be paid in
capital, by the net book value of Birch prior to the merger.
Dissenters' Rights with Respect to the Merger.
----------------------------------------------
Under the NRS, stockholders who dissent from the merger are not entitled
to appraisal or dissenter's rights. However, in the interests of fairness and
of giving our stockholders as many options as possible with respect to the
merger, our Board of Directors has decided to grant our stockholders
dissenter's rights for this matter. These rights will be governed by
applicable provisions of the NRS, which are attached hereto as Appendix A.
For a general discussion of these provisions, see the caption "Dissenters'
Rights with Respect to the Reverse Stock Split."
IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names of all current directors
and executive officers of Birch. These persons will serve until the next
annual meeting of the stockholders or until their successors are elected
or appointed and qualified, or their prior resignation or termination.
35
Date of Date of
Positions Election or Termination
Name Held Designation or Resignation
- ---- ---- ----------- --------------
Nelson L. Colvin Vice President 1/14/00 1/16/04
President 1/16/04 *
Secretary 1/14/00 1/14/04
Director 1/14/00 1/14/04
Keith L. Walton Vice President 1/14/00 *
Secretary 1/14/04 *
Treasurer 1/14/04 *
Director 1/14/00 *
Barry L. Cohen Chairman of the 1/14/00 *
Board of Directors
Lebo Newman Director 1/14/00 *
Timothy F. Nord Director 1/14/00 *
Ronald H. Dietz Director 1/14/00 *
Richard L. Angelo Director 1/14/00 *
Frank D. Quaresma Director 1/14/00 *
Mickey D. Strauss Director 11/6/01 *
Jon R. Alsdorf Director 11/6/01 *
* These persons presently serve in the capacities
indicated.
Business Experience.
- --------------------
Nelson L. Colvin. In addition to his duties as President, Secretary
and Director of Birch, Mr. Colvin, age 66, is President/CEO of Golden Oak, and
Secretary of Oakwood Insurance Co., Ltd. and LCIS. He has been the executive
director of the CLCA Insurance Trust since 1994. From 1959 to 1961, Mr.
Colvin attended Los Angeles City College, where he studied accounting and real
estate. He is a licensed landscape contractor and has been a member of the
California Landscape Contractors Association since 1971. Mr. Colvin is also a
past President of the California Landscape
Contractors' Association.
Keith L. Walton. Mr. Walton is 64 years old. In addition to his
duties as Vice President and Director of Birch, Mr. Walton is President of
Oakwood Insurance Co., Ltd., Director of Golden Oak and LCIS and President of
Land Care Corp. and Brookside Olympic. He is also the owner of Chapman Woods
Nursery, Inc., which was founded in 1975.
36
Barry L. Cohen. In addition to his duties as Chairman of the
Board of Directors of Birch, Mr. Cohen, age 63, is Vice President of Oakwood
Insurance Co., Ltd., Director of Golden Oak, director of LCIS and owner of
Diablo Landscape Co. He has owned B. L. Cohen Landscape, Inc., since 1972.
Mr. Cohen is a past President of the California Landscape Contractors
Association.
Lebo Newman. Mr. Newman is 50 years of age. In addition to his
duties as a Director of Birch, Mr. Newman is a Director and Chairman of
Finance Committee of Golden Oak, Oakwood Insurance Co., Ltd. and LCIS. He is
also Chairman of the Board of LCIS. Mr. Newman owns Liberty Enterprises.
Since 1974, he has been the President and sole stockholder of R. L. Company,
Inc., a California corporation doing business as Redwood Landscaping, which
was sold to Service Master. Mr. Newman is a past President of the California
Landscape Contractors' Association.
Timothy F. Nord. Mr. Nord is 58 years old. In addition to his
duties as Director of Birch, Mr. Nord is a Director of Golden Oak, Oakwood
Insurance Co., Ltd. and LCIS. He has also owned Nord Landscape Services
since 1971. Mr. Nord is a past President of the California Landscape
Contractors' Association.
Ronald H. Dietz. Mr. Dietz is 53 years of age. In addition to
his duties as Director of Birch, Mr. Dietz is a Director of Golden Oak,
Oakwood Insurance Co., Ltd. and LCIS. He has been the President and CEO of
Dietz Hydroseeding Co. since 1979. Mr. Dietz is a licensed contractor. He
was the President of the California Landscape Contractors Association in 1989.
Richard L. Angelo. In addition to his duties as Director of Birch,
Mr. Angelo, age 61, is a Director of Golden Oak, Oakwood Insurance Co., Ltd.
and L.C.I.S. He has been the President of Stay Green Inc. since 1970. Mr.
Angelo is a past President of the California Landscape Contractors
Association.
Frank D. Quaresma. In addition to his duties as Director of Birch,
Mr. Quaresma, age 50, is Chairman of the Board of Golden Oak, and a Director
of Oakwood Insurance Co., Ltd. and LCIS. He has owned Live Oak Landscape
since 1977.
Mickey D. Strauss. Mr. Strauss, age 59, has been the Chief
Executive Officer of American Landscape, Inc., since 1973. He is a past
President of the California Landscape Contractors Association and has been
voted Man of the Year by the San Fernando Valley chapter of that association.
Jon R. Alsdorf. Mr. Alsdorf is 59 years of age. He has been a
licensed contractor in Fresno, California since 1984. He is a Director of
Golden Oak and LCIS.
37
VOTING SECURITIES AND PRINCIPAL HOLDERS THEREOF
Voting Securities.
------------------
The securities that would have been entitled to vote if a meeting
was required to have been held regarding these two proposals consist of shares
of our common stock. Each share of our common stock is entitled to one vote.
The number of outstanding shares of our common stock at the close of business
on October 10, 2005, the record date for determining our stockholders who
would have been entitled to notice of and to vote on two proposals, was
32,076,846 shares.
Security Ownership of Principal Holders and Management.
-------------------------------------------------------
The following table sets forth certain information as of October 10,
2005, regarding current beneficial ownership of the shares of our common
stock by (i) each person known by us to own more than 5% of the outstanding
shares of our common stock, (ii) each of our executive officers and directors,
and (iii) all of our executive officers and directors as a group. Except as
noted, each person has sole voting and sole investment or dispositive power
with respect to the shares shown. The information presented is based upon
32,076,846 outstanding shares of our common stock.
Number of Shares Percentage
Name and Address Beneficially Owned of Class
- ---------------- ------------------ --------
Golden Oak Cooperative
Corporation (1) 16,694,362 52.0%
17029 Chatsworth St.
Granada Hills, CA 91344
Keith L. Walton 2,257,864 7.0%
800 N. Meadowpass Rd.
Walnut, CA 91789
Lebo Newman 1,726,213 5.4%
2540 Bennett Ridge Rd.
Santa Rosa, CA 95404
Nelson L. Colvin 606,194 (2) 1.9%
8754 Jumilla Av
Northridge, CA 91324
Barry L. Cohen 351,931 (3) 1.1%
19519 Kenosha Court
Saratoga, CA 95070
Timothy F. Nord 149,248 (4) 0.5%
2425 Alder Street
Bakersfield, CA 93301
Ronald H. Dietz 300,000 (5) 0.9%
8244 E. Hillsdale Drive
Orange, CA 92869
Richard L. Angelo 49,227 0.2%
11774 Monte Leon Way
Northridge, CA 91326
Frank D. Quaresma 1,382,178 4.3%
3342 McDonald Ave.
Modesto, CA 95358
38
Mickey D. Strauss 1,146,656 (6) 3.6%
7949 Deering Avenue
Canoga Park, CA 91304
Jon R. Alsdorf 36,938 0.1%
4235 West Alamos
Fresno, CA 93722
TOTALS: 24,700,311 77.0%
(1) Golden Oak is a California cooperative corporation that is owned
by the members of the California Landscape Contractors Association on a
cooperative basis.
(2) These shares are held jointly with Mr. Colvin's wife.
(3) These shares are held jointly with Mr. Cohen's wife.
(4) These shares are held jointly with Mr. Nord's wife.
(5) These shares are held of record by the Doherty Dietz 1998 Loving
Family Trust, which Mr. Dietz controls.
(6) These shares are owned by American Landscape Retirement Trust,
of which Mr. Strauss is the President.
Changes in Control.
-------------------
Golden Oak currently beneficially owns approximately 52% of our
outstanding common stock. Upon completion of the merger, LCIS will own all of
our outstanding shares.
MARKET INFORMATION
Our common stock is quoted on the OTC Bulletin Board of the NASD. Our
symbol is "BRFL."
The National Quotations Bureau provided the following quotations.
They do not represent actual transactions, and they do not reflect dealer
markups, markdowns or commissions.
CLOSING BID
Quarter ended: High Low
- -------------- ---- ---
March 31, 2003 0.05 0.01
June 30, 2003 0.20 0.03
September 30, 2003 0.21 0.20
December 31, 2003 0.30 0.21
March 31, 2004 0.27 0.22
June 30, 2004 0.22 0.15
39
September 30, 2004 0.18 0.18
December 31, 2004 0.18 0.12
March 31, 2005 0.45 0.22
June 30, 2005 0.22 0.15
September 30, 2005 0.12 0.12
Due to the extremely limited volume of trading in our common stock, we do
not believe that the market for our shares may be deemed to be an "established
trading market."
Dividends.
---------
The Company has not declared any cash dividends with respect to its
common stock and does not intend to declare dividends in the foreseeable
future. There are no material restrictions limiting, or that are likely to
limit, the Company's ability to pay dividends on its common stock.
TRANSACTIONS WITH MANAGEMENT AND OTHERS
Each year, we pay Golden Oak an administration fee, plus expenses.
During 2004, we paid Golden Oak $24,800. As of December 31, 2004, and 2003,
we had unfunded premium financing payables to LCIS of $717,485 and $957,486,
respectively. As of December 31, 2004, and 2003, we had a cancellation
receivable from LCIS of $114,760 and $342,093, respectively.
As of December 31, 2004, we had a note payable to Golden Oak in the
amount of $826,990. The note is payable on demand and bears interest at the
rate of 5.25%. These funds have been used to fund our equipment financing
business.
VOTE REQUIRED FOR APPROVAL OF THE PROPOSALS
The Reverse Stock Split.
------------------------
Section 390 of the NRS provides that every amendment to the articles of
incorporation of a Nevada corporation shall first be adopted by the resolution
of the Board of Directors and then be subject to the approval of persons
owning a majority of the securities entitled to vote on any such amendment.
Sections 315 and 320, respectively, provide that the Board of Directors and
persons owning the required majority of voting securities necessary to adopt
any action that would otherwise be required to be submitted to a meeting of
stockholders, may adopt such action without a meeting by written consent.
Resolutions to amend our Articles of Incorporation to effect the
Reverse Stock Split were unanimously adopted by our Board of Directors and by
Golden Oak, our majority stockholder. Golden Oak owns approximately 52% of
our outstanding voting securities. No other votes or consents are required
or necessary to effect the amendment to our Articles of Incorporation or to
adopt the Reverse Stock Split. The Effective Date of the Reverse Stock Split
will be the later of (i) the opening of business on _______, 2005, or 21 days
from the mailing of this Information Statement to our stockholders.
40
The Merger.
-----------
Because the Birch stockholders will hold shares of LCIS, rather than
Birch shares, after the merger, the NRS requires that we obtain stockholder
approval for the merger. As with the Reverse Stock Split, the vote
requirements for the merger are governed by Sections 315 (directors' approval)
and 320 (stockholder approval) of the NRS. Resolutions to effectuate the
merger were unanimously adopted by our Board of Directors and Golden Oak. No
other votes or consents are required or necessary to adopt the merger. The
Effective Date of the merger will be the later of (i)the opening of business
on _______, 2005, or 21 days from the mailing of this Information Statement to
our stockholders. The merger will take effect immediately after completion of
the Reverse Stock Split.
NOTICE
GOLDEN OAK, THE MAJORITY STOCKHOLDER OF OUR COMPANY, HAS CONSENTED TO THE
REVERSE STOCK SPLIT AND THE MERGER IN ACCORDANCE WITH NEVADA LAW. NO FURTHER
CONSENTS, VOTES OR PROXIES ARE NEEDED, AND NONE ARE REQUESTED.
BY ORDER OF THE BOARD OF DIRECTORS
October 10, 2005 /s/Nelson Colvin
Nelson Colvin, President
41
Appendix A
SECTIONS 92A.300 to 92A.500 OF THE NEVADA REVISED STATUTES
Set forth below are Sections 92A.300 to 92A.500 of the Nevada Revised
Statutes, which provide that stockholders may dissent from, and obtain the
fair value of their shares in the event of certain corporate actions, and
establish procedures for the exercise of such dissenters' rights.
RIGHTS OF DISSENTING OWNERS
NRS 92A.300 Definitions. As used in NRS 92A.300 to 92A.500, inclusive,
unless the context otherwise requires, the words and terms defined in NRS
92A.305 to 92A.335, inclusive, have the meanings ascribed to them in those
sections. (Added to NRS by 1995, 2086)
NRS 92A.305 "Beneficial stockholder" defined. "Beneficial stockholder"
means a person who is a beneficial owner of shares held in a voting trust or
by a nominee as the stockholder of record. (Added to NRS by 1995, 2087)
NRS 92A.310 "Corporate action" defined. "Corporate action" means the
action of a domestic corporation. (Added to NRS by 1995, 2087)
NRS 92A.315 "Dissenter" defined. "Dissenter" means a stockholder who is
entitled to dissent from a domestic corporation's action under NRS 92A.380 and
who exercises that right when and in the manner required by NRS 92A.400 to
92A.480, inclusive. (Added to NRS by 1995, 2087; A 1999, 1631)
NRS 92A.320 "Fair value" defined. "Fair value," with respect to a
dissenter's shares, means the value of the shares immediately before the
effectuation of the corporate action to which he objects, excluding any
appreciation or depreciation in anticipation of the corporate action unless
exclusion would be inequitable. (Added to NRS by 1995, 2087)
NRS 92A.325 "Stockholder" defined. "Stockholder" means a stockholder of
record or a beneficial stockholder of a domestic corporation. (Added to NRS by
1995, 2087)
NRS 92A.330 "Stockholder of record" defined. "Stockholder of record"
means the person in whose name shares are registered in the records of a
domestic corporation or the beneficial owner of shares to the extent of the
rights granted by a nominee's certificate on file with the domestic
corporation. (Added to NRS by 1995, 2087)
NRS 92A.335 "Subject corporation" defined. "Subject corporation" means
the domestic corporation which is the issuer of the shares held by a dissenter
before the corporate action creating the dissenter's rights becomes effective
or the surviving or acquiring entity of that issuer after the corporate action
becomes effective. (Added to NRS by 1995, 2087)
NRS 92A.340 Computation of interest. Interest payable pursuant to NRS
92A.300 to 92A.500, inclusive, must be computed from the effective date of the
action until the date of payment, at the average rate currently paid by the
entity on its principal bank loans or, if it has no bank loans, at a rate that
is fair and equitable under all of the circumstances. (Added to NRS by 1995,
2087)
NRS 92A.350 Rights of dissenting partner of domestic limited
partnership. A partnership agreement of a domestic limited partnership or,
unless otherwise provided in the partnership agreement, an agreement of merger
or exchange, may provide that contractual rights with respect to the
partnership interest of a dissenting general or limited partner of a domestic
limited partnership are available for any class or group of partnership
interests in connection with any merger or exchange in which the domestic
limited partnership is a constituent entity. (Added to NRS by 1995, 2088)
NRS 92A.360 Rights of dissenting member of domestic limited-liability
company. The articles of organization or operating agreement of a domestic
limited-liability company or, unless otherwise provided in the articles of
organization or operating agreement, an agreement of merger or exchange, may
provide that contractual rights with respect to the interest of a dissenting
member are available in connection with any merger or exchange in which the
domestic limited-liability company is a constituent entity. (Added to NRS by
1995, 2088)
NRS 92A.370 Rights of dissenting member of domestic nonprofit
corporation.
1. Except as otherwise provided in subsection 2, and unless otherwise
provided in the articles or bylaws, any member of any constituent domestic
nonprofit corporation who voted against the merger may, without prior notice,
but within 30 days after the effective date of the merger, resign from
membership and is thereby excused from all contractual obligations to the
constituent or surviving corporations which did not occur before his
resignation and is thereby entitled to those rights, if any, which would have
existed if there had been no merger and the membership had been terminated or
the member had been expelled.
2. Unless otherwise provided in its articles of incorporation or
bylaws, no member of a domestic nonprofit corporation, including, but not
limited to, a cooperative corporation, which supplies services described in
chapter 704 of NRS to its members only, and no person who is a member of a
domestic nonprofit corporation as a condition of or by reason of the ownership
of an interest in real property, may resign and dissent pursuant to subsection
1. (Added to NRS by 1995, 2088)
NRS 92A.380 Right of stockholder to dissent from certain corporate
actions and to obtain payment for shares.
1. Except as otherwise provided in NRS 92A.370 and 92A.390, any
stockholder is entitled to dissent from, and obtain payment of the fair value
of his shares in the event of any of the following corporate actions:
(a) Consummation of a conversion or plan of merger to which the domestic
corporation is a constituent entity:
(1) If approval by the stockholders is required for the
conversion or merger by NRS 92A.120 to 92A.160, inclusive, or the articles of
incorporation, regardless of whether the stockholder is entitled to vote on
the conversion or plan of merger; or
(2) If the domestic corporation is a subsidiary and is merged
with its parent pursuant to NRS 92A.180.
(b) Consummation of a plan of exchange to which the domestic corporation
is a constituent entity as the corporation whose subject owner's interests
will be acquired, if his shares are to be acquired in the plan of exchange.
(c) Any corporate action taken pursuant to a vote of the stockholders to
the extent that the articles of incorporation, bylaws or a resolution of the
board of directors provides that voting or nonvoting stockholders are entitled
to dissent and obtain payment for their shares.
2. A stockholder who is entitled to dissent and obtain payment pursuant
to NRS 92A.300 to 92A.500, inclusive, may not challenge the corporate action
creating his entitlement unless the action is unlawful or fraudulent with
respect to him or the domestic corporation. (Added to NRS by 1995, 2087; A
2001, 1414, 3199; 2003, 3189)
NRS 92A.390 Limitations on right of dissent: Stockholders of certain
classes or series; action of stockholders not required for plan of merger.
1. There is no right of dissent with respect to a plan of merger or
exchange in favor of stockholders of any class or series which, at the record
date fixed to determine the stockholders entitled to receive notice of and to
vote at the meeting at which the plan of merger or exchange is to be acted on,
were either listed on a national securities exchange, included in the national
market system by the National Association of Securities Dealers, Inc., or held
by at least 2,000 stockholders of record, unless:
(a) The articles of incorporation of the corporation issuing the shares
provide otherwise; or
(b) The holders of the class or series are required under the plan of
merger or exchange to accept for the shares anything except:
(1) Cash, owner's interests or owner's interests and cash in lieu
of fractional owner's interests of:
(I) The surviving or acquiring entity; or
(II) Any other entity which, at the effective date of the
plan of merger or exchange, were either listed on a national securities
exchange, included in the national market system by the National Association
of Securities Dealers, Inc., or held of record by a least 2,000 holders of
owner's interests of record; or
(2) A combination of cash and owner's interests of the kind
described in sub-subparagraphs (I) and (II) of subparagraph (1) of paragraph
(b).
2. There is no right of dissent for any holders of stock of the
surviving domestic corporation if the plan of merger does not require action
of the stockholders of the surviving domestic corporation under NRS 92A.130.
(Added to NRS by 1995, 2088)
NRS 92A.400 Limitations on right of dissent: Assertion as to portions
only to shares registered to stockholder; assertion by beneficial stockholder.
1. A stockholder of record may assert dissenter's rights as to fewer
than all of the shares registered in his name only if he dissents with respect
to all shares beneficially owned by any one person and notifies the subject
corporation in writing of the name and address of each person on whose behalf
he asserts dissenter's rights. The rights of a partial dissenter under this
subsection are determined as if the shares as to which he dissents and his
other shares were registered in the names of different stockholders.
2. A beneficial stockholder may assert dissenter's rights as to shares
held on his behalf only if:
(a) He submits to the subject corporation the written consent of the
stockholder of record to the dissent not later than the time the beneficial
stockholder asserts dissenter's rights; and
(b) He does so with respect to all shares of which he is the beneficial
stockholder or over which he has power to direct the vote. (Added to NRS by
1995, 2089)
NRS 92A.410 Notification of stockholders regarding right of dissent.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, the notice of the meeting must
state that stockholders are or may be entitled to assert dissenters' rights
under NRS 92A.300 to 92A.500, inclusive, and be accompanied by a copy of those
sections.
2. If the corporate action creating dissenters' rights is taken by
written consent of the stockholders or without a vote of the stockholders, the
domestic corporation shall notify in writing all stockholders entitled to
assert dissenters' rights that the action was taken and send them the
dissenter's notice described in NRS 92A.430. (Added to NRS by 1995, 2089; A
1997, 730)
NRS 92A.420 Prerequisites to demand for payment for shares.
1. If a proposed corporate action creating dissenters' rights is
submitted to a vote at a stockholders' meeting, a stockholder who wishes to
assert dissenter's rights:
(a) Must deliver to the subject corporation, before the vote is taken,
written notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
2. A stockholder who does not satisfy the requirements of subsection 1
and NRS 92A.400 is not entitled to payment for his shares under this chapter.
(Added to NRS by 1995, 2089; 1999, 1631)
NRS 92A.430 Dissenter's notice: Delivery to stockholders entitled to
assert rights; contents.
1. If a proposed corporate action creating dissenters' rights is
authorized at a stockholders' meeting, the subject corporation shall deliver a
written dissenter's notice to all stockholders who satisfied the requirements
to assert those rights.
2. The dissenter's notice must be sent no later than 10 days after the
effectuation of the corporate action, and must:
(a) State where the demand for payment must be sent and where and when
certificates, if any, for shares must be deposited;
(b) Inform the holders of shares not represented by certificates to what
extent the transfer of the shares will be restricted after the demand for
payment is received;
(c) Supply a form for demanding payment that includes the date of the
first announcement to the news media or to the stockholders of the terms of
the proposed action and requires that the person asserting dissenter's rights
certify whether or not he acquired beneficial ownership of the shares before
that date;
(d) Set a date by which the subject corporation must receive the demand
for payment, which may not be less than 30 nor more than 60 days after the
date the notice is delivered; and
(e) Be accompanied by a copy of NRS 92A.300 to 92A.500, inclusive.
(Added to NRS by 1995, 2089)
NRS 92A.440 Demand for payment and deposit of certificates; retention of
rights of stockholder.
1. A stockholder to whom a dissenter's notice is sent must:
(a) Demand payment;
(b) Certify whether he or the beneficial owner on whose behalf he is
dissenting, as the case may be, acquired beneficial ownership of the shares
before the date required to be set forth in the dissenter's notice for this
certification; and
(c) Deposit his certificates, if any, in accordance with the terms of
the notice.
2. The stockholder who demands payment and deposits his certificates,
if any, before the proposed corporate action is taken retains all other rights
of a stockholder until those rights are cancelled or modified by the taking of
the proposed corporate action.
3. The stockholder who does not demand payment or deposit his
certificates where required, each by the date set forth in the dissenter's
notice, is not entitled to payment for his shares under this chapter.
(Added to NRS by 1995, 2090; A 1997, 730; 2003, 3189)
NRS 92A.450 Uncertificated shares: Authority to restrict transfer after
demand for payment; retention of rights of stockholder.
1. The subject corporation may restrict the transfer of shares not
represented by a certificate from the date the demand for their payment is
received.
2. The person for whom dissenter's rights are asserted as to shares not
represented by a certificate retains all other rights of a stockholder until
those rights are cancelled or modified by the taking of the proposed corporate
action. (Added to NRS by 1995, 2090)
NRS 92A.460 Payment for shares: General requirements.
1. Except as otherwise provided in NRS 92A.470, within 30 days after
receipt of a demand for payment, the subject corporation shall pay each
dissenter who complied with NRS 92A.440 the amount the subject corporation
estimates to be the fair value of his shares, plus accrued interest. The
obligation of the subject corporation under this subsection may be enforced by
the district court:
(a) Of the county where the corporation's registered office is located;
or
(b) At the election of any dissenter residing or having its registered
office in this state, of the county where the dissenter resides or has its
registered office. The court shall dispose of the complaint promptly.
2. The payment must be accompanied by:
(a) The subject corporation's balance sheet as of the end of a fiscal
year ending not more than 16 months before the date of payment, a statement of
income for that year, a statement of changes in the stockholders' equity for
that year and the latest available interim financial statements, if any;
(b) A statement of the subject corporation's estimate of the fair value
of the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's rights to demand payment under NRS
92A.480; and
(e) A copy of NRS 92A.300 to 92A.500, inclusive. (Added to NRS by 1995,
2090)
NRS 92A.470 Payment for shares: Shares acquired on or after date of
dissenter's notice.
1. A subject corporation may elect to withhold payment from a dissenter
unless he was the beneficial owner of the shares before the date set forth in
the dissenter's notice as the date of the first announcement to the news media
or to the stockholders of the terms of the proposed action.
2. To the extent the subject corporation elects to withhold payment,
after taking the proposed action, it shall estimate the fair value of the
shares, plus accrued interest, and shall offer to pay this amount to each
dissenter who agrees to accept it in full satisfaction of his demand. The
subject corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was
calculated, and a statement of the dissenters' right to demand payment
pursuant to NRS 92A.480. (Added to NRS by 1995, 2091)
NRS 92A.480 Dissenter's estimate of fair value: Notification of subject
corporation; demand for payment of estimate.
1. A dissenter may notify the subject corporation in writing of his own
estimate of the fair value of his shares and the amount of interest due, and
demand payment of his estimate, less any payment pursuant to NRS 92A.460, or
reject the offer pursuant to NRS 92A.470 and demand payment of the fair value
of his shares and interest due, if he believes that the amount paid pursuant
to NRS 92A.460 or offered pursuant to NRS 92A.470 is less than the fair value
of his shares or that the interest due is incorrectly calculated.
2. A dissenter waives his right to demand payment pursuant to this
section unless he notifies the subject corporation of his demand in writing
within 30 days after the subject corporation made or offered payment for his
shares. (Added to NRS by 1995, 2091)
NRS 92A.490 Legal proceeding to determine fair value: Duties of subject
corporation; powers of court; rights of dissenter.
1. If a demand for payment remains unsettled, the subject corporation
shall commence a proceeding within 60 days after receiving the demand and
petition the court to determine the fair value of the shares and accrued
interest. If the subject corporation does not commence the proceeding within
the 60-day period, it shall pay each dissenter whose demand remains unsettled
the amount demanded.
2. A subject corporation shall commence the proceeding in the district
court of the county where its registered office is located. If the subject
corporation is a foreign entity without a resident agent in the state, it
shall commence the proceeding in the county where the registered office of the
domestic corporation merged with or whose shares were acquired by the foreign
entity was located.
3. The subject corporation shall make all dissenters, whether or not
residents of Nevada, whose demands remain unsettled, parties to the proceeding
as in an action against their shares. All parties must be served with a copy
of the petition. Nonresidents may be served by registered or certified mail or
by publication as provided by law.
4. The jurisdiction of the court in which the proceeding is commenced
under subsection 2 is plenary and exclusive. The court may appoint one or more
persons as appraisers to receive evidence and recommend a decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or any amendment thereto. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
5. Each dissenter who is made a party to the proceeding is entitled to
a judgment:
(a) For the amount, if any, by which the court finds the fair value of
his shares, plus interest, exceeds the amount paid by the subject corporation;
or
(b) For the fair value, plus accrued interest, of his after-acquired
shares for which the subject corporation elected to withhold payment pursuant
to NRS 92A.470. (Added to NRS by 1995, 2091)
NRS 92A.500 Legal proceeding to determine fair value: Assessment of
costs and fees.
1. The court in a proceeding to determine fair value shall determine
all of the costs of the proceeding, including the reasonable compensation and
expenses of any appraisers appointed by the court. The court shall assess the
costs against the subject corporation, except that the court may assess costs
against all or some of the dissenters, in amounts the court finds equitable,
to the extent the court finds the dissenters acted arbitrarily, vexatiously or
not in good faith in demanding payment.
2. The court may also assess the fees and expenses of the counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the subject corporation and in favor of all dissenters if
the court finds the subject corporation did not substantially comply with the
requirements of NRS 92A.300 to 92A.500, inclusive; or
(b) Against either the subject corporation or a dissenter in favor of
any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously or not in good faith with
respect to the rights provided by NRS 92A.300 to 92A.500, inclusive.
3. If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the subject
corporation, the court may award to those counsel reasonable fees to be paid
out of the amounts awarded to the dissenters who were benefited.
4. In a proceeding commenced pursuant to NRS 92A.460, the court may
assess the costs against the subject corporation, except that the court may
assess costs against all or some of the dissenters who are parties to the
proceeding, in amounts the court finds equitable, to the extent the court
finds that such parties did not act in good faith in instituting the
proceeding.
5. This section does not preclude any party in a proceeding commenced
pursuant to NRS 92A.460 or 92A.490 from applying the provisions of N.R.C.P. 68
or NRS 17.115. (Added to NRS by 1995, 2092)
Appendix B
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT is dated as of October 10, 2005, by and among Landscape
Contractors Insurance Services, Inc. a California corporation ("Parent"), LCIS
Acquisition Corp., a Nevada corporation and wholly-owned subsidiary of Parent
("Merger Subsidiary"), and Birch Financial, Inc., a Nevada corporation (the
"Company").
WHEREAS, the Company is in the business of providing insurance premium
financing and equipment financing to the "green" industry, deriving
approximately 90% of its insurance premium financing revenues from Parent; and
WHEREAS, the Boards of Directors of Parent, the Company and Merger
Subsidiary, and the majority shareholders of the Company and Merger
Subsidiary, have approved the merger of the Merger Subsidiary with and into
the Company (the "Merger") upon the terms and subject to the conditions set
forth herein; and
WHEREAS, prior to the completion of the Merger, the Company will effected
a 100,001 for one reverse split of its outstanding voting securities, and all
computations herein take into account the effects of that reverse split on the
outstanding securities of the Company; and
WHEREAS, for federal income tax purposes, it is intended that the Merger
will qualify as a reorganization within the meaning of Section 368(a)(1)(A)
and (a)(2)(E) of the Internal Revenue Code of 1986, as amended (the "Code");
and
WHEREAS, the parties hereto desire to make certain representations,
warranties, and agreements in connection with the Merger and also to prescribe
various conditions to the Merger;
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
representations, warranties, covenants, and agreements contained herein, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER; CONVERSION OF SHARES
ARTICLE 1.1
The Merger. Subject to the terms and conditions of this Agreement, at
the Effective Time (as defined in Section 1.2 hereof), the Merger Subsidiary
will be merged with and into the Company in accordance with the provisions of
Chapter 92A of the Nevada Revised Statutes (the "Nevada Act"), whereupon the
separate corporate existence of the Merger Subsidiary will cease, and the
Company will continue as the surviving corporation (the "Surviving
Corporation"). From and after the Effective Time, the Surviving Corporation
will possess all the rights, privileges, powers, and franchises and be subject
to all the restrictions, disabilities, and duties of the Company and Merger
Subsidiary, all as more fully described in Chapter 92A of the Nevada Act.
ARTICLE 1.2
Effective Time. As soon as practicable after each of the conditions set
forth in Article 5 and Article 6 has been satisfied or waived, the Company and
Merger Subsidiary will file, or cause to be filed, with the Secretary of State
of the State of Nevada, Articles of Merger for the Merger, which Articles will
be in substantially the form attached hereto as Exhibit 1.2 (the "Articles of
Merger"). The Merger will become effective at the time such filing is made
or, if agreed to by Parent and the Company, such later time or date set forth
in the Articles of Merger (the "Effective Time").
ARTICLE 1.3
Closing.
(a) Closing. Unless this Agreement has been terminated and the
transactions contemplated herein have been abandoned pursuant to
Article 7 hereof, the closing of the Merger (the "Closing") will
take place at a time and on a date (the "Closing Date") to
be specified by the parties; provided, however, that all of the
conditions provided for in Articles 5 and 6 hereof shall have been
satisfied or waived by such date. The Closing shall take place by
the exchange of facsimile counterpart signature pages to the
Closing, at which time the documents and instruments necessary or
appropriate to effect the transactions contemplated herein will be
exchanged by the parties. Within one business day of such closing
by facsimile, the parties shall deliver originals of all closing
deliveries to the offices of Burningham and Burningham, 455 East 500
South, Suite 205, Salt Lake City, Utah 84111, or such other place
as the parties may agree. Except as otherwise provided herein, all
actions taken at the Closing will be deemed to be taken
simultaneously.
(b) Conversion of Interests. Subject to the terms and conditions of
this Agreement, at the Effective Time, by virtue of the Merger and
without any action on the part of the Parent, the Company and/or the
Merger Subsidiary:
(i) Except as set forth in Section 1.3(c)(ii) below and
except with respect to Dissenting Shares (as defined in
Section 1.8), all of the shares of common stock of the
Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time will collectively
be converted into the right to receive an aggregate number
of shares of common stock of the Parent ("Parent Common
Stock") equal to 7.32 shares of the Parent for every share
of the Company issued and outstanding immediately prior to
the Effective Time, for a total of 2,250 shares. The
amount of Parent Common Stock into which shares of Company
Common Stock is converted is referred to herein as the
"Merger Consideration."
(ii) Each share of Company Common Stock issued and
outstanding immediately prior to the Effective Time will
be canceled in consideration of the issuance of one share
of Parent Common Stock. All Dissenting Shares will be
treated as set forth in Section 1.8
(iii) All of the shares of common stock of Merger
Subsidiary ("Merger Subsidiary Common Stock"), issued and
outstanding immediately prior to the Effective Time will
collectively be converted into a number of shares of
common stock of the Surviving Corporation equal to the
number of shares of Company Common Stock that were issued
and outstanding immediately prior to the Effective Time.
ARTICLE 1.4
Post-Closing Exchanges. As soon as reasonably practicable after the
Effective Time, Parent will mail to each person that held Company Common Stock
immediately prior to the Effective Time ("Shareholder") (i) a notice advising
the Shareholders that the Merger has become effective and a letter of
transmittal in customary and appropriate form (which will specify that
delivery will be effected, and risk of loss and title of a certificate or
certificates that immediately before the Effective Time represented shares of
Company Common Stock (a "Certificate") will pass, only upon proper delivery of
the Certificates to Parent) and (ii) instructions for use in effecting the
surrender of the Certificates in exchange for the number of shares of Parent
Common Stock such Shareholder is entitled to receive pursuant to Section
1.3(b). Upon surrender of a Certificate for cancellation to Parent or to such
agent or agents as may be appointed by Parent, together with such letter of
transmittal, properly completed and duly executed, and such other customary
documents as may reasonably be required by Parent, the holder of such
Certificate will be entitled to receive in exchange therefor a number of
shares of Parent Common Stock equal to the number of shares of Parent Common
Stock into which the Company Shares theretofore represented by such
Certificate have been converted pursuant to Section 1.3(b), and the
Certificate so surrendered will be canceled. In the event of a transfer of
ownership of Company shares that is not registered in the transfer records of
Company, delivery of the number of Shares of Parent Common Stock to which such
transferred Company Shares are entitled may be made to a person other than the
person in whose name the Certificate so surrendered is registered, if such
Certificate is properly endorsed or otherwise is in proper form for transfer,
if the transfer is in compliance with applicable state and federal securities
laws and the person requesting such delivery pays any transfer or other taxes
required by reason of the delivery to a person other than the registered
holder of such Certificate or establishes to the satisfaction of Parent that
such tax has been paid or is not applicable. Until surrendered as
contemplated by this Section 1.4(a), each Certificate will be deemed at any
time after the Effective Time to represent only the right to receive upon such
surrender a number of shares of Parent Common Stock into which the share of
Company Common Stock theretofore represented by such Certificate will have
been converted pursuant to Section 1.3(b). No interest will be paid or will
accrue on shares of Parent Common Stock deliverable upon the surrender of any
Certificate.
(a) All shares of Parent Common Stock issued upon the surrender for
exchange of shares of Company Common Stock in accordance with the terms
hereof will be deemed to have been issued in full satisfaction of all
rights pertaining to such Company Common Stock.
(b) As of the Effective Time, the holders of Certificates representing
shares of Company Common Stock will cease to have any rights as
shareholders of the Company (except such rights, if any, as the holders
of Dissenting Shares may have pursuant to the Nevada Act).
(c) No fractional shares of Parent Common Stock will be issued upon the
surrender for exchange of Company Certificates; no dividend or other
distribution of Parent will relate to any fractional share; and such
fractional share interests will not entitle the owner thereof to vote or
to any rights of a shareholder of Parent. All fractional shares of
Parent Common Stock to which a holder of Company Common Stock immediately
prior to the Effective Time would otherwise be entitled, at the Effective
Time, will be aggregated if and to the extent multiple Certificates of
such holder are submitted together to Parent. If a fractional share
results from such aggregation, then such fractional share will be
rounded up to the nearest whole share and each holder of shares of
Company Common Stock Interests who otherwise would be entitled to receive
such fractional share of Parent Common Stock will receive one whole share
in lieu of such fractional share.
(d) To the extent that any outstanding rights exercisable for, or
convertible into, Company Common Stock do not include provisions into
which such rights automatically convert at the Effective Time into rights
exercisable for, or convertible into, Parent Common Stock, on terms
reflecting the exchange rate implicit in the Merger, Parent shall
promptly use commercially reasonable efforts to obtain from the holders
of such rights amendments to governing instruments causing such rights to
become exercisable for, or convertible into, Parent Common Stock, on
terms reflecting the exchange rate implicit in the Merger.
ARTICLE 1.5
Articles of Incorporation of the Surviving Corporation. The Articles of
Incorporation of the Company as in effect immediately prior to the Effective
Time will be the Articles of Incorporation of the Surviving Corporation.
ARTICLE 1.6
Bylaws of the Surviving Corporation. The Bylaws of the Company, as in
effect immediately prior to the Effective Time, will be the Bylaws of the
Surviving Corporation until thereafter amended in accordance with applicable
law.
ARTICLE 1.7
Directors and Officers of the Surviving Corporation. The directors and
officers of the Company, as of the Effective Time, shall continue as the
directors of the Surviving Corporation.
1.8 Dissenting Shares. Notwithstanding any provision of this Agreement
to the contrary, each outstanding share of Company Common Stock, the holder of
which has demanded and perfected such holder's right to dissent from the
Merger and to be paid the fair value of such shares in accordance with
Sections 92A.300 to 92A.500 of the Nevada Act and, as of the Effective Time,
has not effectively withdrawn or lost such dissenters' rights ("Dissenting
Shares"), will not be converted into or represent a right to receive Parent
Common Stock into which Company Common Stock are converted pursuant to Section
1.3(b) hereof, but the holder thereof will be entitled only to such rights as
are granted by Section 92A.300 to 92A.500 of the Nevada Act. Prior to the
Effective Time, the Company will give Parent prompt written notice of
any notice of intent to demand fair value for any Company Common Stock,
withdrawals of such notices, and any other instruments served pursuant to the
Nevada Act and received by the Company. Notwithstanding the provisions of
this Section 1.8, if any Dissenting Shareholder shall effectively withdraw or
lose (through failure to perfect or otherwise) the right to dissent, then, as
of the later of the Effective Time and the occurrence of such event, such
holder's shares shall automatically be converted into and represent only the
right to receive the applicable consideration to which such Shareholder is
then entitled under Section 1.3(b) of this Agreement and Nevada Law, without
interest thereon and upon surrender of the certificate representing such
shares (and the Merger Consideration shall be proportionately adjusted to
reflect the increase in shares of Company Common Stock eligible for conversion
in the Merger).
1.9 Restricted Securities. The parties acknowledge and agree that there
is no market whatsoever for the Parent Common Stock, that the offers and
issuance of shares of Parent Common Stock under this Agreement has not been,
and will not be, registered under the Securities Act of 1933, as amended (the
"Securities Act") or any state securities laws and that such offer and
issuance are being made in reliance upon exemptions from the registration
requirements of the Securities Act and state securities laws. Accordingly,
all shares of Parent Common Stock issued in connection with the Merger will be
"restricted securities," as that term is defined in Rule 144 promulgated under
the Securities Act, and all certificates representing shares of Parent Common
Stock will bear appropriate legends evidencing the restrictions on transfer
imposed by the Securities Act and other securities laws.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent that the statements
contained in this Article 2 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Effective Time (as though
made then and as though the Effective Time were substituted for the date of
this Agreement throughout this Article 2), except as set forth in the
disclosure schedule delivered by the Company in connection with the Agreement
(the "Company Disclosure Schedule"). The Company Schedule will be arranged in
paragraphs corresponding to the lettered and numbered paragraphs and
subparagraphs contained in this Section 2. Any matter disclosed on the
Company Disclosure Schedule in respect of a particular representation will be
deemed to have been disclosed in respect of any other representation calling
for a similar or related type of disclosure (even if such matter is not
specifically referenced to the lettered and numbered paragraphs relating to
such representation), if and only to the extent that, it is clear from a
reading of the disclosure that it applies to such other representation.
Notwithstanding the foregoing, the Company Disclosure Schedule shall be
deemed to include all information contained in its Annual Report on Form
10-KSB for the calendar year ended December 31, 2004, filed with the
Securities and Exchange Commission (the "SEC") on April 8, 2005, and its
Quarterly Report on Form 10-QSB for the quarterly period ended March 31, 2005,
filed with the SEC on May 16, 2005 (including all exhibits to both documents
and incorporated by reference therein, collectively referred to as the "in
\pard plain Periodic Reports"), and the requirement that the Company
Disclosure Schedule be divided in Sections corresponding to the section of
this Article 2 shall not apply to information included in the Company
Disclosure Schedule by means of the Periodic Reports.
ARTICLE 2.1
[intentionally omitted]
ARTICLE 2.2
Corporate Organization, etc. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Nevada with the requisite corporate power and authority to carry on its
business as it is now being conducted and to own, operate and lease its
properties and assets, is duly qualified or licensed to do business as a
foreign corporation in good standing in every other jurisdiction in which the
character or location of the properties and assets owned, leased or operated
by it or the conduct of its business requires such qualification or licensing,
except in such jurisdictions in which the failure to be so qualified or
licensed and in good standing would not, individually or in the aggregate,
have a Material Adverse Effect (as defined below) on the Company. The Company
Disclosure Schedule contains a list of all jurisdictions in which the Company
is qualified or licensed to do business and includes complete and correct
copies of the Company's articles of incorporation and bylaws. Other than as
set forth in Section 2.2 of Company Disclosure Schedule, the Company does not
have any subsidiaries or own or control any capital stock of any corporation
or any interest in any partnership, joint venture or other entity.
ARTICLE 2.3
Capitalization. The authorized capital securities of the Company is set
forth in the Company Disclosure Schedule. The number of shares of Company
Common Stock outstanding, as of the date of this Agreement and as set forth in
the Company Disclosure Schedule, represent all of the issued and outstanding
capital securities of the Company. All issued and outstanding shares of
Company Common Stock are duly authorized, validly issued, fully paid and
nonassessable and are without, and were not issued in violation of, preemptive
rights. Other than as set forth in the Company Disclosure Schedule, there are
no shares of Company Common Stock or other equity securities of the Company
outstanding or any securities convertible into or exchangeable for such
interests, securities or rights. Other than as set forth on the Company
Disclosure Schedule and pursuant to this Agreement, there is no subscription,
option, warrant, call, right, contract, agreement, commitment, understanding
or arrangement to which the Company is a party, or by which it is bound, with
respect to the issuance, sale, delivery or transfer of the capital securities
of the Company, including any right of conversion or exchange under any
security or other instrument.
ARTICLE 2.4
Authorization, etc. The Company has all requisite corporate power and
authority to enter into, execute, deliver, and, subject to its obtaining
approval for the Merger from the holders of Company Common Stock, perform its
obligations under this Agreement. This Agreement has been duly and validly
executed and delivered by the Company and is the valid and binding legal
obligation of the Company enforceable against the Company in accordance with
its terms, subject to bankruptcy, moratorium, principles of equity and other
limitations limiting the rights of creditors generally.
ARTICLE 2.5
Non-Contravention. Except as set forth in the Company Disclosure
Schedule, neither the execution, delivery and performance of this Agreement,
and each other agreement to be entered into in connection with this Agreement,
nor the consummation of the transactions contemplated herein will:
(a) violate, contravene or be in conflict with any provision
of the articles of incorporation or bylaws of the Company;
(b) be in conflict with, or constitute a default, however defined
(or an event which, with the giving of due notice or lapse of time,
or both, would constitute such a default), under, or cause or permit
the acceleration of the maturity of, or give rise to any right of
termination, cancellation, imposition of fees or penalties under any
debt, note, bond, lease, mortgage, indenture, license, obligation,
contract, commitment, franchise, permit, instrument or other
agreement or obligation to which the Company is a party or by which
the Company or any of the Company's properties or assets is bound;
(c) result in the creation or imposition of any pledge, lien,
security interest, restriction, option, claim or charge of any kind
whatsoever ("Encumbrances") upon any property or assets of the
Company under any debt, obligation, contract, agreement or commitment
to which the Company is a party or by which the Company or any of the
Company's assets or properties is bound; or
(d) materially violate any statute, treaty, law, judgment, writ,
injunction, decision, decree, order, regulation, ordinance or other
similar authoritative matters (referred to herein individually as a
"Law" and collectively as "Laws") of any foreign, federal, state or
local governmental or quasi-governmental, administrative, regulatory
or judicial court, department, commission, agency, board, bureau,
instrumentality or other authority applicable to the Company or its
assets and properties (referred to herein individually as an
"Authority" and collectively as "Authorities").
ARTICLE 2.6
Consents and Approvals. Except as set forth in the Company Disclosure
Schedule, with respect to the Company, no consent, approval, order or
authorization of or from, or registration, notification, declaration or filing
with ("Consent") any individual or entity, including without limitation any
Authority, is required in connection with the execution, delivery or
performance of this Agreement by the Company or the consummation by the
Company of the transactions contemplated herein.
ARTICLE 2.7
Financial Statements. The Company Disclosure Schedule contains a copy of
the financial statements of the Company for the calendar year ended December
31, 2005 and 2004, and the period ended March 31, 2005 (the "Company Financial
Statements"). Except as disclosed therein or in the Company Disclosure
Schedule, the aforesaid Company Financial Statements: (i) are in accordance
with the books and records of the Company and have been prepared in conformity
with United States Generally Accepted Accounting Principals ("GAAP") (except
as stated therein or in the notes thereto); and (ii) are true, complete and
accurate in all material respects and fairly present the financial position of
the Company as of the date thereof, and the income or loss for the period then
ended.
ARTICLE 2.8
Absence of Undisclosed Liabilities. The Company does not have any
material liabilities or obligations or claims of any kind whatsoever, whether
secured or unsecured, accrued or unaccrued, fixed or contingent, matured or
unmatured, known or unknown, direct or indirect, contingent or otherwise and
whether due or to become due (referred to herein individually as a "Liability"
and collectively as "Liabilities"), other than: (a) Liabilities that are fully
reflected or reserved for in the Balance Sheet or not required to be reflected
thereon pursuant to GAAP; (b) Liabilities that are set forth on the Company
Disclosure Schedule; (c) Liabilities incurred by the Company in the ordinary
course of business after the date of the Balance Sheet and consistent with
past practice; or (d) Liabilities in an amount not to exceed $50,000
individually or in the aggregate unless such amounts are disclosed on the
Company Disclosure Schedule.
ARTICLE 2.9
Absence of Certain Changes. Except as set forth in the Company
Disclosure Schedule, since March 31, 2005, the Company has owned and operated
its assets, properties and business in the ordinary course of business and
consistent with past practice. Without limiting the generality of the
foregoing, subject to the aforesaid exceptions:
(a) the Company has not experienced any change that has had or
could reasonably be expected to have a Material Adverse Effect on the
Company; and
(b) the Company has not suffered (i) any loss, damage, destruction
or other property or casualty (whether or not covered by insurance)
or (ii) any loss of officers, employees, dealers, distributors,
independent contractors, customers or suppliers, which had or may
reasonably be expected to result in a Material Adverse Effect on the
Company.
ARTICLE 2.10
Assets. Except as set forth in the Company Disclosure Schedule, the
Company has good and marketable title to all of its assets and properties,
whether or not reflected in the Balance Sheet or acquired after the date
thereof (except for properties sold or otherwise disposed of since the
date thereof in the ordinary course of business and consistent with past
practices), that relate to or are necessary for the Company to conduct its
business and operations as currently conducted (collectively, the "Assets"),
free and clear of any mortgage, pledge, lien, security interest, conditional
or installment sales agreement, encumbrance, claim, easement, right of way,
tenancy, covenant, encroachment, restriction or charge of any kind or nature
(whether or not of record) (a "Lien"), other than (i) liens securing specific
Liabilities shown on the Balance Sheet with respect to which no breach,
violation or default exists; (ii) mechanics', carriers', workers' or other
like liens arising in the ordinary course of business; (iii) minor
imperfections of title that do not individually or in the aggregate, impair
the continued use and operation of the Assets to which they relate in the
operation of the Company as currently conducted; and (iv) liens for current
taxes not yet due and payable or being contested in good faith by appropriate
proceedings ("Permitted Liens").
ARTICLE 2.11
Receivables and Payables.
(a) Except as set forth on the Company Disclosure Schedule, all
accounts receivable of the Company represent sales in the ordinary
course of business and, to the Company's knowledge, are current and
collectible net of any reserves shown on the Balance Sheet and none
of such receivables is subject to any Lien other than a Permitted
Lien.
(b) Except as set forth on the Company Disclosure Schedule, all
payables by the Company arose in bona fide transactions in the
ordinary course of business and no such payable is delinquent by
more than sixty (60) days beyond the due date in its payment.
ARTICLE 2.12
Intellectual Property Rights. The Company owns or has the unrestricted
right to use all patents, patent applications, patent rights, registered and
unregistered trademarks, trademark applications, tradenames, service marks,
service mark applications, copyrights, internet domain names, computer
programs and other computer software, inventions, know-how, trade secrets,
technology, proprietary processes, trade dress, software and formulae
(collectively, "Intellectual Property Rights") used in, or necessary for, the
operation of its Business as currently conducted or proposed to be conducted.
Except as set forth on the Company Disclosure Schedule, to the Company's
knowledge, the use by the Company of all Intellectual Property Rights
necessary or required for the conduct of the Business of the Company as
presently conducted and as proposed to be conducted does not infringe or
violate the Intellectual Property Rights of any person or entity. Except as
described on the Company Disclosure Schedule, to the Company's knowledge:
(a) the Company does not own or use any Intellectual Property Rights pursuant
to any written license agreement (other than a so-called "shrink wrap" license
agreements or similar agreements related to off-the-shelf software for which
aggregate licensing fees do not, or would not exceed $1,000, per year (a
"Shrink-Wrap License"); (b) the Company has not granted any person or entity
any rights, pursuant to a written license agreement or otherwise, to use the
Intellectual Property Rights; and (c) the Company owns, has unrestricted right
to use and has sole and exclusive possession of and has good and valid title
to, all of the Intellectual Property Rights owned by the Company, free and
clear of all Liens and Encumbrances. All license agreements relating to
Intellectual Property Rights are binding and there is not, under any of
such licenses, any existing default or event of default (or event which with
notice or lapse of time, or both, would constitute a default, or would
constitute a basis for a claim on non-performance) on the part of the Company
or, to the knowledge of the Company, any other party thereto.
ARTICLE 2.13
Litigation. Except as set forth in the Company Disclosure Schedule,
there is no legal, administrative, arbitration, or other proceeding, suit,
claim or action of any nature or investigation, review or audit of any kind,
or any judgment, decree, decision, injunction, writ or order pending, noticed,
scheduled, or, to the knowledge of the Company, threatened or contemplated by
or against or involving the Company, its assets, properties or business or its
directors, officers, agents or employees (but only in their capacity as such),
whether at law or in equity, before or by any person or entity or Authority,
or which questions or challenges the validity of this Agreement or any action
taken or to be taken by the parties hereto pursuant to this Agreement or in
connection with the transactions contemplated herein.
ARTICLE 2.14
Contracts and Commitments; No Default.
(a) Except as set forth in the Company Disclosure Schedule, the
Company is not a party to, nor are any of the Assets bound by, any
written or oral:
(i) employment, non-competition, consulting or severance
agreement, collective bargaining agreement, or pension,
profit-sharing, incentive compensation, deferred compensation,
stock purchase, stock option, stock appreciation right,
group insurance, severance pay or retirement plan or agreement;
(ii) indenture, mortgage, note, installment obligation,
agreement or other instrument relating to the borrowing of
money by the Company;
(iii) contract, agreement, lease (real or personal property)
or arrangement that (A) is not terminable on less than 30
days' notice without penalty, (B) is not over one year in
length of obligation of the Company, or (C) involves an
obligation of more than $50,000 over its term;
(iv) contract, agreement, commitment or license relating to
Intellectual Property Rights (other than a Shrink-Wrap
License);
(v) obligation or requirement to provide funds to or make any
investment (in the form of a loan, capital contribution or
otherwise) in any person or entity; or
(vi) outstanding sales or purchase contracts, commitments or
proposals that will result in any material loss upon completion
or performance thereof after allowance for direct distribution
expenses, or bound by any outstanding contracts, bids, sales or
service proposals quoting prices that are not reasonably
expected to result in a normal profit.
(b) True and complete copies (or summaries, in the case of oral
items) of all agreements disclosed pursuant to this Section 2.14
(the "Company Contracts") have been provided to Parent for review or
are available on the SEC's EDGAR website. Except as set forth in
the Company Disclosure Schedule, all of the Company Contracts items
are valid and enforceable by and against the Company in accordance
with their terms, and are in full force and effect. The Company is
not in breach, violation or default, however defined, in the
performance of any of its obligations under any of the Company
Contracts, and no facts and circumstances exist which, whether with
the giving of due notice, lapse of time, or both, would constitute
such breach, violation or default thereunder or thereof by the
Company, and, to the knowledge of the Company, no other parties
thereto are in a breach, violation or default, however defined,
thereunder or thereof, and no facts or circumstances exist which,
whether with the giving of due notice, lapse of time, or both,
would constitute such a breach, violation or default thereunder or
thereof.
ARTICLE 2.15
Compliance with Law; Permits and Other Operating Rights. Except as set
forth in the Company Disclosure Schedule, the Assets, properties, business and
operations of the Company are and have been in compliance in all respects with
all Laws applicable to the Company's assets, properties, business and
operations, except where the failure to comply would not have a Material
Adverse Effect. The Company possesses all material permits, licenses and
other authorizations from all Authorities necessary to permit it to operate
its business in the manner in which it presently is conducted, except where
the failure to possession such permits, licenses and other operations would
not have a Material Adverse Effect) and the consummation of the transactions
contemplated by this Agreement will not prevent the Company from being able to
continue to use such permits and operating rights. The Company has not
received notice of any violation of any such applicable Law, and is not in
default with respect to any order, writ, judgment, award, injunction or decree
of any Authority.
ARTICLE 2.16
Brokers. Neither the Company nor, to the knowledge of the Company, any
of its directors, officers or employees, has employed any broker, finder,
investment banker or financial advisor or incurred any liability for any
brokerage fee or commission, finder's fee or financial advisory fee, in
connection with the transactions contemplated hereby, nor is there any basis
known to the Company for any such fee or commission to be claimed by any
person or entity.
ARTICLE 2.17
Issuance of Parent Common Stock. To the Company's knowledge, as of the
date of this Agreement and as of the Effective Time, no facts or circumstances
exist or will exist that could cause the issuance of Parent Common Stock
pursuant to the Merger to fail to meet the exemption from the registration
requirements of the Securities Act set forth in Rule 506 of Regulation D
under of the Securities Act.
ARTICLE 2.18
Books and Records. The books of account, minute books, stock record
books, and other material records of the Company, all of which have been made
available to Parent, are complete and correct in all material respects and
have been maintained in accordance with reasonable business practices. The
minute books of the Company contain accurate and complete records of all
formal meetings held of, and corporate action taken by, the directors and
officers, the managers and committees of the managers of the Company. At the
Closing, all of those books and records will be in the possession of the
Company.
ARTICLE 2.19
Business Generally; Accuracy of Information. No representation or
warranty made by the Company in this Agreement, the Company Disclosure
Schedule, or in any document, agreement or certificate furnished or to be
furnished to Parent at the Closing by or on behalf of the Company in
connection with any of the transactions contemplated by this Agreement
contains or will contain any untrue statement of material fact or omit or will
omit to state any material fact necessary in order to make the statements
herein or therein not misleading in light of the circumstances in which they
are made, and all of the foregoing completely and correctly present the
information required or purported to be set forth herein or therein.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE PARENT
AND THE MERGER SUBSIDIARY
Parent and Merger Subsidiary hereby represent and warrant to the Company
that the statements contained in this Article 3 are correct and complete as of
the date of this Agreement and will be correct and complete as of the
Effective Time (as though made then and as though the Effective Time were
substituted for the date of this Agreement throughout this Article 3),
except as set forth in the disclosure schedule delivered by Parent and Merger
Subsidiary in connection with the Agreement (the "Parent Disclosure
Schedule"). The Parent Disclosure Schedule will be arranged in paragraphs
corresponding to the lettered and numbered paragraphs and subparagraphs
contained in this Section 3. Any matter disclosed on the Parent Disclosure
Schedule in respect of a particular representation will be deemed to have been
disclosed in respect of any other representation calling for a similar or
related type of disclosure (even if such matter is not specifically referenced
to the lettered and numbered paragraphs relating to such representation), if
and only to the extent that, it is clear from a reading of the disclosure that
it applies to such other representation.
ARTICLE 3.1
[intentionally omitted]
ARTICLE 3.2
Corporate Organization, Standing and Power. Parent is a corporation duly
organized, validly existing and in good standing under the laws of the State
of California; and Merger Subsidiary is a corporation duly organized, validly
existing and in good standing under the laws of the State of Nevada. Each of
Parent and Merger Subsidiary has all corporate power and authority to own its
properties and to carry on its business as now being conducted and is duly
qualified to do business and is in good standing in each jurisdiction in which
the failure to be so qualified would have a Material Adverse Effect on Parent
and Merger Subsidiary. Parent owns all of the outstanding capital stock of
Merger Subsidiary. Parent does not own or control any capital stock of any
corporation or any interest in any partnership, joint venture or other entity,
other than Merger Subsidiary.
ARTICLE 3.3
Authorization. Each of Parent and the Merger Subsidiary has all the
requisite corporate power and authority to enter into this Agreement and to
carry out the transactions contemplated herein. The Board of Directors of
Parent and the Merger Subsidiary, and Parent as the sole shareholder of the
Merger Subsidiary, have taken all action required by law, their respective
articles of incorporation and bylaws or otherwise to authorize the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated herein. This Agreement is the valid and binding
legal obligation of Parent and the Merger Subsidiary enforceable against each
of them in accordance with its terms, except as such enforceability may
be limited by applicable bankruptcy, insolvency, reorganization or similar
laws that affect creditors' rights generally.
ARTICLE 3.4
Capitalization. The authorized capital securities of the Parent and
Merger Subsidiary are set forth in the Parent Disclosure Schedule. The number
of shares of Parent Common Stock, as of the date of this Agreement and as set
forth in the Parent Disclosure Schedule, represent all of the issued and
outstanding capital securities of the Parent. All issued and outstanding
shares of Parent Common Stock are duly authorized, validly issued, fully paid
and nonassessable and are without, and were not issued in violation of,
preemptive rights. There are no shares of Parent Common Stock or other equity
securities of Parent outstanding or any securities convertible into or
exchangeable for such interests, securities or rights. Other than as set
forth on the Parent Disclosure Schedule and pursuant to this Agreement, there
is no subscription, option, warrant, call, right, contract, agreement,
commitment, understanding or arrangement to which Parent is a party, or by
which it is bound, with respect to the issuance, sale, delivery or transfer of
the capital securities of Parent, including any right of conversion or
exchange under any security or other instrument.
ARTICLE 3.5
Non-Contravention. Neither the execution, delivery and performance of
this Agreement nor the consummation of the transactions contemplated herein
will:
(a) violate any provision of the articles of incorporation or
bylaws of Parent or the Merger Subsidiary; or
(b) be in conflict with, or constitute a default, however defined
(or an event which, with the giving of due notice or lapse of time,
or both, would constitute such a default), under, or cause or permit
the acceleration of the maturity of, or give rise to, any right of
termination, cancellation, imposition of fees or penalties under,
any debt, note, bond, lease, mortgage, indenture, license,
obligation, contract, commitment, franchise, permit, instrument or
other agreement or obligation to which Parent or the Merger
Subsidiary is a party or by which Parent or the Merger Subsidiary or
any of their respective properties or assets is bound;
(c) result in the creation or imposition of any Encumbrance upon
any property or assets of Parent or the Merger Subsidiary under any
debt, obligation, contract, agreement or commitment to which Parent
or the Merger Subsidiary is a party or by which Parent or the Merger
Subsidiary or any of their respective properties or assets is bound;
or
(d) violate any Law of any Authority.
ARTICLE 3.6
Consents and Approvals. No Consent is required by any person or entity,
including without limitation any Authority, in connection with the execution,
delivery and performance by Parent or Merger Subsidiary of this Agreement, or
the consummation of the transactions contemplated herein, other than any
Consent which, if not made or obtained, will not, individually or in the
aggregate, have a Material Adverse Effect on the business of Parent or Merger
Subsidiary.
ARTICLE 3.7
Valid Issuance. The Parent Common Stock to be issued in connection with
the Merger will be duly authorized and, when issued, delivered and paid for as
provided in this Agreement, will be validly issued, fully paid and
non-assessable.
ARTICLE 3.8
Financial Statements. The Parent Disclosure Schedule contains a copy of
the financial statements of the Parent as of the years ended December 31, 2004
and 2003, and the period ended March 31, 2005 (the "Parent Financial
Statements"). Except as disclosed therein or in the Parent Disclosure
Schedule, the aforesaid Parent Financial Statements: (i) are in accordance
with the books and records of the Parent and have been prepared in conformity
with GAAP (except as stated therein or in the notes thereto); and (ii) are
true, complete and accurate in all material respects and fairly present the
financial position of the Parent as of the date thereof, and the income or
loss for the period then ended.
ARTICLE 3.9
Absence of Undisclosed Liabilities. Parent does not have any material
liabilities or obligations or claims of any kind whatsoever, whether secured
or unsecured, accrued or unaccrued, fixed or contingent, matured or unmatured,
known or unknown, direct or indirect, contingent or otherwise and whether due
or to become due (referred to herein individually as a "Liability" and
collectively as "Liabilities"), other than: (a) Liabilities that are fully
reflected or reserved for in the Balance Sheet or not required to be reflected
thereon pursuant to GAAP; (b) Liabilities that are set forth on the Parent
Disclosure Schedule; (c) Liabilities incurred by the Parent in the ordinary
course of business after the date of the Balance Sheet and consistent with
past practice; or (d) Liabilities in an amount not to exceed $50,000
individually or in the aggregate unless such amounts are disclosed on the
Parent Disclosure Schedule.
ARTICLE 3.10
[Intentionally omitted.]
ARTICLE 3.11
Absence of Certain Changes. Except as set forth in the Parent Disclosure
Schedule, Parent has owned and operated its assets, properties and business in
the ordinary course of business and consistent with past practice. Without
limiting the generality of the foregoing, subject to the aforesaid exceptions,
Parent has not experienced any change that has had or could reasonably be
expected to have a Material Adverse Effect on the Parent.
ARTICLE 3.12
Litigation. Except as disclosed in the Parent Disclosure Schedule, there
is no legal, administrative, arbitration, or other proceeding, suit, claim or
action of any nature or investigation, review or audit of any kind, or any
judgment, decree, decision, injunction, writ or order pending, noticed,
scheduled, or, to the knowledge of the Parent or the Merger Subsidiary,
threatened or contemplated by or against or involving the Parent, its assets,
properties or business or its directors, officers, agents or employees (but
only in their capacity as such), whether at law or in equity, before or by any
person or entity or Authority, or which questions or challenges the validity
of this Agreement or any action taken or to be taken by the parties hereto
pursuant to this Agreement or in connection with the transactions contemplated
herein.
ARTICLE 3.13
Contracts and Commitments; No Default. The Parent is not a party to, nor
are any of its Assets bound by, any contract, agreement, commitment, note,
covenant or promise, written or oral (a "Parent Contract"); that is not
disclosed in the Parent Disclosure Schedule. Except as disclosed in the
Parent Disclosure Schedule, none of the Parent Contracts contains a provision
requiring the consent of any party with respect to the consummation of the
transactions contemplated by this Agreement. The Parent is not in breach,
violation or default, however defined, in the performance of any of its
obligations under any of the Parent Contracts, and no facts and circumstances
exist which, whether with the giving of due notice, lapse of time, or both,
would constitute such breach, violation or default thereunder or thereof, and,
to the knowledge of the Parent, no other parties thereto are in a breach,
violation or default, however defined, thereunder or thereof, and no facts or
circumstances exist which, whether with the giving of due notice, lapse of
time, or both, would constitute such a breach, violation or default
thereunder or thereof.
ARTICLE 3.14
No Broker or Finder. No broker, finder or investment banker is entitled
to any brokerage, finder's or other fee or commission in connection with the
Merger or any of the other transactions contemplated by this Agreement based
upon arrangements made by or on behalf of the Parent.
ARTICLE 3.15
Intercompany And Affiliate Transactions; Insider Interests. Except as
expressly identified in the Parent Disclosure Schedule or in the Consent of
Directors of Parent approving the Merger which has been executed and provided
to the Company prior to execution, there are, and during the last two years
there have been, no transactions, agreements or arrangements of any kind,
direct or indirect, between the Parent, on the one hand, and any director,
officer, employee, stockholder, or affiliate of the Parent, on the other hand,
including, without limitation, loans, guarantees or pledges to, by or for the
Parent or from, to, by or for any of such persons, that are currently in
effect.
ARTICLE 3.16
Business Generally; Accuracy of Information. No representation or
warranty made by the Parent or Merger Subsidiary in this Agreement, the Parent
Disclosure Schedule, or in any document, agreement or certificate furnished or
to be furnished to the Company at the Closing by or on behalf of the Parent or
Merger Subsidiary in connection with any of the transactions contemplated by
this Agreement contains or will contain any untrue statement of material fact
or omit or will omit to state any material fact necessary in order to make the
statements herein or therein not misleading in light of the circumstances in
which they are made, and all of the foregoing completely and correctly present
the information required or purported to be set forth herein or therein.
ARTICLE 3.17
Compliance with Law; Permits and Other Operating Rights. The assets,
properties, business and operations of Parent and Merger Subsidiary are and
have been in compliance in all respects with all Laws applicable to the Parent
assets, properties, business and operations, except where the failure to
comply would not have a Material Adverse Effect. Parent and Merger
Subsidiary possess all material permits, licenses and other authorizations
from all Authorities necessary to permit it to operate their businesses in the
manner in which they presently are conducted, except where the failure to
possession such permits, licenses and other operations would not have a
Material Adverse Effect) and the consummation of the transactions contemplated
by this Agreement will not prevent the Parent or Merger Subsidiary from being
able to continue to use such permits and operating rights. Parent has not
received notice of any violation of any such applicable Law, and is not in
default with respect to any order, writ, judgment, award, injunction or decree
of any Authority. Merger Subsidiary has not had operations at any time and
was created after July 1, 2005 for the sole purpose of becoming a party to
this Agreement.
ARTICLE 3.18
Books and Records. The books of account, minute books, stock record
books, and other material records of Parent and Merger Subsidiary, all of
which have been made available to the Company, are complete and correct in all
material respects and have been maintained in accordance with reasonable
business practices. The minute books of the Parent and Merger Subsidiary
contain accurate and complete records of all formal meetings held of, and
corporate action taken by, the directors and officers, the managers and
committees of the managers of the Parent and Merger Subsidiary. Immediately
following Closing, all of those books and records shall be transferred to the
Company.
ARTICLE 3.19
Material Liability to an Authority. Parent has filed all reports or
returns related to all federal, state or local taxes of any time owed or owing
by Parent, and Parent has paid all federal, state and local taxes and
assessments owed by Parent with respect to time periods prior to the Effective
Time. Parent has complied and is in compliance in all respects with all
applicable federal, state, and local laws, statutes, ordinances and
regulations, and any judicial or administrative interpretation thereof,
relating to regulation and protection of human health, safety, the environment
and natural resources (including ambient air, surface water, groundwater,
wetlands, land surface or subsurface strata, wildlife, aquatic species and
vegetation). Except as indicated in the Parent Disclosure Schedule, Parent has
no obligations under, or with respect to, any retirement plan, employee
benefit plan or plan of any kind subject to the Employee Retirement Income
Security Act of 1974.
ARTICLE 4
COVENANTS OF THE PARTIES
ARTICLE 4.1
Conduct of Business. Except as contemplated by this Agreement or as
contemplated by Section 4.1 of the Company Disclosure Schedule, during the
period from the date of this Agreement to the Closing Date, each of Parent,
the Company and Merger Subsidiary will conduct its business and operations
according to its ordinary and usual course of business consistent with past
practices. Without limiting the generality of the foregoing, and, except as
otherwise expressly provided in this Agreement or as otherwise disclosed on
the Parent Disclosure Schedule or Company Disclosure Schedule, respectively,
prior to the Closing Date, without the prior written consent of the other
party, not to be unreasonably delayed, none of Parent, Merger Subsidiary or
the Company will:
(a) amend its articles of incorporation or bylaws;
(b) issue, reissue, sell, deliver or pledge or authorize or propose
the issuance, reissuance, sale, delivery or pledge of shares of
capital stock of any class, or securities convertible into capital
stock of any class, or any rights, warrants or options to acquire
any convertible securities or capital stock;
(c) adjust, split, combine, subdivide, reclassify or redeem,
purchase or otherwise acquire, or propose to redeem or purchase or
otherwise acquire, any shares of its capital stock, or
any of its other securities;
(d) declare, set aside or pay any dividend or other distribution
(whether in cash, stock or property or any combination thereof) in
respect of its capital stock, redeem or otherwise acquire any shares
of its capital stock or other securities, alter any term of any of
its outstanding securities;
(e) (i) except as required under any employment agreement, increase
in any manner the compensation of any of its directors, officers or
other employees; (ii) pay or agree to pay any pension, retirement
allowance or other employee benefit not required or permitted by any
existing plan, agreement or arrangement to any such director,
officer or employee, whether past or present; or (iii) commit itself
to any additional pension, profit-sharing, bonus, incentive,
deferred compensation, stock purchase, stock option, stock
appreciation right, group insurance, severance pay, retirement or
other employee benefit plan, agreement or arrangement, or to any
employment agreement or consulting agreement(arising out of prior
employment ) with or for the benefit of any person, or, except to
the extent required to comply with applicable law, amend any of such
plans or any of such agreements in existence on the date of this
Agreement;
(f) incur, assume, suffer or become subject to, whether directly or
by way of guarantee or otherwise, any Liabilities which,
individually or in the aggregate, exceed $10,000 in the case of
Parent or $50,000 in the case of the Company;
(g) make or enter into any commitment for capital expenditures in
excess of $10,000 in the case of Parent or $50,000 in the case of
the Company;
(h) pay, lend or advance any amount to, or sell, transfer or lease
any properties or assets (real, personal or mixed, tangible or
intangible) to, or enter into any agreement or arrangement with, any
of its officers or directors or any affiliate or associate of any of
its officers or directors;
(i) terminate, enter into or amend in any material respect any
contract, agreement, lease, license or commitment, or take any
action or omit to take any action which will cause a breach,
violation or default (however defined) under any contract, except in
the ordinary course of business and consistent with past practice;
(j) acquire any of the business or assets of any other person or
entity;
(k) permit any of its current insurance (or reinsurance) policies
to be cancelled or terminated or any of the coverage thereunder to
lapse, unless simultaneously with such termination, cancellation or
lapse, replacement policies providing coverage equal to or greater
than coverage remaining under those cancelled, terminated or lapsed
are in full force and effect;
(l) enter into other material agreements, commitments or contracts
not in the ordinary course of business or in excess of current
requirements;
(m) settle or compromise any suit, claim or dispute, or threatened
suit, claim or dispute (other than any settlement or compromise
having no effect upon the Company, its assets, operations or
financial position); or
(n) agree in writing or otherwise to take any of the foregoing
actions or any action which would make any representation or
warranty in this Agreement untrue or incorrect in any material
respect.
Nothing herein shall prevent the Company or the Parent from operating
their businesses in the ordinary course and consistent with past practice.
ARTICLE 4.2
Full Access. Throughout the period prior to Closing, each party will
afford to the other and its directors, officers, employees, counsel,
accountants, investment advisors and other authorized representatives and
agents, reasonable access to the facilities, properties, books and records of
the party in order that the other may have full opportunity to make such
investigations as it will desire to make of the affairs of the disclosing
party. Each party will furnish such additional financial and operating data
and other information as the other will, from time to time, reasonably
request, including without limitation access to the working papers of its
independent certified public accountants; provided, however, that any such
investigation will not affect or otherwise diminish or obviate in any respect
any of the representations and warranties of the disclosing party.
ARTICLE 4.3
Confidentiality. Each of the parties hereto agrees that it will not use,
or permit the use of, any of the information relating to any other party
hereto furnished to it in connection with the transactions contemplated herein
("Information") in a manner or for a purpose detrimental to such other party
or otherwise than in connection with the transaction, and that they will not
disclose, divulge, provide or make accessible (collectively, "Disclose"), or
permit the Disclosure of, any of the Information to any person or entity,
other than their respective directors, officers, employees, investment
advisors, accountants, counsel and other authorized representatives and
agents, except as may be required by judicial or administrative process or, in
the opinion of such party's counsel, by other requirements of Law; provided,
however, that prior to any Disclosure of any Information permitted hereunder,
the disclosing party will first obtain the recipients' undertaking to comply
with the provisions of this Section with respect to such information. The
term "Information" as used herein will not include any information relating to
a party that the party disclosing such information can show: (i) to have been
in its possession prior to its receipt from another party hereto; (ii) to be
now or to later become generally available to the public through no fault of
the disclosing party; (iii) to have been available to the public at the time
of its receipt by the disclosing party; (iv) to have been received separately
by the disclosing party in an unrestricted manner from a person entitled to
disclose such information; or (v) to have been developed independently by the
disclosing party without regard to any information received in connection with
this transaction. Each party hereto also agrees to promptly return to the
party from whom it originally received such information all original and
duplicate copies of written materials containing Information should the
transactions contemplated herein not occur. A party hereto will be deemed to
have satisfied its obligations to hold the Information confidential if it
exercises the same care as it takes with respect to its own similar
information.
ARTICLE 4.4
Filings; Consents; Removal of Objections. Subject to the terms and
conditions herein provided, the parties hereto will use their best efforts to
take or cause to be taken all actions and do or cause to be done all things
necessary, proper or advisable under applicable Laws to consummate and make
effective, as soon as reasonably practicable, the transactions contemplated
hereby, including without limitation obtaining all Consents of any person or
entity, whether private or governmental, required in connection with the
consummation of the transactions contemplated herein. In furtherance, and not
in limitation of the foregoing, it is the intent of the parties to consummate
the transactions contemplated herein at the earliest practicable time, and
they respectively agree to exert commercially reasonable efforts to that
end, including without limitation: (i) the removal or satisfaction, if
possible, of any objections to the validity or legality of the transactions
contemplated herein; and (ii) the satisfaction of the conditions to
consummation of the transactions contemplated hereby.
ARTICLE 4.5
Further Assurances; Cooperation; Notification.
(a) Each party hereto will, before, at and after Closing, execute
and deliver such instruments and take such other actions as the
other party or parties, as the case may be, may reasonably require
in order to carry out the intent of this Agreement. Without
limiting the generality of the foregoing, at any time after the
Closing, at the reasonable request of Parent and without further
consideration, the Company and Merger Subsidiary will execute and
deliver such instruments of sale, transfer, conveyance, assignment
and confirmation and take such action as Parent may reasonably deem
necessary or desirable in order to more effectively consummate the
transactions contemplated hereby.
(b) At all times from the date hereof until the Closing, each party
will promptly notify the other in writing of the occurrence of any
event which it reasonably believes will or may result in a failure
by such party to satisfy the conditions specified in this Article 4.
ARTICLE 4.6
Supplements to Disclosure Schedule. Prior to the Closing, each party will
supplement or amend its respective Disclosure Schedule with respect to any
event or development which, if existing or occurring at or prior to the date
of this Agreement, would have been required to be set forth or described in
the Disclosure Schedule or which is necessary to correct any information in
the Disclosure Schedule or in any representation and warranty of the Company
which has been rendered inaccurate by reason of such event or development.
For purposes of determining the accuracy as of the date hereof of the
representations and warranties of the Company contained in Article 2 hereof or
Parent in Article 3 hereof in order to determine the fulfillment of the
conditions set forth herein, the Disclosure Schedule of each party will be
deemed to exclude any information contained in any supplement or amendment
hereto delivered after the delivery of the Disclosure Schedule.
ARTICLE 4.7
Public Announcements. None of the parties hereto will make any public
announcement with respect to the transactions contemplated herein without the
prior written consent of the other parties, which consent will not be
unreasonably withheld or delayed; provided, however, that any of the parties
hereto may at any time make any announcements that are required by applicable
Law so long as the party so required to make an announcement promptly upon
learning of such requirement notifies the other parties of such requirement
and discusses with the other parties in good faith the exact proposed wording
of any such announcement.
ARTICLE 4.8
Satisfaction of Conditions Precedent. Each party will use commercially
reasonable efforts to satisfy or cause to be satisfied all the conditions
precedent that are applicable to them, and to cause the transactions
contemplated by this Agreement to be consummated, and, without limiting the
generality of the foregoing, to obtain all material consents and
authorizations of third parties and to make filings with, and give all notices
to, third parties that may be necessary or reasonably required on its part in
order to effect the transactions contemplated hereby.
4.9
[Intentionally omitted.]
4.10
Preparation of Information Statement. The parties shall jointly and
immediately complete the preparation of an Information Statement (the
"Information Statement"), which the Company shall distribute to its
Shareholders in accordance with applicable SEC requirements. The Company and
Parent each undertake to the other that all information provided for inclusion
in the Information Statement by Company on the one hand and Parent on the
other hand will not contain any untrue statement of material fact or omit to
state a material fact required to be stated herein or therein necessary to
make the statements therein, in light of the circumstances in which
they were made, not misleading. The parties shall jointly seek to ensure that
the Information Statement complies with all requirements of applicable state
and federal securities laws.
4.11
Investment Letters. The Company shall send to each Shareholder with the
Information Statement an Investment Representation Letter in a form and
substance approved by Parent (an "Investment Representation Letter"). The
Company shall use reasonable efforts to cause all shareholders to execute and
deliver to Company an Investment Representation Letter as soon as practicable
possible (and shall deliver copies of the same to Parent). In the event that
any Shareholder is not an "Accredited Investor," as defined in Rule 501(a)
under the Securities Act, the Company and Parent shall take steps reasonably
designed to confirm that such Shareholder is (i) capable of evaluating the
merits and risks of investing in the shares of Parent Common Stock, or (ii)
advised by a Purchaser Representative (as defined in Rule 501(h) promulgated
under the Securities Act) in connection with such shareholder's evaluation of
the Merger and the execution of the Investment Representation Letter. Parent
and the Company shall each provide any Shareholders with all non-confidential
information requested by such Shareholder in connection with the solicitation
of the Investment Representation Letter.
ARTICLE 5
CONDITIONS TO THE OBLIGATIONS OF THE PARENT
AND MERGER SUBSIDIARY
Notwithstanding any other provision of this Agreement to the contrary,
the obligation of Parent and Merger Subsidiary to effect the transactions
contemplated herein will be subject to the satisfaction at or prior to the
Closing, or waiver by Parent, of each of the following conditions:
ARTICLE 5.1
Representations and Warranties True. The representations and warranties
of the Company contained in this Agreement, including without limitation in
the Company Disclosure Schedule (and not including any changes or additions
delivered to Parent pursuant to Section 4.6), will be true, complete and
accurate in all material respects as of the date when made and at and as of
the Closing Date as though such representations and warranties were made at
and as of such time, except for changes specifically permitted or contemplated
by this Agreement, and except insofar as the representations and warranties
relate expressly and solely to a particular date or period, in which case they
will be true and correct at the Closing with respect to such date or period.
ARTICLE 5.2
Performance. The Company will have performed and complied in all
material respects with all agreements, covenants, obligations and conditions
required by this Agreement to be performed or complied with by the Company on
or prior to the Closing.
ARTICLE 5.3
Required Approvals and Consents.
(a) All action required by law and otherwise to be taken by the
shareholders of the Company to authorize the execution, delivery and
performance of this Agreement and the consummation of the
transactions contemplated hereby will have been duly and validly
taken.
(b) All Consents of or from all Authorities required hereunder to
consummate the transactions contemplated herein, will have been
delivered, made or obtained, and Parent will have received copies
thereof.
ARTICLE 5.4
Agreements and Documents. Parent and Merger Subsidiary will have
received the following agreements and documents, each of which will be in full
force and effect:
(a) a certificate executed on behalf of the Company by its Chief
Executive Officer confirming that the conditions set forth in
Sections 5.1, 5.2, 5.3, 5.5, 5.6 and 5.7 have been duly satisfied
(unless any such condition has been waived by Parent); and
(b) resolutions of the board of directors of the Company and the
stockholders of the Company, certified by the secretary of the
Company, approving the transactions contemplated by this Agreement,
including the Merger.
ARTICLE 5.5
Adverse Changes. No material adverse change will have occurred in the
business, financial condition, prospects, assets or operations of the Company
since March 31, 2005, except as set forth in the Company Disclosure Schedule
or on Schedule 5.5 attached hereto.
ARTICLE 5.6
No Proceeding or Litigation. No suit, action, investigation, inquiry or
other proceeding by any Authority or other person or entity will have been
instituted or threatened which delays or questions the validity or legality of
the transactions contemplated hereby or which, if successfully asserted,
would, in the reasonable judgment of Parent, individually or in the aggregate,
otherwise have a Material Adverse Effect on the Company's business, financial
condition, prospects, assets or operations or prevent or delay the
consummation of the transactions contemplated by this Agreement.
ARTICLE 5.7
Legislation. No Law will have been enacted which prohibits, restricts or
delays the consummation of the transactions contemplated hereby or any of the
conditions to the consummation of such transaction.
ARTICLE 5.8
Appropriate Documentation. The Parent will have received, in a form and
substance reasonably satisfactory to Parent, dated the Closing Date, all
certificates and other documents, instruments and writings to evidence the
fulfillment of the conditions set forth in this Article 5 as Parent may
reasonably request.
ARTICLE 5.9
Qualifications of Company Stockholders. All Company Shareholders shall
be either "accredited investors" or "sophisticated investors" as defined under
Rule 506 of Regulation D promulgated under the Securities Act; and there shall
be no more than 35 "sophisticated investors."
ARTICLE 5.10
Definitive Information Statement. The Company shall have filed with the
Securities and Exchange Commission a definitive information statement with
respect to the Merger and shall have mailed copies of such information
statement to its stockholders of record at least 21 days prior to the
Effective Time of the Merger.
ARTICLE 6
CONDITIONS TO OBLIGATIONS OF THE COMPANY
Notwithstanding anything in this Agreement to the contrary, the
obligation of the Company to effect the transactions contemplated herein will
be subject to the satisfaction at or prior to the Closing of each of the
following conditions:
ARTICLE 5.10
Representations and Warranties True. The representations and warranties
of Parent and Merger Subsidiary contained in this Agreement will be true,
complete and accurate in all material respects as of the date when made and at
and as of the Closing, as though such representations and warranties were made
at and as of such time, except for changes permitted or contemplated in this
Agreement, and except insofar as the representations and warranties relate
expressly and solely to a particular date or period, in which case they will
be true and correct at the Closing with respect to such date or period.
ARTICLE 5.11
Performance. The Parent will have performed and complied in all
material respects with all agreements, covenants, obligations and conditions
required by this Agreement to be performed or complied with by Parent at or
prior to the Closing, including the obligations of the pre-Close officers and
directors of Parent set forth in Section 4.9.
ARTICLE 5.12
Required Approvals and Consents.
(a) All action required by law and otherwise to be taken by the
directors and stockholders of the Parent to authorize the execution,
delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby will have been duly and validly
taken.
(b) All Consents of or from all Authorities required hereunder to
consummate the transactions contemplated herein, will have been
delivered, made or obtained, and the Company will have received
copies thereof.
ARTICLE 5.13
Agreements and Documents. The Company will have received the following
agreements and documents, each of which will be in full force and effect:
(a) a certificate executed on behalf of Parent by its Chief
Executive Officer confirming that the conditions set forth in
Sections 6.1, 6.2, 6.3, 6.5, 6.6 and 6.7 have been duly satisfied
(unless any such condition has been waived by the Company);
(b) resolutions of the board of directors of Parent and the board
of directors and sole stockholder of Merger Subsidiary, certified by
the secretary of Parent, approving the transactions contemplated by
this Agreement, including the Merger and the issuance of the Merger
Consideration.
6.5 Adverse Changes. No material adverse change will have occurred in
the business, financial condition, prospects, assets or operations of
Parent since March 31, 2005, except as set forth on Schedule 6.5 attached
hereto.
6.6 No Proceeding or Litigation. No suit, action, investigation,
inquiry or other proceeding by any Authority or other person or entity
will have been instituted or threatened which delays or questions the
validity or legality of the transactions contemplated hereby or which, if
successfully asserted, would, in the reasonable judgment of the Company,
individually or in the aggregate, otherwise have a Material Adverse
Effect on Parent's business, financial condition, prospects, assets or
operations or prevent or delay the consummation of the transactions
contemplated by this Agreement.
6.7 Legislation. No Law will have been enacted which prohibits,
restricts or delays the consummation of the transactions contemplated
hereby or any of the conditions to the consummation of such transaction.
6.8 Appropriate Documentation. The Company will have received, in a
form and substance reasonably satisfactory to Company, dated the Closing
Date, all certificates and other documents, instruments and writings to
evidence the fulfillment of the conditions set forth in this Article 6 as
the Company may reasonably request.
ARTICLE 6
TERMINATION AND ABANDONMENT
ARTICLE 6.1
Termination by Mutual Consent. This Agreement may be terminated at any
time prior to the Closing by the written consent of the Company and Parent.
ARTICLE 6.2
[Intentionally omitted.]
ARTICLE 6.3
Termination for Breach. This Agreement may be terminated by the board of
directors of either Company or Parent if (a) representation or warranty of the
other party is inaccurate or untrue in a material way, or (b) a material
default is be made by the other party in the observance or in the due and
timely performance of any of its covenants and agreements herein contained
and, with respect to (b), such default is not cured by the defaulting party
prior to the earlier of the day prior to the Effective Time or within 7 days
after receipt of written notice from the non-defaulting party which indicates
the basis for such default.
ARTICLE 6.4
Procedure and Effect of Termination. In the event of termination of this
Agreement and abandonment of the transactions contemplated hereby by the
Company or Parent pursuant to this Article 7, written notice thereof will be
given to all other parties and this Agreement will terminate and the
transactions contemplated hereby will be abandoned, without further action by
any of the parties hereto. If this Agreement is terminated as provided
herein:
(a) Each of the parties will, upon request, redeliver all
documents, work papers and other material of the other parties
relating to the transactions contemplated hereby, whether
obtained before or after the execution hereof, to the party
furnishing the same;
(b) All rights and obligations of the parties hereunder shall
terminate without any Liability of any party to any other party
(except for any Liability of any party then in breach related to
such breach).
(c) All filings, applications and other submissions made pursuant
to the terms of this Agreement will, to the extent practicable, be
withdrawn from the agency or other person to which made.
ARTICLE 7
MISCELLANEOUS PROVISIONS
ARTICLE 7.1
Expenses. The Parent and the Company will each bear their own costs and
expenses relating to the transactions contemplated hereby, including without
limitation, fees and expenses of legal counsel, accountants, investment
bankers, brokers or finders, printers, copiers, consultants or other
representatives for the services used, hired or connected with the
transactions contemplated hereby.
ARTICLE 7.2
Survival. As among the parties hereto, the representations and
warranties of the parties shall not survive the Effective Time, at which time
any action or claim based upon a breach of any representation or warranty with
respect to which a complaint has not been filed shall be time barred. The
foregoing shall not be deemed to limit any claim that the Company may make
against Tryant under the Indemnification Agreement or alter any survival
period set forth therein with respect to the representations and warrants of
Parent or Merger Subsidiary.
ARTICLE 7.3
Amendment and Modification. Subject to applicable Law, this Agreement
may be amended or modified by the parties hereto at any time with respect to
any of the terms contained herein; provided, however, that all such amendments
and modifications must be in writing duly executed by all of the parties
hereto.
ARTICLE 7.4
Waiver of Compliance; Consents. Any failure of a party to comply with
any obligation, covenant, agreement or condition herein may be expressly
waived in writing by the party entitled hereby to such compliance, but such
waiver or failure to insist upon strict compliance with such obligation,
covenant, agreement or condition will not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. No single or partial
exercise of a right or remedy will preclude any other or further exercise
thereof or of any other right or remedy hereunder. Whenever this Agreement
requires or permits the consent by or on behalf of a party, such consent will
be given in writing in the same manner as for waivers of compliance.
ARTICLE 7.5
No Third Party Beneficiaries. Nothing in this Agreement will entitle any
person or entity (other than a party hereto and his, her or its respective
successors and assigns permitted hereby) to any claim, cause of action, remedy
or right of any kind.
ARTICLE 7.6
Notices. All notices, requests, demands and other communications
required or permitted hereunder will be made in writing and will be deemed to
have been duly given and effective: (i) on the date of delivery, if delivered
personally or by express courier; (ii) on the earlier of the fourth (4th) day
after mailing or the date of the return receipt acknowledgement, if mailed,
postage prepaid, by certified or registered mail, return receipt requested; or
(iii) on the date of transmission, if sent by facsimile, telecopy, telegraph,
telex or other similar telegraphic communications equipment (with written
confirmation of delivery):
If to the Company:
With a copy to:
Birch Financial, Inc.
17029 Chatsworth Street, Suite 100
Granada Hills, California 91344
Attn: Nelson Colvin
Fax: 800-959-3702
Branden T. Burningham, Esq.
455 East 500 South, Suite 205
Salt Lake City, Utah 84111
Fax: 801-355-7126
or to such other person or address as either the Company will furnish to the
other parties hereto in writing in accordance with this subsection.
If to the Parent or Merger Subsidiary:
With a copy to:
Landscape Contractors Insurance Services,Inc.
1835 North Fine Avenue
Fresno, California 93727
Attn: Steve Hartman
Fax:
________________________________
________________________________
_____________________________
or to such other person or address as Parent will furnish to the other parties
hereto in writing in accordance with this subsection.
ARTICLE 7.7
Assignment. This Agreement and all of the provisions hereof will be
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assigns, but neither this Agreement nor
any of the rights, interests or obligations hereunder will be assigned
(whether voluntarily, involuntarily, by operation of law or otherwise) by any
of the parties hereto without the prior written consent of the other parties.
ARTICLE 7.8
Governing Law. This Agreement and the legal relations among the parties
hereto will be governed by and construed in accordance with the internal
substantive laws of the State of Nevada (without regard to the laws of
conflict that might otherwise apply) as to all matters, including without
limitation matters of validity, construction, effect, performance and
remedies.
ARTICLE 7.9
Jurisdiction and Venue. Each of the parties submits to the exclusive
jurisdiction of any state or federal court sitting in the state of California
in any action or proceeding arising out of or relating to this agreement and
agrees that all claims in respect of the action or proceeding may be heard and
determined in any such court. Each party also agrees not to bring any action
or proceeding arising out of or relating to this agreement in any other court.
Each of the parties waives any defense of inconvenient forum to the
maintenance of any action or proceeding so brought and waives any bond,
surety, or other security that might be required of any other party
with respect thereto. Any party may make service on any other party by
sending or delivering a copy of the process (i) to the party to be served at
the address and in the manner provided for the giving of notices in Section
8.6 above or the giving of notices in Section 8.6 above. Each party agrees
that a final judgment in any action or proceeding so brought shall be
conclusive and may e enforced by suit on the judgment or in any other manner
provided by law or in equity.
ARTICLE 7.10
Counterparts. This Agreement may be executed simultaneously in one or
more counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument. A facsimile copy of any
counterpart signature page to this Agreement shall be valid as an original.
ARTICLE 7.11
Headings. The table of contents and the headings of the sections and
subsections of this Agreement are inserted for convenience only and will not
constitute a part hereof.
ARTICLE 7.12
Entire Agreement. This Agreement, the Disclosure Schedule and the
exhibits and other writings attached to or delivered at Closing in connection
with this Agreement, together they embody the entire agreement and
understanding of the parties hereto in respect of the transactions
contemplated by this Agreement and together they are referred to as this
"Agreement" or the "Agreement." There are no restrictions, promises,
warranties, agreements, covenants or undertakings, other than those expressly
set forth or referred to in this Agreement. This Agreement supersedes all
prior agreements and understandings between the parties with respect to the
transaction or transactions contemplated by this Agreement. Provisions of
this Agreement will be interpreted to be valid and enforceable under
applicable Law to the extent that such interpretation does not materially
alter this Agreement; provided, however, that if any such provision becomes
invalid or unenforceable under applicable Law such provision will be
stricken to the extent necessary and the remainder of such provisions and the
remainder of this Agreement will continue in full force and effect.
ARTICLE 7.13
Definition of Material Adverse Effect. "Material Adverse Effect" with
respect to a party means a material adverse change in or effect on the
business, operations, financial condition, properties or liabilities of that
party taken as a whole; provided, however, that a Material Adverse Effect will
not be deemed to include (i) changes as a result of the announcement of this
transaction, (ii) events or conditions arising from changes in general
business or economic conditions or (iii) changes in generally accepted
accounting principles.
Signature Page Follows
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed as of the day and year first above written.
LANDSCAPE CONTRACTORS
BIRCH FINANCIAL, INC., a Nevada INSURANCE SERVICES, INC., a
corporation California corporation
By /s/ Nelson L. Colvin By /s/ Steve Hartman
--------------------- ------------------
Nelson L. Colvin, President Steve Hartman, President
LCIS ACQUISITION CORP., a Nevada
corporation
By /s/ Nelson L. Colvin
---------------------
Nelson L. Colvin, President