<PAGE>
As filed with the Securities and Exchange Commission on November 13, 2000.
Registration No. 333-_________
==============================================================================
U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
BIRCH FINANCIAL, INC.
---------------------
(Name of small business issuer in its charter)
Nevada 5222 91-2077659
------ ---- ----------
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
15722 Kadota St.
Sylmar, California 91342
(800) 959-3701
--------------
(Address and telephone number of principal executive offices)
15722 Kadota St.
Sylmar, California 91342
(800) 959-3701
--------------
(Address of principal place of business
or intended principal place of business)
Efraim Donitz
15722 Kadota St.
Sylmar, California 91342
(800) 959-3701
--------------
(Name, address and telephone number of agent for service)
Copies to:
Branden T. Burningham, Esq.
455 East 500 South, Suite 205
Salt Lake City, Utah 84111
(801) 363-7411
Approximate date of proposed sale to the public: As soon as practicable after
the effective date of this Registration Statement.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If this Form is a post effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
==============================================================================
CALCULATION OF REGISTRATION FEE
Title of
Each Proposed Proposed
Class of Maximum Maximum
Securities Amount Offering Aggregate Amount of
to be to be Price per Offering
Registration
Registered Registered Unit/Share (1) Price (1) Fee
---------- ---------- ---------- ----- ---
Common Stock, 5,000,000 $1.25 $6,250,000 $1,737.50
$0.01 par value shares
==============================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
BIRCH FINANCIAL, INC.
5,000,000 shares of common stock
Birch Financial, Inc., a Nevada corporation, is offering 5,000,000
shares of common stock. For a complete description of the securities being
offered, see the caption "Description of Securities."
Our common stock is quoted on the Pink Sheets published by Pink
Sheets LLC, under the symbol "BRFL." On August 17, 2000, the price of our
common stock as quoted in the Pink Sheets was $0.125. There is no established
public market for the shares.
These securities involve a high degree of risk. See the caption
"Risk Factors," beginning on page 4 of this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these securities or
passed upon the adequacy or accuracy of the prospectus. Any representation to
the contrary is a criminal offense.
You may rely only on the information contained in this prospectus.
We have not authorized anyone to provide information different from that
contained in this prospectus. Neither the delivery of the prospectus nor the
sale of common stock means that information contained in this prospectus is
correct after the date of this prospectus. This prospectus is not an offer to
sell or a solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
------------------------------------------------------------------------------
Underwriting Proceeds to Issuer
Price to Discounts and or Other Public Persons
Public Commissions(1) (2)
------------------------------------------------------------------------------
Per Share $1.25 $0 $1.25
Total Maximum $6,250,000 $0 $6,250,000
------------------------------------------------------------------------------
(1) The shares will be sold by Birch Financial's directors and executive
officers on a "direct participation" basis. As of the date of this
prospectus, Birch Financial has not received any commitments to purchase the
shares and it can not guarantee that it will be able to raise any specific
dollar amount. The offering will end on __________________. Birch
Financial's directors may extend the offering period to __________________, in
their sole discretion. The proceeds of this offering will not be placed in
escrow and will be available for Birch Financial's use immediately after they
are received.
(2) Before deducting estimated expenses of $60,000, all of which will be
paid by Birch Financial.
The date of this prospectus is _________________.
1
<PAGE>
TABLE OF CONTENTS
Available Information . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Forward Looking Statements . . . . . . . . . . . . . . . . . . . . . . . 7
Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Determination of Offering Price . . . . . . . . . . . . . . . . . . . . 8
Dilution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Selling Security Holders . . . . . . . . . . . . . . . . . . . . . . . . 9
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Directors, Executive Officers, Promoters and Control Persons . . . . . .10
Security Ownership of Certain Beneficial Owners and Management . . . . .13
Description of Securities . . . . . . . . . . . . . . . . . . . . . . . 16
Interest of Named Experts and Counsel . . . . . . . . . . . . . . . . . 17
Disclosure of Commission Position on Indemnification for Securities . . 17
Act Liabilities
Description of Business . . . . . . . . . . . . . . . . . . . . . . . . 19
Management's Discussion and Analysis or Plan of Operation . . . . . . . 31
Description of Property . . . . . . . . . . . . . . . . . . . . . . . . 33
Certain Relationships and Related Transactions . . . . . . . . . . . . .33
Market for Common Equity and Related Stockholder Matters . . . . . . . .35
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . .36
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . .38
Changes in and Disagreements with Accountants on Accounting and . . . . 58
Financial Disclosure
2
<PAGE>
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a
Registration Statement on Form SB-2, under the Securities Act of 1933. The
registration statement covers the securities described in this prospectus.
This prospectus is filed as part of the registration statement. It does not
contain all of the information set forth in the registration statement and the
exhibits and schedules filed with it. For further information about us and
the common stock described by this prospectus, we refer you to the
registration statement and to the exhibits and schedules filed with it. You
may inspect or obtain these documents from the Commission's Public Reference
Branch. You may also view them on the Commission's web site: www.sec.gov.
PROSPECTUS SUMMARY
------------------
Birch Financial
----------------
Since this is a summary of the terms of the common stock described
in this prospectus, it does not contain all of the information that may be
important to you. This prospectus contains "forward-looking" information
within the meaning of the Private Securities Litigation Reform Act of 1995.
We believe that the forward-looking statements contained in this prospectus
are within the meaning of the safe harbor provided by Section 27A of the
Securities Act of 1933. Forward-looking statements contained in this
prospectus involve known and unknown risks, uncertainties and other factors
that could cause actual results, financial or operating performance to differ
from the future results, financial or operating performance or achievements
expressed or implied by such forward-looking statements. You should read the
following summary and the "Risk Factors" section along with the more detailed
information , financial statements and the notes to the financial statements
appearing elsewhere in this prospectus before you decide whether to purchase
the common stock described in this prospectus.
The Company
-----------
Birch Financial is a financial company serving California, Nevada,
Arizona and Utah. We provide insurance premium financing for landscapers,
nurseries, golf courses and other members of the "green industry." We are
also planning to begin offering equipment financing for members of the green
industry.
The Offering
------------
Securities Offered . . . . . .5,000,000 shares of our common stock.
Offering Price . . . . . . . .$1.25 per share.
Plan of Distribution . . . . .Birch Financial's directors and executive
officers will offer the shares on a "direct
participation" basis.
Securities Outstanding . . . .As of the date of this prospectus, 32,083,548
shares of our common stock are outstanding.
Transfer Agent . . . . . . . .Standard Registrar & Transfer Co., Inc., 12528
South 1840 East, Draper, Utah 84020, (801) 571-
8844, serves as our transfer agent and registrar
for our outstanding securities.
3
<PAGE>
RISK FACTORS
------------
An investment in Birch Financial's shares is very speculative and
involves substantial risks. In addition to the general investment risks and
other information in this prospectus, you should carefully consider the
following factors in deciding whether to invest in the shares.
Our Operations are Concentrated in the Insurance Premium Finance
Industry.
---------
Although we plan to expand our operations into the equipment
finance industry, we get almost all of our operating income from insurance
premium financing, or "IPF." This concentration exposes us to greater risks
of loss than a more traditional commercial lender would normally encounter.
We Provide IPF Loans for Only One Insurance Agent.
--------------------------------------------------
Birch Financial provides IPF loans for the insureds of only one
agent, Landscape Contractor Insurance, Inc. We are planning to offer our
services to other insurance agents in California. However, we expect LCIS to
provide a very large part of our IPF business in the foreseeable future. The
loss or reduction of LCIS' business for any reason would force us to originate
other types of loans or make other investments, and may seriously diminish our
revenues and profitability.
We Depend Heavily on the Administrative Services of a Contractor.
-----------------------------------------------------------------
Automated Installment Systems, of St. Louis, Missouri, performs all
of our billing, collection and accounting services. We have a written
Computer Services and Consulting Agreement, dated September 8, 1995, with AIS.
The agreement provides for an additional term of one year, with each party
having the right to terminate the agreement upon 90 days' notice after the end
of the first year. We believe that we have good relations with AIS. However,
the termination of our agreement would require us to find another suitable
contractor. We can not assure you that we would be able to locate such a
contractor on affordable terms. Any delay in this effort would probably cause
us to lose revenue during the search period and could jeopardize our
operations.
The Loss of Our Line of Credit Would Hurt Our Operations.
---------------------------------------------------------
Our operating needs, including our ability to fund our IPF loans,
depend on a $3,500,000 line of credit from Safeco Credit Company, Inc., a
Washington corporation. This line of credit is evidenced by a Credit and
Security Agreement that is subject to annual renewal. As of the date of this
prospectus, our line of credit has been renewed through June 30, 2001. We
believe that our relationship with Safeco is good. However, if it does not
renew our line of credit for any reason, we will be forced to locate another
credit source. We can not guarantee that we would be able to find any such
lender on affordable terms. If we lose our line of credit with Safeco, our
ability to fund our loans and to meet our operating expenses could be
jeopardized.
4
<PAGE>
Our Industry is Very Competitive.
---------------------------------
We face very strong competition in the IPF industry. Many of our
competitors are national in scale and are affiliated with insurance carriers,
banks and other lenders. Of the 74 premium finance companies operating in
California in December 1999, we were ranked 17th in total number of loans and
19th in total assets. We believe that we will be able to continue competing
successfully in our market. However, we also believe that competition in our
industry will continue to increase, and we can not guarantee that we will be
able to maintain our competitive position.
Our Industry is Heavily Regulated.
----------------------------------
The states regulated the IPF industry extensively. These
regulations vary by state, but they often
require IPF lenders to be licensed by the state;
restrict the content of IPF loan agreements and impose certain
disclosure requirements on those agreements;
limit the amount of finance charges that lenders may impose;
regulate the amount of refunds due to a borrower who prepays
his
or her loan before it matures;
limit the amount of late fees, if any, and finance charges that
lenders can charge on overdue loans;
dictate the ways in which policies may be canceled for
non-payment
of the IPF loan, including the requirement that the lender give
the borrower notice before the cancellation; and
permit the imposition of significant penalties on lenders that
violate the IPF laws.
We believe that we are in compliance with all applicable state
regulations. However, these regulations may change at any time, and we can
not guarantee that we will be able to comply with any new regulations that may
be adopted.
Changing Technology May Make it Harder for Us to Compete.
---------------------------------------------------------
The way in which financial services companies deliver their services
has changed in recent years. We expect this trend to continue. We can not
predict the ways in which technological changes will affect us and our
industry. However, these changes will probably require us to spend additional
money to stay competitive. We can not assure you that we will have enough
assets or access to any technology that we may need in order to compete
successfully.
5
<PAGE>
We Will Use the Proceeds from This Offering for a New Business.
---------------------------------------------------------------
We are planning to begin offering equipment financing services to
members of the "green industry" in California, Nevada and Arizona. As of the
date of this prospectus, we have not conducted any equipment financing
operations. We will be subject to all of the risks faced by a new business.
You should be aware that new businesses in a highly competitive industry
normally encounter many difficulties. It is not clear that we will succeed
with our equipment financing business. This makes an investment in Birch
Financial more speculative than if all of our operations were focused on an
area in which we have a history of success.
Our Directors and Officers May Face Conflicts of Interest.
----------------------------------------------------------
In addition to their capacities with Birch Financial, each of our
directors and executive officers is a director and/or officer of Golden Oak
Cooperative Corporation, a California corporation; Oakwood Insurance Company,
Ltd., a Bermuda corporation; and LCIS. In addition, Golden Oak owns a 49%
interest in Oakwood, and Golden Oak and Oakwood collectively own approximately
67% of our outstanding shares. LCIS is a wholly-owned subsidiary of Golden
Oak. Due to these interrelationships and the fact that LCIS is the only
insurance agent for whom we currently provide IPF loans, our directors and
officers may face conflicts of interest over use of time and corporate
opportunity. In addition, any relationships or contracts with LCIS would not
be at arm's length, due to the overlapping ownership and control of Birch
Financial and LCIS.
We Rely Heavily on Existing Management.
---------------------------------------
Our operations depend primarily upon the experience and expertise of
Efraim Donitz (President, CEO, Treasurer and director) and Nelson L. Colvin
(Vice President, Secretary and director). The loss of either Mr. Donitz or
Mr. Colvin would seriously impede our operations. We do not carry any "key
man" life insurance on Mr. Donitz or Mr. Colvin. Golden Oak and Oakwood are
each the beneficiaries of $100,000 life insurance policies on Mr. Donitz.
The Offering Price of Our Shares Bears No Relation to Typical
Valuation Measures.
-------------------
Birch Financial has set the price for the shares arbitrarily. The
price is not based on any recognized measure of value, such as assets, book
value or net worth. You should not consider the offering price to be an
indication of Birch Financial's value. Management expects that purchasers of
shares in this offering will experience immediate and substantial dilution in
net tangible book value.
6
<PAGE>
You Should Not Expect The Payment of Dividends From Your
Investment.
-----------
Birch Financial does not expect to pay dividends on its common
stock in the foreseeable future. Future dividends, if any, will depend upon
our earnings, if any. Purchasers who will need cash dividends from their
investment should not purchase the shares.
Unless a Public Market Develops, You May Not Be Able to Sell Your
Shares.
-------
Our common stock is currently quoted on the Pink Sheets, published
by Pink Sheets LLC. However, there is no established public market for our
securities. We can not guarantee that any public market will develop after
the offering. As a result, purchasers of the shares may not be able to sell
their investment readily, if at all.
Our Company's Lack of an Underwriter Makes it Less Likely a Public
Market Will Develop.
--------------------
Birch Financial is not using an underwriter for this offering.
The "due diligence" review that an underwriter would customarily perform has
not been performed for this offering. Our directors and officers are
conducting the offering, which makes it less likely that a public market will
develop for our securities.
FORWARD-LOOKING STATEMENTS
--------------------------
This prospectus contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. Such statements can be identified by the use
of the forward-looking words "anticipate," "estimate," "project," "likely,"
"believe," "intend," "expect," or similar words. These statements discuss
future expectations, contain projections regarding future developments,
operations, or financial conditions, or state other forward-looking
information. When considering such forward-looking statements, you should
keep in mind the risk factors noted in this section and other cautionary
statements throughout this prospectus and any prospectus supplement. You
should also keep in mind that all forward-looking statements are based on
management's existing beliefs about present and future events outside of
management's control and on assumptions that may prove to be incorrect. If
one or more risks identified in this prospectus, a prospectus supplement, or
any applicable filings materializes, or any other underlying assumptions prove
incorrect, Birch Financial's actual results may vary materially from those
anticipated, estimated, projected or intended.
USE OF PROCEEDS
---------------
Birch Financial estimates that its net proceeds from this offering
will be approximately $6,190,000, after deducting estimated offering expenses
of about $60,000. Birch Financial plans to use all of these proceeds to fund
loans in our new equipment financing business. See the Risk Factor "We Will
Use the Proceeds from This Offering for a New Business."
7
<PAGE>
DETERMINATION OF OFFERING PRICE
-------------------------------
There is no established public market for our shares of common
stock. We have arbitrarily determined the price of the common stock based on
the amount of net proceeds that we think we will need to begin our equipment
financing operations and the percentage ownership interest in Birch Financial
that our principal stockholders are willing to give up. If the maximum
offering is sold, our principal stockholders, Golden Oak and Oakwood, will
still have a controlling ownership interest of approximately 58% of our then-
outstanding shares. See the Risk Factor "The Offering Price of Our Shares
Bears No Relation to Typical Valuation Measures."
Birch Financial can not assure you that any public market that
develops for its common stock will equal or exceed the offering price of the
shares. Purchasers of the shares face the risk that their shares will not be
worth what they paid for them when the purchasers decide to sell them.
DILUTION
--------
Purchasers of the shares will likely experience immediate and
substantial dilution in the value of our common stock. The net tangible book
value of Birch Financial as of June 30, 2000, was approximately $619,727, or
$0.019 per share. Net tangible book value per share is determined by
subtracting our total liabilities from our total tangible assets and dividing
the remainder by the number of shares of common stock outstanding.
If we sell all 5,000,000 shares being offered in this offering (at
a price of $1.25 per share), and after deduction of offering expenses of
approximately $60,000, the net tangible book value of Birch Financial as of
June 30, 2000, would have been $6,809,727, equaling $0.184 per share. This
amount represents an immediate increase of $0.165 per share (or approximately
968%) to current stockholders, and an immediate dilution in net tangible book
value of $1.066 per share (or approximately 85%) to purchasers of shares in
this offering. The following table illustrates this dilution:
<TABLE>
<S> <C>
Assuming
Maximum
Shares
Sold
--------
Initial public offering price per share (1).. $1.25
Net tangible book value per share
before offering........................... $0.019
Increase per share due to new investors... $0.165
(approximately 968% increase) ------
8
<PAGE>
Net tangible book value per share
after offering (2)......................... $0.184
------
Dilution per share purchased by new
investors................................. $1.066
(approximately 85% decrease)
(1) Offering price per share before deduction of offering expenses.
(2) After deduction of offering expenses estimated at $60,000.
</TABLE>
SELLING SECURITY HOLDERS
------------------------
No security holder of Birch Financial is offering any securities
under this offering. Birch Financial is selling all of the shares under this
offering.
PLAN OF DISTRIBUTION
--------------------
General
-------
Birch Financial is offering its shares to the public through its
directors and executive officers on a "direct participation" basis, with no
minimum number of shares which must be sold. Birch Financial can provide no
assurance that it will be able to sell any of the shares. There is no
provision for the escrow of offering proceeds pending the receipt of any
minimum proceeds; all proceeds will be immediately available for Birch
Financial's use. The offering will continue until ______________, or until
all offered shares are sold, or until terminated by Birch Financial, whichever
occurs first. Our Board of Directors can extend the offering period for an
additional two months, to _____________, 2000, in its sole discretion.
All subscription payments shall be made payable to "Birch
Financial, Inc."
The shares will be offered and sold by Birch Financial's directors
and executive officers. They will receive no compensation except for
reimbursement of expenses actually incurred in connection with offering
activities. We have no plans, proposals, arrangements or understandings with
any potential sales agent with respect to participation in the distribution of
our securities. If we later decide to seek the participation of any potential
sales agent, the registration statement of which this prospectus is a part
will be appropriately amended to identify such persons.
9
<PAGE>
There are no formal arrangements between Birch Financial and its
directors and executive officers pursuant to which shares will be reserved for
sales to persons designated by such directors and executive officers or their
affiliates. Directors and executive officers and their affiliates may
purchase shares under this offering, but it is unlikely that they will
purchase any shares.
We are not using the services of an underwriter for the offer and
sale of the shares; no underwriter has performed the usual independent "due
diligence" review of Birch Financial and its affairs and financial condition.
We can give no assurance that any market for our securities will develop after
the offering or that, if such a market does develop, it will be maintained.
Since the offering is not being underwritten by a broker-dealer that would
ordinarily be expected to publish quotations for and make a market in the
offered securities following the offering, Birch Financial has not had any
discussions with any broker-dealer firms regarding the possibility of making a
market in its securities after the offering.
Prior to this offering, there has been no established public
market for our securities. All dealers effecting transactions in the
securities being offered, whether or not the dealers are participating in this
distribution, may be required to deliver a prospectus until the later of the
termination of this offering or ___________________ (90 days after the date of
this prospectus). This is in addition to the obligation of dealers to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
LEGAL PROCEEDINGS
-----------------
Birch Financial is not a party to any pending legal proceeding.
To the knowledge of management, no federal, state or local governmental agency
is presently contemplating any proceeding against Birch Financial. None of
our directors, executive officers or affiliates or owners of record or
beneficially of more than five percent of our common stock is a party adverse
to us or has a material interest adverse to us in any proceeding.
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
------------------------------------------------------------
The following table sets forth the names of all current directors
and executive officers of Birch Financial. 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.
10
<PAGE>
<TABLE>
<CAPTION>
Date of Date of
Positions Election or Termination
Name Held Designation or Resignation
---- ---- ----------- --------------
<S> <C> <C> <C>
Efraim Donitz President 1/14/00 *
CEO 1/14/00 *
Treasurer 1/14/00 *
Director 1/14/00 *
Nelson L. Colvin Vice President 1/14/00 *
Secretary 1/14/00 *
Director 1/14/00 *
Keith L. Walton Vice President 1/14/00 *
Director 1/14/00 *
Barry L. Cohen Chairman of the 1/14/00 *
Board of Directors
Lebo Newman Director 1/14/00 *
Barry L. Konier 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 *
</TABLE>
* These persons presently serve in the capacities
indicated.
Business Experience.
--------------------
Efraim Donitz. Mr. Donitz is 62 years of age. In addition to his
duties as President, CFO and Treasurer of Birch Financial, Mr. Donitz has been
the CFO of Oakwood Insurance Co., Ltd., and CLCA Insurance Trust since 1994.
He is also CFO of Golden Oak Co-op Corporation and L.C.I.S. Mr. Donitz is
also one of the founders of L.C.I.S., which is the insurance agency arm of the
California Landscape Contractors Association. He has also been the President
of EFCO, Inc. since 1983. Mr. Donitz is a licensed landscape contractor and
insurance agent. He holds a degree in Agricultural Business and Management
and a Bachelor of Science in Fruit Industries from California Polytechnic
University. Mr. Donitz is a past President of the California Landscape
Contractors' Association.
11
<PAGE>
Nelson L. Colvin. In addition to his duties as Vice President,
Secretary and Director of Birch Financial, Mr. Colvin, age 62, is
President/CEO of Golden Oak Co-op Corporation, and Secretary of Oakwood
Insurance Co., Ltd. and L.C.I.S. 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 59 years old. In addition to his
duties as Vice President and Director of Birch Financial, Mr. Walton is
President of Oakwood Insurance Co., Ltd., Director of Golden Oak Co-op
Corporation and L.C.I.S. and President of Land Care Corp. and Brookside
Olympic. He is also the owner of Chapman Woods Nursery, Inc., which was
founded in 1975.
Barry L. Cohen. In addition to his duties as Chairman of the
Board of Directors of Birch Financial, Mr. Cohen, age 58, is Vice President of
Oakwood Insurance Co., Ltd., Director of Golden Oak Co-op Corporation,
director of L.C.I.S. 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 45 years of age. In addition to his
duties as a Director of Birch Financial, Mr. Newman is a Director and Chairman
of Finance Committee of Golden Oak Co-op Corporation, Oakwood Insurance Co.,
Ltd. and L.C.I.S. He is also Chairman of the Board of L.C.I.S. 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.
Barry L. Konier. In addition to his duties as a Director of Birch
Financial, Mr. Konier, age 55, is a Director of Golden Oak Co-op Corporation,
Oakwood Insurance Co., Ltd. and L.C.I.S. He was also the President of
Landscape West, Inc., which was sold to Service Master.
Timothy F. Nord. Mr. Nord is 53 years old. In addition to his
duties as Director of Birch Financial, Mr. Nord is a Director of Golden Oak
Co-op Corporation, Oakwood Insurance Co., Ltd. and L.C.I.S. 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 48 years of age. In addition to
his duties as Director of Birch Financial, Mr. Dietz is a Director of Golden
Oak Co-op Corporation, Oakwood Insurance Co., Ltd. and L.C.I.S. 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
Financial, Mr. Angelo, age 56, is a Director of Golden Oak Co-op Corporation,
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.
12
<PAGE>
Frank D. Quaresma. In addition to his duties as Director of Birch
Financial, Mr. Quaresma, age 45, is Chairman of the Board of Golden Oak Co-op
Corporation, and a Director of Oakwood Insurance Co., Ltd. and L.C.I.S. He
has owned Live Oak Landscape since 1977.
Significant Employees.
----------------------
Birch Financial does not employ any non-officers who are expected
to make a significant contribution to its business.
Family Relationships.
---------------------
There are no family relationships between any of the officers
and/or directors of Birch Financial.
Involvement in Certain Legal Proceedings.
-----------------------------------------
During the past five years, no present or former director, executive
officer or person nominated to become a director or an executive officer of
Birch Financial:
(1) was a general partner or executive officer of any business
against which any bankruptcy petition was filed, either at the time of the
bankruptcy or two years prior to that time;
(2) was convicted in a criminal proceeding or named subject to a
pending criminal proceeding (excluding traffic violations and other minor
offenses);
(3) was subject to any order, judgment or decree, not subsequently
reversed, suspended or vacated, of any court of competent jurisdiction,
permanently or temporarily enjoining, barring, suspending or otherwise
limiting his involvement in any type of business, securities or banking
activities; or
(4) was found by a court of competent jurisdiction (in a civil
action), the Commission or the Commodity Futures Trading Commission to have
violated a federal or state securities or commodities law, and the judgment
has not been reversed, suspended or vacated.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
Security Ownership of Certain Beneficial Owners.
------------------------------------------------
The following table sets forth the shareholdings of each of our
stockholders who is known to beneficially own more than five percent of our
outstanding common stock as of July 5, 2000. Except as otherwise indicated,
to the knowledge of management, each of these stockholders has sole investment
and sole voting power over the shares indicated.
13
<PAGE>
<TABLE>
<CAPTION>
Number Percentage
Name and Address of Shares Beneficially Owned of Class
---------------- ---------------------------- --------
<S> <C> <C>
Golden Oak Cooperative 10,930,000 34%
Corporation (1)
17029 Chatsworth St.
Granada Hills, CA 91344
Oakwood Insurance Co., Ltd. (1) 10,500,000 33%
P.O. Box HM 1538
Hamilton HM FX, Bermuda
---------- -----
TOTALS 21,430,000 67%
</TABLE>
(1) Golden Oak beneficially owns approximately 49% of Oakwood.
Security Ownership of Management.
---------------------------------
The following table sets forth the shareholdings of our directors and
executive officers as of July 5, 2000. Each of these persons has sole
investment and sole voting power over the shares indicated.
<TABLE>
<CAPTION>
Number Percentage
Name and Address of Shares Beneficially Owned of Class
---------------- ---------------------------- ----------
<S> <C> <C>
Efraim Donitz 1,000,000 3%
The Donitz Family Trust
12419 Debby St.
No. Hollywood, CA 91606
Nelson L. Colvin 500,000 (1) 1.5%
8754 Jumilla Av
Northridge, CA 91324
Keith L. Walton 1,000,000 3%
800 N. Meadowpacs Rd.
Walnut, CA 91789
Barry L. Cohen 100,000 (2) 0.3%
19519 Kenosha Court
Saratoga, CA 95070
14
<PAGE>
Lebo Newman 1,000,000 3%
2540 Bennett Ridge Rd.
Santa Rosa, CA 95404
Barry L. Konier 1,000,000 3%
20541 Anapola
Orange, CA 92869
Timothy F. Nord 100,000 (3) 0.3%
2425 Alder Street
Bakersfield, CA 93301
Ronald H. Dietz 300,000 (4) 0.9%
8244 E. Hillsdale Drive
Orange, CA 92869
Richard L. Angelo -0- -0-
11774 Monte Leon Way
Northridge, CA 91326
Frank D. Quaresma 1,000,000 3%
3342 McDonald Ave.
Modesto, CA 95358
--------- -----
All directors and executive
officers as a group
(10 persons) 6,000,000 18.7%
</TABLE>
(1) These shares are held jointly with Mr. Colvin's wife.
(2) These shares are held jointly with Mr. Cohen's wife.
(3) These shares are held jointly with Mr. Nord's wife.
(4) These shares are held of record by the Doherty Dietz 1998 Loving
Family Trust, which Mr. Dietz controls.
Changes in Control.
-------------------
There are no present arrangements or pledges of Birch Financial's
securities which may result in a change in control of Birch Financial.
15
<PAGE>
DESCRIPTION OF SECURITIES
-------------------------
Common Stock
------------
Birch Financial has the authority to issue 63,000,000 shares of
one cent par value common voting stock. The holders of our common stock are
entitled to one vote per share on each matter submitted to a vote at a meeting
of stockholders. The shares of common stock do not carry cumulative voting
rights in the election of directors.
Our stockholders have no pre-emptive rights to acquire additional
shares of common stock or other securities. The common stock is not subject
to redemption rights and carries no subscription or conversion rights. In the
event of liquidation of Birch Financial, the shares of common stock are
entitled to share equally in corporate assets after satisfaction of all
liabilities. All shares of the common stock now outstanding are fully paid
and non-assessable.
Our Bylaws authorize the Board of Directors to vote to declare
dividends from surplus profits whenever they believe it to be expedient.
The common stock holders are not personally liable for the payment
of our debts.
Our shares of common stock are "penny stock" as defined in Rule
3a51-1 of the Commission. This designation may adversely affect the
development of any public market for our common stock or, if such a market
develops, its continuation. Broker-dealers are required to personally
determine whether an investment in "penny stock" is suitable for customers.
Penny stocks are securities (i) with a price of less than five
dollars per share; (ii) that are not traded on a "recognized" national
exchange; (iii) whose prices are not quoted on the NASDAQ automated quotation
system (NASDAQ-listed stocks must still meet requirement (i) above); or (iv)
of an issuer with net tangible assets less than $2,000,000 (if the issuer has
been in continuous operation for at least three years) or $5,000,000 (if in
continuous operation for less than three years), or with average annual
revenues of less than $6,000,000 for the last three years.
Section 15(g) of the 1934 Act, and Rule 15g-2 of the Commission
require broker-dealers dealing in penny stocks to provide potential investors
with a document disclosing the risks of penny stocks and to obtain a manually
signed and dated written receipt of the document before effecting any
transaction in a penny stock for the investor's account. Potential investors
in Birch Financial's common stock are urged to obtain and read such disclosure
carefully before purchasing any shares that are deemed to be "penny stock."
Rule 15g-9 of the Commission requires broker-dealers in penny
stocks to approve the account of any investor for transactions in such stocks
before selling any penny stock to that investor. This procedure requires the
broker-dealer to (i) obtain from the investor information concerning his or
her financial situation, investment experience and investment objectives; (ii)
16
<PAGE>
reasonably determine, based on that information, that transactions in penny
stocks are suitable for the investor and that the investor has sufficient
knowledge and experience as to be reasonably capable of evaluating the risks
of penny stock transactions; (iii) provide the investor with a written
statement setting forth the basis on which the broker-dealer made the
determination in (ii) above; and (iv) receive a signed and dated copy of such
statement from the investor, confirming that it accurately reflects the
investor's financial situation, investment experience and investment
objectives. Compliance with these requirements may make it more difficult for
purchasers of our common stock to resell their shares to third parties or to
otherwise dispose of them.
Of the 32,083,548 shares of our common stock that were issued and
outstanding on July 5, 2000, 31,992,648 shares are "restricted," and
approximately 808,600 of these "restricted" shares are currently eligible
for resale under Rule 144 of the Securities and Exchange Commission. On
September 13, 2000, Golden Oak obtained an opinion of counsel as to the
availability of Rule 144 for the resale of 320,830 of these shares. The
remaining "restricted" shares will become eligible on or before April 13,
2001. The future sale of these "restricted" shares may have an adverse effect
on any market that may develop for our common stock.
There is no provision in its Articles of Incorporation or Bylaws
that would delay, defer, or prevent a change in control of Birch Financial.
INTEREST OF NAMED EXPERTS AND COUNSEL
-------------------------------------
The financial statements of Birch Financial as of December 31,
1999, have been included herein in reliance on the report of Jimmy Loh, CPA,
an independent certified public accountant, appearing elsewhere herein, and
upon the authority of said firm as experts in accounting and auditing.
Birch Financial has not hired any expert or counsel on a
contingent basis. No expert or counsel will receive a direct or indirect
interest in Birch Financial, and no such person was a promoter, underwriter,
voting trustee, director, officer or employee of Birch Financial.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
-----------
Section 78.751(1) of the Nevada Revised Statutes ("NRS")
authorizes a Nevada corporation to indemnify any director, officer, employee,
or corporate agent "who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, except an action by or
in the right of the corporation" due to his corporate role. Section 78.751(1)
extends this protection "against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful."
17
<PAGE>
Section 78.751(2) of the NRS also authorizes indemnification of
the reasonable defense or settlement expenses of a corporate director,
officer, employee or agent who is sued, or is threatened with a suit, by or in
the right of the corporation. The party must have been acting in good faith
and with the reasonable belief that his actions were not opposed to the
corporation's best interests. Unless the court rules that the party is
reasonably entitled to indemnification, the party seeking indemnification must
not have been found liable to the corporation.
To the extent that a corporate director, officer, employee, or
agent is successful on the merits or otherwise in defending any action or
proceeding referred to in Section 78.751(1) or 78.751(2), Section 78.751(3) of
the NRS requires that he be indemnified "against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with
the defense."
Section 78.751 (4) of the NRS limits indemnification under
Sections 78.751 (1) and 78.751(2) to situations in which either (1) the
stockholders, (2)the majority of a disinterested quorum of directors, or (3)
independent legal counsel determine that indemnification is proper under the
circumstances.
Pursuant to Section 78.751(5) of the NRS, the corporation may
advance an officer's or director's expenses incurred in defending any action
or proceeding upon receipt of an undertaking. Section 78.751(6)(a) provides
that the rights to indemnification and advancement of expenses shall not be
deemed exclusive of any other rights under any bylaw, agreement, stockholder
vote or vote of disinterested directors. Section 78.751(6)(b) extends the
rights to indemnification and advancement of expenses to former directors,
officers, employees and agents, as well as their heirs, executors, and
administrators.
Regardless of whether a director, officer, employee or agent has
the right to indemnity, Section 78.752 allows the corporation to purchase and
maintain insurance on his behalf against liability resulting from his
corporate role.
Article VIII of our Bylaws contains indemnification and insurance
provisions that are substantially similar to those set forth in the NRS.
This is only a summary of the indemnification provisions of our
Bylaws. You are urged to review this document for the actual text of its
indemnification provisions. See the Exhibit Index.
Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to directors, officers and controlling persons of Birch
Financial pursuant to the foregoing provisions, or otherwise, Birch Financial
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable.
18
<PAGE>
DESCRIPTION OF BUSINESS
-----------------------
GENERAL
Birch Financial was incorporated in the State of Nevada on April
20, 1983, as "Import Dynamics, Inc."
Over the next 10 years, we filed several Articles of Amendment, by
which we changed our name and our capitalization several times.
On July 23, 1993, we filed Articles of Amendment changing our name
to "United States Indemnity & Casualty, Inc.," and changing our capitalization
to 50,000,000 shares of common stock with a par value of $0.01 per share.
We ceased business operations in 1993 and were inactive until
December, 1999. On December 15, 1999, we effected a reverse split of our
common stock on the basis of 1,000 for one. Two days later, we completed a
forward split on a basis of 100 for one.
We entered into an Agreement and Plan of Reorganization with Birch
Financial, Inc., a Missouri corporation and all of the Birch Missouri
stockholders, on December 27, 1999. Under the Agreement, the Birch Missouri
stockholders transferred to us all of the outstanding securities of Birch
Missouri in exchange for 31,553,948 shares of our common stock. After the
reorganization, Birch Missouri became our wholly-owned subsidiary.
In connection with the reorganization, we changed our accounting
year from September 30 to December 31.
On January 20, 2000, we filed a Certificate of Amendment changing
our name to "Birch Financial, Inc." and changing our capitalization to
63,000,000 shares of common stock with a par value of $0.01 per share.
PRINCIPAL PRODUCTS OR SERVICES AND THEIR MARKETS
Insurance Premium Financing.
----------------------------
Neither Birch Financial nor Birch Missouri has significant assets or
operations. Substantially all of our assets and operations are those of Birch
California, Inc., a California corporation, which is a wholly-owned subsidiary
of Birch Missouri. Through Birch California, we are engaged in the business
of insurance premium finance for landscapers, nurseries, golf courses and
other members of the "green industry."
Insurance premium financing involves the lending of funds to
companies and individuals for the purpose of financing their purchase of
property and casualty insurance. Landscape Contractor Insurance, Inc. is the
only insurance agent for whom we currently offer IPF services. LCIS is wholly
owned by Golden Oak Cooperative Corporation, which also owns approximately 34%
of our outstanding shares.
19
<PAGE>
As of June 30, 2000, our premium financing receivables totaled
$2,765,238, net of unearned interest of $67,089, as compared to total
receivables of $2,501,627 at December 31, 1999, net of unearned interest of
$59,495 and reserves for a doubtful account of $3,988 at that date.
Our loans are relatively short term, generally with maturities of
approximately nine months. Down payments on our loans are generally 20
percent. Interest rates are tied to the prime lending rate and vary based on
the size of the loan. We also give a preferential interest rate to members of
the green industry. If a borrower becomes 20 days late on its loan, we send a
notice advising the borrower that its coverage may be terminated. Total
insurance policy cancellations are approximately $100,000 per year.
Our IPF loans are secured by the unearned premiums on the insureds'
insurance policies. Financed commercial insurance policies typically require
that the insured pay the full premium at or near the beginning of the policy
period. The insurance company generally earns the full premium over the
course of the policy period. If the insured cancels the policy before the end
of the policy period, it is usually entitled to a repayment of the unearned
portion of the policy payment as of the date of the cancellation.
Depending on the type of insurance coverage, and the terms of the
policy in question, the amount of unearned premium available upon cancellation
of a policy will vary. Relevant factors include:
the applicable method for measuring unearned premium; for
example,
whether it is prorated over the policy period or whether more
premium is earned at the beginning of the period;
the amount of the policy period that has lapsed at the time of
cancellation;
the loss experience under the policy before the cancellation;
and
variations in the scope of the risks covered after the
beginning
of the policy period.
In certain cases, the insurance company may earn all or part of the
premium at the inception of the policy. In either case, less of the unearned
premium would be available for return.
Because of the relatively short duration of IPF loans, most loans
are not prepaid. However, the loan terms and regulations do not prohibit
prepayments or provide for penalties if a borrower prepays its loan.
Equipment Financing.
--------------------
During the quarterly period ended June 30, 2000, we began offering
equipment financing services to members of the green industry under the name
"Birch Financial Equipment Financing." As of June 30, 2000, we had equipment
financing receivables of $37,000.
20
<PAGE>
Our equipment financing operations will focus on equipment leasing,
including truck and trailer equipment, and may possibly lease office equipment
machines, including copying, data processing, communication, printing and
manufacturing equipment. Our leases will be made exclusively to business
users. Initial lease terms for truck and trailer equipment typically will
range from 24 months to 60 months. We will commit to the purchase this
equipment only when we have a signed lease with a lessee who satisfies our
credit and funding requirements. Substantially all of our leases will be
full-payout, or "direct financing," leases that allow us to sell or re-lease
the equipment upon termination of the lease. Since inception, we have entered
into three financing and related lease transactions as follows:
On March 30, 2000 we financed a short-term real estate loan in
the amount of $15,000 for commercial property located in Newhall,
California. The term of the loan is 90 days, payable at an
interest rate of 13.5% per year, extended for an additional 90
days at an interest rate of 14% per year. Monthly payments of
interest only are subject to late charges.
On April 11, 2000, we financed a vehicle loan for a 1996 Ford
Explorer in the amount of $13,000. The term of the loan is 36
months at an interest rate of 13.5% per annum and is subject to
late charges.
On May 31, 2000 we financed a vehicle loan for a 1997 Dodge Ram
Wagon in the amount of $9,000. The term of the loan is 36 months
at an interest rate of 12.5% per annum and is subject to late
charges.
Upon expiration of the initial lease terms of its direct-financing
leases, Birch Financial expects, on average, to realize slightly more than the
residual value at which the leased equipment is carried on its books. Our
ability to recover the recorded estimated residual value depends on the
accuracy of initial estimates of the equipment's useful life, the market
conditions for used equipment when leases expire, and the effectiveness of
our program for re-leasing or otherwise disposing of leased equipment.
Residual recovery, however, is not required for us to achieve a profitable
return on our investment.
Birch Financial will use a non-cancelable lease, the terms and
conditions of which will vary only slightly from transaction to transaction.
In substantially all of the leases, lessees are obligated to:
remit all rents due, regardless of the performance of the
equipment;
operate the equipment in a careful and proper manner in
compliance
with governmental rules and regulations;
maintain and service the equipment;
insure the equipment against casualty losses and public
liability,
bodily injury and property damage; and
21
<PAGE>
pay us directly or reimburse us for, any taxes associated with the
equipment, its use, possession or lease, except those relating to
net income that we derive from it.
The leases will provide that we, in the event of a default by a
lessee, may declare the entire unpaid balance of rentals due and payable
immediately, and may seize and remove the equipment for subsequent sale,
re-lease or other disposition.
We maintain written credit policies that we believe are prudent and
customary within the lease finance industry. These policies form the basis
for our standardized lease forms and approval processes. On occasion, we will
make exceptions to our written credit policy for lessees with whom we have had
past positive experience. In general, our credit policies encourage leasing of
income-generating equipment. Within these guidelines, there are few specific
equipment or industry prohibitions.
Under our current underwriting guidelines, each loan is originated
after a review of the following criteria:
the applicant's ability to repay the loan;
the adequacy of the cash flow from the borrower's operations;
and
the real and tangible personal property that serve as
collateral for the loan.
Birch Financial has created an underwriting model, which
incorporates historical operating results of the borrower and compares
them to industry statistics. The model helps outline the loan proposal to
fit the approval guidelines. Loan officers input data provided by potential
borrowers into the underwriting model, and determine whether or not a
loan would qualify under our underwriting guidelines before submission to the
credit group. This pre-screening process allows for documentation once a loan
is accepted for underwriting. Our loan originations will typically range in
size from $1,000 to $75,000 for each truck, equipment and trailer loan. We
anticipate that most borrowers will be multiple unit operators.
We anticipate that we will act as a senior secured asset-based
lender. Our initial lending activities will be in the southwestern United
States. Our office is located in Sylmar, California. We will provide
asset-based lending to small to medium-sized businesses with annual revenues
ranging from approximately $50,000 to $5 million.
Our loans will be categorized based on the type of collateral
securing the loan. We will make revolving loans primarily secured by accounts
receivable and secondarily by inventory. We also will make term loans secured
by real property, equipment or other fixed assets. We also may periodically
enter into participations with other commercial finance companies. Our loans
typically will have maturities of six months to five years. We believe that
this will provide borrowers with greater flexibility to manage their borrowing
needs. These loans have an automatic renewal for a one-year period at the end
22
<PAGE>
of the contract term unless terminated by either party. Termination usually
requires 60 days' written notice before the end of the term. Equipment loans
are term loans typically with two to five-year amortization periods, but are
due and payable upon termination of the master loan and security agreement.
Before a credit line proposal letter is issued and a line of
credit is established, our policy requires a review of the prospective
client, its principals, business and customer base, including a review of
financial statement and other financial records, legal documentation,
samples of invoices and related documentation, operational matters, and
accounts receivable and payable. In addition, Birch Financial confirms
certain matters relating to the prospective client's business and the
collectability of the client's commercial receivables and other potential
collateral by conducting public record searches for liens, conducting credit
reviews of the prospective client and its principals, contracting major
customers and suppliers to identify potential problems, and conducting an
on-site audit of the prospective client's invoice, bookkeeping and collection
procedures to verify that they are properly conducted and operationally
compatible with our operations.
After the preliminary review and due diligence, we will:
require the prospective borrower to provide a deposit for fees;
order appraisals if lending against inventory, equipment or
real
estate; and
schedule an audit.
Our internal auditing staff conducts an audit generally consisting
of a due diligence review of the prospective borrower's accounting and
financial records, including a statistical review of accounts receivable and
charge-off history. Our internal auditors then submit their audit reports and
work papers to our credit committee for review before we extend credit. In
making a decision to approve a credit line, Birch Financial establishes credit
limits under the revolving credit line and analyzes the prospective client's
customer base to ensure compliance with our policies generally limiting our
overall exposure to account debtors, especially with respect to privately held
or non-investment grade borrowers. When deemed necessary for credit approval,
we may obtain guarantees or other types of security from a client or its
affiliates and may also obtain subordination and intercreditor agreements from
the borrower's other lenders. Although our underwriting guidelines and
policies provide that, prior to each loan funding, the account executive
assigned to the borrower:
obtain the original of a copy of the invoice to be sent to
the borrower and the purchase order, if we require one, related to
the invoice;
confirm the validity and accuracy of a representative
sampling of invoices; and
23
<PAGE>
mail a letter, on the borrower's letterhead, to the new
borrower's
customer which introduces Birch Financial and requests the
payment
be made directly to us.
An assigned Birch Financial account executive will monitor each
borrower's credit, collateral and advances. Account executives will be
required to meet with each of their assigned borrowers at least quarterly to
monitor the borrower's business, physically inspect the borrower's facilities
and equipment, and discuss any potential problem the borrower may be
experiencing. We will monitor borrowers' accounts receivable using three
forms. The first form is an accounts receivable aging analysis report
prepared monthly by the loan processor and reviewed by the account executive,
and which includes, among other things, details about account concentrations
and aging trends. The second is an accounts receivable activity summary
prepared monthly by the loan processor and reviewed by the account executive,
summarizing borrowings, repayments and pledged collateral. The
third is a daily report prepared by the borrower and reviewed by the account
executive to determine credit availability for a particular day. In addition
to the foregoing monitoring procedures, interim audits of all borrowers will
be scheduled as deemed appropriate. Also, each account will be reviewed on
its anniversary date and revolving lines will be reviewed and reconciled on a
monthly basis. Where liquidation is required for repayment of an outstanding
loan, we will try to obtain consensual possession of the subject collateral
property and joint collections of accounts receivable. In certain cases,
court action may be required to ensure collections of receivables and
possession of pledged assets.
We expect to have an ongoing need to finance our lending activities.
We expect this need to increase as the volume of loan and lease originations
increases. Our primary operating cash requirements will include the funding
of:
loans and leases pending their sale;
fees and expenses incurred in connection with our
securitization
program;
over-collateralization or reserve account requirements in
connection with loans pooled and sold;
interest, fees, and expenses associated with our warehouse
credit
and repurchase facilities with certain financial institutions;
federal and state income tax payments; and
ongoing administrative and other operating expenses.
We currently fund these cash requirements primarily by credit
facilities from commercial entities and financial institutions, and anticipate
that we will rely more heavily on securitizations, whole loan and lease sales,
and borrowings as our cash requirements increase.
24
<PAGE>
We will depend on our ability to access commercial loans, repurchase
facilities and warehouse lines of credit in order to fund new originations and
purchases. Historically, affiliates of Birch Financial have had various
commercial loans, warehouse lines and reverse repurchase facilities available
to finance truck equipment acquisitions.
In the future, we may enter into warehouse lines of credit with
commercial finance institutions. We expect these warehouse lines of credit
to provide additional financing for our continued growth in loan and lease
originations. We also intend to negotiate with a major financial institution
to provide additional financing for our continued growth in loan and lease
originations.
As a fundamental part of its business and financing strategy, Birch
Financial intends to sell substantially all of its loans and leases through
securitization, except for loans held for investments. We believe that
securitizations provide us with greater operating leverage and a reduced cost
of funds.
Each loan or lease securitization may have specific credit
enhancement requirements in the form of over-collateralization, which must be
met before we receive cash flows due. As the securitized assets generate cash
flows, they may be used to pay down the balance of the pass-through
certificates until the ratio of securitized assets to pass-through
certificates reaches the over-collateralization requirement specified in each
securitization. This over-collateralization amount is carried on the balance
sheet as retained interest in loan and lease securitizations. After the
over-collateralization requirement and the other requirements specified in the
pooling and servicing agreement have been met, we begin to receive principal
and interest on any subordinate bonds of residual interests retained. We
anticipate that a substantial portion of our gross income will be recognized
as gain on sales of loans or leases, which represent the present value of the
estimated cash flows on the subordinate bonds or residual interests retained,
less origination and underwriting costs. Interest-only and residual
certificates in securitizations of mortgage loans that we retain may be held
as trading securities and adjusted to their respective market value quarterly
with corresponding charges and credits made to income in the adjustment
period.
Depending on market conditions, we also intend to execute whole loan
and lease sales in which we disposes of our entire economic interest in the
loans and leases on a non-recourse basis, excluding servicing rights, for
cash. Whole loan and lease sale gains and losses will be recognized at the
time of sale and there are generally no residuals. We seek to maximize our
premium on whole loan sale revenues by closely monitoring institutional
purchasers' requirements and focusing on originating or purchasing the types
of loans and leases that meet those requirements and for which institutional
25
<PAGE>
purchasers tend to pay higher premiums. Whole loan and lease sales will be
made on a non-recourse basis pursuant to a purchase agreement containing
customary representations and warranties by Birch Financial regarding the
underwriting criteria applied by us and the origination process. We may be
required to repurchase or substitute loans in the event of a breach of our
representations and warranties. In addition, we may commit to repurchase or
substitute a loan if a payment default occurs within the first month following
the date the loan is funded, unless other arrangements are made between us and
the purchaser. We may be required either to repurchase or to replace loans or
leases which do not conform to our representations and warranties in the
pooling and servicing agreements entered into when the loans and leases are
pooled and sold through securitizations.
Our Servicing Department is responsible for loan and lease
accounting, compliance monitoring and, and necessary, collections. Our
servicing operations are located in Sylmar, California.
The loan and lease servicing function includes monthly invoicing,
payment collections, computing investor payments and processing investor
remittances. The primary method for borrower payments is through automatic
clearinghouse direct debiting.
Compliance monitoring procedures include a semi-annual review of
each borrower's compliance with stated covenants, including fixed charge
coverage ratios. If a borrower fails to comply with these covenants, the
borrower will be placed in our credit watch list. Loans and leases on the
credit watch list are subject to increased scrutiny and monitoring by our
servicing personnel. If a payment has not been received by the due date the
loan or lease is considered in default, and we will aggressively pursue
collection procedures, including collection calls and onsite visits. We will
file the appropriate lien documentation with the state so that we can
repossess the equipment if necessary.
During the first month of a delinquency lasting 10 days or more, we
will contact the borrower to determine the reason for the default and the
likelihood and timing of any payment. We will perform a credit investigation
and obtain updated financial statements from the borrower and current Dun &
Bradstreet and personal credit reports. Most of our borrowers are also
borrowers in the premium finance division, which gives us a record of payment
for the past two years. The borrower's bank and major trade creditors
typically will be contacted to provide first-hand verification of the
financial status of the borrower. We also may retain counsel in the state in
which the borrower is located, if we determine that the borrower or a related
entity is in bankruptcy or there is a reason to believe voluntary or
involuntary bankruptcy will be declared.
Within 15 to 45 days of the delinquency, an officer of Birch
Financial will meet in person with the delinquent borrower, the nature of the
borrower's financial difficulty will be re-examined and the likelihood of
repayment will be re-evaluated. We will physically inspect the borrower's
business unit, and industry consultants or other borrowers may be contacted
to evaluate the delinquent business unit.
26
<PAGE>
After 60 days of delinquency, the loan or lease likely will be
accelerated, and the borrower sent a written notice demanding payment of the
full amount due in respect of the loan or lease. The borrower may also be
reminded that any other loans that the borrower may have from other sources
are likely to be in the default. If it appears unlikely that the borrower will
cure the default, we may decide to negotiate with the borrower to induce the
borrower to offer the business unit for sale to other borrowers. In this
manner the loans and leases could be assumed.
Our profits will depend, in part, on the difference, or "spread,"
between the effective rate of interest that we receive on the loans we
originate or purchase and the interest rates payable by us under our warehouse
financing facilities or for securities issued in our securitizations. The
spread can be adversely affected because of interest rate increases during the
period from the date the loans are originated or purchased until the closing
of the sale or securitization of the loans.
From time to time, we may use various hedging strategies to provide
a level of protection against interest rate risks on our fixed-rate loans.
These strategies may include forward sales of loans or loan-backed
securities, interest rate caps and floors, and buying and selling of futures
and options on futures. Management will determine the nature and quantity of
hedging transactions based on various factors, including market conditions and
the expected volume of loan originations and purchases. While we believe that
our hedging strategies will be cost-effective and will provide some protection
against interest rate risks, no hedging strategy can completely protect us
from these risks. We do not believe that hedging against interest rate risks
associated with adjustable-rate loans likely will be cost-effective, and
accordingly, likely will not utilize the hedging strategies described above
with respect to our adjustable-rate loans.
DISTRIBUTION METHODS OF THE PRODUCTS OR SERVICES
Insurance Premium Financing.
----------------------------
All of our loans are generated through LCIS, which offers IPF loans
to allow its commercial customers to purchase the full amount of insurance
coverage that they need, while spreading out the payments over a period of
several months. LCIS maintains offices in the Bay Area of California, as well
as in Fresno, Granada Hills, Sacramento, and Orange County, California, and
Reno, Nevada. LCIS has eight agents.
Our loans are typically originated when one of LCIS' insureds signs
a premium finance agreement for its policy. The premium finance agreement
contains a limited power of attorney that gives us the power to cancel
coverage in the event of default, and a collateral assignment to us of any
unearned insurance premium remaining after cancellation.
When an insured signs a premium finance agreement, it is sent to
Automated Installment Systems. AIS then prepares a check for the financed
27
<PAGE>
premium amount and sends it to us for signature. The checks are drawn on our
account with Prudential Securities, which is funded through our $3.5 million
line of credit with Safeco Credit Company, Inc. We have a $3.5 million
promissory note with Safeco. Depending on the nature of the advance from
Safeco, we pay interest at the prime rate or the prime rate plus one-half
percent, provided that the interest rate shall never be less than 7.5%. The
advances are secured by our interests in our premium finance agreements with
our borrowers and our rights to unearned premiums under those agreements.
AIS bills our borrowers monthly. It sends out each bill 20 days
before payment is due. Each borrower sends its payment to AIS, which deposits
the payment in our bank account. All funds due to Safeco are then credited to
its account on a weekly basis.
We pay AIS $125 each for the first 35 premium finance agreements
processed in any month and $75 for each premium finance agreement processed
after the first 35 in any month, or 3% of any contract below $2,500. The
yearly average does not exceed $75 per contract.
Golden Oak and Oakwood perform all of our administrative functions
that are not performed by AIS. These include the preparation of our
correspondence and the billings for our equipment financing operations, as
well as miscellaneous secretarial functions. In exchange for these services,
we pay Golden Oak and Oakwood $12,000 each per year. We do not have any
written administration agreement with Golden Oak or Oakwood.
Equipment Financing.
--------------------
Birch Financial markets its equipment lease products through its own
in-house sales force. Our two-person in-house sales force solicits end
user customers and vendors to market equipment lease transactions. In
the future, we intend to expand our marketing efforts to include more
vendors.
Our broker advisory panel will consist of a group of productive
brokers who are brought together on an annual basis, so that they may have an
open interchange of ideas and information about us and the leasing
marketplace. We believe that the advisory panel will serve a
multi-purpose function by allowing us to reward those brokers that
provide us a profitable base of business, and also provide us with an
opportunity to market new ideas and concepts to those brokers before a
general release in the leasing community. We believe that we will
benefit by obtaining information on how the brokers work with our
competitors, such as special programs and market trends, and this
information can then be used to drive future marketing plans.
We anticipate that we will obtain business through referrals
from banks, venture capitalists, accounting firms, management consultants,
existing borrowers, other finance companies and independent brokers and
insurance agencies. Our marketing officers will call on our referral
sources to identify and receive introductions to potential clients and to
28
<PAGE>
identify potential clients from database searches. We expect to compensate
our marketing personnel with what we believe are competitive base salaries and
commissions based on funded transactions in order to motivate and reward the
creation of new business and the renewal of existing business. Such
commissions can be a significant portion of our total compensation paid to our
marketing personnel. Our marketing personnel have no credit decision
authority. We believe that our marketing strengths are our rapid response
time and high level of service.
COMPETITIVE BUSINESS CONDITIONS
Insurance Premium Financing.
----------------------------
Our industry is very competitive. Competitors include national
commercial premium finance companies, companies affiliated with insurance
carriers, independent insurance brokers that offer premium finance services,
banks and other lending institutions.
Approximately 80% percent of our IPF activities take place in
California. As of December 31, 1999, the California Department of Financial
Institutions had a record of 74 companies doing business in that state. Based
on the number of outstanding loans, we ranked approximately 17th, with 2,565
loans outstanding. Based on total assets, we were the 19th largest IPF
company in California on that date.
We believe that we will be able to continue operating in our
industry. However, we can not assure you that we will be able to maintain our
current competitive position.
Equipment Financing.
--------------------
The equipment financing industry is very competitive. Banks and
commercial finance companies dominate the industry. As of October 18, 2000,
we had only three outstanding equipment loans. We do not expect our
competitive position to be significant.
SOURCES AND AVAILABILITY OF RAW MATERIALS
None; not applicable.
DEPENDENCE ON ONE OR A FEW MAJOR CUSTOMERS
Birch Financial provides IPF loans for the insureds of only one
agent, LCIS. See the Risk Factor "We Provide IPF Loans for Only One Insurance
Agent."
We will focus our equipment lending efforts on members of the green
industry. Although there are thousands of green industry members in our area
of operations, our emphasis on that industry will limit the number of
potential borrowers.
29
<PAGE>
NEED FOR GOVERNMENTAL APPROVAL OF PRINCIPAL PRODUCTS OR SERVICES
See the caption "Effect of Existing or Probable Governmental
Regulations on the Business."
EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS ON THE BUSINESS
The making, enforcement and collection of IPF loans is regulated
under state law. These laws vary by state, but they generally do the
following:
require that IPF lenders be licensed by the state;
restrict the content of premium finance loan agreements and
impose
certain disclosure requirements on the agreements;
limit the amount of finance charges that the lender can impose;
regulate the amount of refunds due to a borrower who prepays
the
premium finance loan prior to maturity;
regulate the amount of late fees, if any, and finance charges
that
a lender may charge when a loan becomes overdue;
regulate the manner of canceling an insurance policy upon non-
payment of the loan, including a requirement that the lender
notify the borrower before cancellation; and
allow imposition of penalties, which may be significant, on
premium finance lenders for violations of the state's premium
finance laws.
Federal and state laws also prohibit us from using discriminatory
lending practices and unfair credit practices. We are licensed as an IPF
lender in California and Missouri and as an equipment lender in California.
We believe that we are in compliance with all applicable laws governing IPF
lenders. However, regulations change frequently, and we can not assure you
that future regulations will not hurt our business, either by increasing our
compliance costs or by restricting our operations.
RESEARCH AND DEVELOPMENT
Birch Financial does not expect that research and development will
be a significant part of its operations.
COSTS AND EFFECTS OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Management does not believe that compliance with environmental
laws will require a significant portion of its resources.
30
<PAGE>
NUMBER OF EMPLOYEES
Other than our officers, we do not have any employees.
REPORTS TO SECURITY HOLDERS
Birch Financial is not a reporting issuer under the 1934 Act. As
a result of this offering, we will become subject to the informational
requirements of the 1934 Act for a period of at least one fiscal year. As of
the fiscal year ending December 31, 2000, we may be required to register the
common stock being offered hereunder, under the 1934 Act, and continue to file
annual and quarterly reports.
The National Association of Securities Dealers, Inc. requires that
all issuers maintaining quotations of their securities on the OTC Bulletin
Board file periodic reports under the 1934 Act. In order to maintain such a
quotation, Birch Financial will have to register its securities under the 1934
Act on Form 8-A or Form 10-SB.
The public may read and copy any materials that we file with the
Commission at the Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the Commission at 1-800-SEC-
0330. The Commission maintains an Internet site that contains reports, proxy
and information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
Birch Financial intends to furnish to its stockholders annual
reports containing financial statements audited and reported upon by its
independent accounting firm, and such other periodic reports as it may
determine to be appropriate or as may be required by law.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
---------------------------------------------------------
Plan of Operation
-----------------
Premium Finance Division.
-------------------------
By December, 2001, we plan to expand our premium finance activities
with LCIS to $15 million. In addition, we are negotiating with other agencies
to provide premium financing for associations that they represent. We hope to
increase the gross premiums financed to $23 million by December, 2001.
However, we can not assure you that we will be able to get these associations'
business or that, if we do, we will be able to finance this level of gross
premiums.
We intend to renegotiate our line of credit with Safeco for all
contract financing to be provided at the prime interest rate instead of an
amount over the prime rate. If necessary, we should be able to increase the
Safeco line of credit from $3.5 million to $5 million.
31
<PAGE>
Equipment Finance Division.
---------------------------
We currently have over $60,000 in new loans or completed contracts.
We hope to finance at least $5 million by December, 2001, although we can not
assure you that we will reach any specific dollar amount.
We also intend to offer lines of credit to companies with "Class A"
credit ratings. We hope that this will generate about $2 million in
additional revenues, although we can not provide any guarantees in this
regard.
During the period ended December 31, 2000, we hope to provide leasing
services for office equipment, tractors, trenchers, mowers and vehicles, both
new and used.
We believe that our equipment finance division will grow
substantially through December 31, 2000. We expect additional funds to become
available as we sell bundled loans to banks and other financial institutions,
retaining the servicing and loan fees.
Results of Operations.
----------------------
Six Months Ended June 30, 2000.
-------------------------------
During the six months ended June 30, 2000, we received $179,057 in
interest income on our premium financing contracts. We also received $4,567
in interest income from bank accounts and $26,741 in late charge income during
that period. After deduction of interest expenses of $78,833, our total
income was $134,956.
Operating expenses during the period totaled $84,118, of which
$45,895 was our administrative fee to AIS and $12,000 was our administrative
fee to Golden Oak. Income before income tax was $50,838. After provision for
income taxes of $16,500, our net income for the six months ended June 30,
2000, was $34,338.
Fiscal Year Ended December 31, 1999.
------------------------------------
We received $313,594 in interest income on our IPF contracts during
the fiscal year ended December 31, 1999. Interest income from bank accounts
and late charge income totaled $1,848 and $54,350, respectively. Our interest
expense during that period was $131,005. Total income in the fiscal year
ended December 31, 1999, was $235,933.
Our administrative fee payments to AIS and to Golden Oak and Oakwood
were our largest operating expenses. These payments totaled $89,853 and
$24,000, respectively. Total operating expenses during the period were
$144,166. Income before income tax was $91,767. Provision for income tax was
$28,458, and our net income during the period was $63,309.
32
<PAGE>
Fiscal year ended December 31, 1998.
------------------------------------
In the fiscal year ended December 31, 1998, we received total
interest income of $309,431, of which $307,392 came from our IPF contracts and
$2,039 came from interest on our bank accounts. Late charge income totaled
$55,005. We paid interest expenses of $157,247 during the period and our
total income was $206,839.
Our principal operating expenses during the fiscal year ended
December 31, 1998, were $87,415 paid to AIS and $24,000 paid to Golden Oak and
Oakwood. Total operating expenses were $139,309. Our income before income
tax totaled $67,530. After provision for income taxes of $17,210, our net
income during the period was $50,320.
Liquidity and Capital Resources.
--------------------------------
Out total assets as of June 30, 2000, were $3,089,548, as compared
to total assets of $2,770,093 at December 31, 1999. We believe that our
current assets will be sufficient to allow us to operate for the next 12
months. However, we depend heavily on our line of credit with Safeco to fund
our IPF loans. As of June 30, 2000, our payable on the line of credit was
$1,730,792. 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. See the Risk Factor "The Loss of Our Line of Credit Would
Hurt Our Operations."
DESCRIPTION OF PROPERTY
-----------------------
We use a 3,000 square foot office facility in Sylmar, California.
The office is owned by The Donitz Family Trust, which owns approximately three
percent of our outstanding common stock and is controlled by Efraim Donitz,
our President, CEO and Treasurer. The Donitz Family Trust leases the building
to Efco, Inc., which is also controlled by Mr. Donitz. Efco lets us use this
facility rent-free, and gives us free access to its telephone, fax machine and
copier.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Transactions with Management and Others.
----------------------------------------
Except as indicated below, during the calendar year ended December
31, 1999, and the six months ended June 30, 2000, there were no material
transactions, series of similar transactions, currently proposed transactions,
or series of similar transactions, to which Birch Financial or any of its
subsidiaries was or is to be a party, in which the amount involved exceeded
$60,000 and in which any director or executive officer, or any security holder
who is known to Birch Financial to own of record or beneficially more than
five percent of its common stock, or any member of the immediate family of any
of the foregoing persons, had a material interest.
33
<PAGE>
We pay Efraim Donitz, our President, CEO and Treasurer, based on our
pre-tax earnings. We pay Mr. Donitz 10% of the first $100,000 of pre-tax
earnings, and 20% of any pre-tax earnings above $100,000. See the caption
"Executive Compensation" of this prospectus.
Each year, we pay Golden Oak and Oakwood administration fees of
$12,000 each. Golden Oak owns approximately 35% of our outstanding shares.
Oakwood, which is 49% owned by Golden Oak, owns approximately 33% of our
outstanding shares. LCIS, the only insurer for whom we offer premium
financing services, is a wholly-owned subsidiary of Golden Oak. As of December
31, 1999, and 1998, we had unfunded premium financing payables to LCIS of
$738,479 and $403,755, respectively. Our unfunded premium financing payable
was $445,298 as of June 30, 2000. As of December 31, 1999, and 1998, we had a
cancellation receivable from LCIS of $142,017 and$174,449, respectively. This
figure was $119,698 on June 30, 2000.
Each of our directors and executive officers is also a director or
executive officer of Golden Oak and Oakwood. Golden Oak is owned by the
employer members of the California Landscape Contractors' Association.
Certain Business Relationships.
-------------------------------
Except as indicated under the heading "Transactions with Management
and Others," during the calendar year ended December 31, 1999, and the six
months ended June 30, 2000, there were no material transactions, series of
similar transactions, currently proposed transactions, or series of similar
transactions, to which Birch Financial or any of its subsidiaries was or is to
be a party, in which the amount involved exceeded $60,000 and in which any
director or executive officer, or any security holder who is known to Birch
Financial to own of record or beneficially more than five percent of its
common stock, or any member of the immediate family of any of the foregoing
persons, had a material interest.
Indebtedness of Management.
---------------------------
Except as indicated under the heading "Transactions with Management
and Others," during the calendar year ended December 31, 1999, and the six
months ended June 30, 2000, there were no material transactions, series of
similar transactions, currently proposed transactions, or series of similar
transactions, to which Birch Financial or any of its subsidiaries was or is to
be a party, in which the amount involved exceeded $60,000 and in which any
director or executive officer, or any security holder who is known to Birch
Financial to own of record or beneficially more than five percent of the its
common stock, or any member of the immediate family of any of the foregoing
persons, had a material interest.
34
<PAGE>
Parents of the Issuer.
----------------------
Birch Financial has no parents, except to the extent that Golden Oak
and Oakwood may be deemed to be parents due to their collective ownership of
approximately 67% of our outstanding shares.
Transactions with Promoters.
----------------------------
Except as indicated under the heading "Transactions with Management
and Others," during the calendar year ended December 31, 1999, and the six
months ended June 30, 2000, there were no material transactions, series of
similar transactions, currently proposed transactions, or series of similar
transactions, to which Birch Financial or any of its subsidiaries was or is to
be a party, in which the amount involved exceeded $60,000 and in which any
promoter or founder, or any member of the immediate family of any of the
foregoing persons, had a material interest.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
--------------------------------------------------------
Market Information.
-------------------
Our common stock is quoted on the Pink Sheets, which are published
by Pink Sheets LLC. Our symbol is "BRFL." On August 17, 2000, the price of
our common stock as quoted on the Pink Sheets was $0.125.
Birch Financial intends to submit for listing on the OTC Bulletin
Board of the NASD, once it registers its securities to become subject to the
reporting requirements of the 1934 Act. However, it can provide no assurance
that it will meet the reporting requirements or that any market for its common
stock will develop or be maintained.
If a public market ever develops in the future, the sale of
"unregistered" and "restricted" shares of common stock pursuant to Rule 144 of
the Commission may hurt any such public market.
We will have to file quarterly and annual reports with the
Commission in order to have our securities quoted on the OTC Bulletin Board.
These reports must contain financial statements, with year-end financial
statements being audited. Management expects that the legal and accounting
fees required to prepare and file its periodic reports will total
approximately $10,000 per year.
There are no outstanding options, warrants or calls to purchase
any of our securities.
35
<PAGE>
Holders.
--------
As of the date of this prospectus, we have approximately 481
stockholders of record.
Dividends.
----------
Birch Financial has not declared any cash dividends with respect
to its common stock, and does not intend to declare dividends in the
foreseeable future. There are no material restrictions limiting, or that are
likely to limit, our ability to pay dividends on our securities.
EXECUTIVE COMPENSATION
----------------------
The following table sets forth the aggregate compensation that we
have paid for services rendered during the periods indicated:
Summary Compensation Table
--------------------------
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Secur-
ities All
Name and Year or Other Rest- Under- LTIP Other
Principal Period Salary Bonus Annual rictedlying Pay- Comp-
Position Ended ($) ($) Compen-Stock Optionsouts ensat'n
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Efraim 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Donitz 12/31/98 -0- (1) -0- -0- -0- -0- -0-
CEO, Pres. 12/31/99 -0- (1) -0- -0- -0- -0- -0-
and Treasurer 6/30/00 -0- (1) -0- -0- -0- -0- -0-
(6 mos.)
Nelson L. 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Colvin 12/31/98 -0- -0- -0- -0- -0- -0- -0-
Vice Pres. 12/31/99 -0- -0- -0- -0- -0- -0- -0-
and Secretary 6/30/00 -0- -0- -0- -0- -0- -0- -0-
(6 mos.)
Keith L. 12/31/97 -0- -0- -0- -0- -0- -0- -0-
Walton 12/31/98 -0- -0- -0- -0- -0- -0- -0-
Vice Pres. 12/31/99 -0- -0- -0- -0- -0- -0- -0-
6/30/00 -0- -0- -0- -0- -0- -0- -0-
(6 mos.)
</TABLE>
36
<PAGE>
(1) We pay our President, Efraim Donitz, 10% of our first $100,000
of pre-tax earnings and 20% of all pre-tax earnings in excess
of $100,000. For the calendar year ended December 31, 1999, we
accrued $17,675 and paid $12,500 to Mr. Donitz under this
arrangement. In the calendar year ended December 31, 1998, we
accrued $12,500 and paid Mr. Donitz $7,500. For the six months
ended June 30, 2000, we had accrued $10,000 and paid Mr. Donitz
$17,675 as bonus earned during the December 31, 1999, calendar
year.
Compensation of Directors.
--------------------------
We do not have any arrangements to compensate our directors for any
services provided as a director. We do not pay any additional amounts to our
directors for committee participation or special assignments.
Employment Contracts and Termination of Employment and Change-in-Control
Arrangements.
-------------
Our officers are our only employees. We do not have any written
employment agreements or any change-in-control arrangements with our officers.
37
<PAGE>
FINANCIAL STATEMENTS
--------------------
38
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
OF
BIRCH FINANCIAL, INC. AND SUBSIDIARIES
AS OF
DECEMBER 31, 1999
AND FOR YEARS ENDED
DECEMBER 31, 1999 AND 1998
WITH THE REPORT OF
INDEPENDENT AUDITOR
39
<PAGE>
Jimmy Loh, CPA a Professional Corporation
1522 S. Garfield Avenue, #A, Alhambra, CA 91801
Tel: (626) 300-8184 Fax: (626) 300-8125 Member AICPA & CSCPA
March 23, 2000
Report of Independent Auditor
To the Board of Directors and Shareholders
Birch Financial, Inc.
(Formerly United States Indemnity & Casualty, Inc.)
P.O. Box 3247
North Hollywood, CA 91609
We have audited the accompanying consolidated statement of financial condition
of Birch Financial, Inc. (formerly United States Indemnity & Casualty, Inc.),
a Nevada corporation as of December 31, 1999, and the related consolidated
statements of income, shareholder's equity, and cash flows for the years ended
December 31, 1999 and 1998. These consolidated financial statements are the
responsibility of the management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits. We did not
audit the unconsolidated financial statements of Birch Financial, Inc.
(formerly United States Indemnity & Casualty, Inc.) Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the financial data and information of Birch
Financial, Inc. (formerly United State Indemnity & Casualty, Inc.), is based
on the report of the other auditors.
We conducted the audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Birch
Financial, Inc. (formerly United States Indemnity & Casualty, Inc.) as of
December 31, 1999, and the results of its operations and its cash flows for
the years ended December 31, 1999 and 1998 in conformity with generally
accepted accounting principles.
Alhambra, California
40
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
CONSOLIDATED STATEMENT OF FINANCIAL CONDITIONS
As of December 31, 1999
ASSETS
[CAPTION]
<TABLE>
<S> <C> <C>
Cash and Cash Equivalents 44,053
Premium Financing Receivable
(Net of Unearned Interest of $59,495 and
Reserves for Doubtful Account of $3,988 ) 2,501,627
Cancellations Receivable 142,017
Organization Cost
(Net of Accumulated Amortization of $7,448) 1,623
Prepaid Fees and Other Receivable 80,773
Total Assets 2,770,093
LIABILITIES AND EQUITY
Bank Overdraft 196,401
Unfunded Premium Financing Payable (Note 2) 738,479
Line of Credit Payable (Note 3) 1,221,645
Accrued Interest Payable 2,971
Incentive Bonus Payable (Note 2) 17,675
Management Fees Payable (Note 2) 24,000
Income Tax Liabilities 11,024
Other Accrued Expenses and Payable 10,971
Total Liabilities 2,223,166
Shareholders Equity
Common Stock (Note 5)
(50,000,000 authorized at $0.01 par value
32,083,048 shares issued and outstanding) 320,830
Additional Paid in Capital 316,049
Accumulated Deficit (89,952)
Total Shareholder's Equity 546,927
Total Liabilities and Equity 2770,093
</TABLE>
41
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
CONSOLIDATED INCOME STATEMENT
For Years ended December 31, 1999 and 1998
[CAPTION]
<TABLE>
1999 1998
<S> <C> <C>
Interest Income - Premium Financing Contracts 313,594 307,392
Interest Income - Bank Accounts 1,848 2,039
Total Interest Income 315,442 309,431
Interest Expenses 131,005 157,247
Net Interest Income 184,437 152,184
Provision for Loan Loss 3,541 1,057
Net Interest Income After Provision for Loss 180,896 151,127
Late Charge Income 54,350 55,005
Other Income 687 707
Total Income 235,933 206,839
Operating Expenses
Bank Fees 26 30
Depreciation and Amortization 1,315 1,692
License and Permit 1,051 260
Management Fee (Note 2) 24,000 24,000
Incentive Bonus (Note 2) 17,675 12,500
Notary and Postage 140 244
Office Expenses 218 80
Professional Fees 8,615 12,096
Third Party Administrative Fees 89,853 87,415
Telephone 270 112
Travel Expenses 635 391
Other Expenses 368 489
Total Operating Expenses 144,166 139,309
Income Before Income Tax 91,767 67,530
Provision for Income taxes 28,458 17,210
NET INCOME 63,309 50,320
</TABLE>
42
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
For Years Ended December 31, 1999 and 1998
[CAPTION]
<TABLE>
Common Paid In Retained Total
Stock Capital Earning Equity
<S> <C> <C> <C> <C>
Beginning Balance
As of January 1, 1998 8,500 469,750 (87,452) 390,798
1998
Operating Income 50,320 50,320
Balance
As of December 31, 1998 8,500 520,070 (87,452) 441,118
Cancellation of Commons
Stock (3,700) 3,700
Fractional Shares Issued in
Reverse Split 491 (491)
Capital Contributed by
Shareholders 42,500 42,500
Issuance of Common Stock 315,539 (315,539)
1999 Operating income 65,809 (2,500) 63,309
Balance
As of December 31, 1999 320,830 316,049 (89,952) 546,927
</TABLE>
43
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
CONSOLIDATED STATEMENT AND CASH FLOW
For Years Ended December 31, 1999 and 1998
[CAPTION]
<TABLE>
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATIONS ACTIVITIES
Net Income 63,309 50,321
Reconciliation of Net Income to
Net Cash Used by Operating Activities:
Depreciation and Amortization 1,315 1,692
Change in Accrued Interest 2,170 (2,170)
Change in Cancellation Receivable 32,432 (112,407)
Change in Bonus Payable 5,175 5,000
Change in Prepaid Fees and Other Receivable (48,334) 5,087
Change in Unfunded Premium Financing 334,724 122,121
Change in Tax Liabilities (6,409) 16,050
Change in Accrued Expenses and Payable (1,286) 0
Total Reconciliation 319,787 35,373
Net Cash Provided by Operating Activities 383,096 85,694
CASH FLOWS FROM INVESTMENT ACTIVITIES
Increase (Decrease) in
Premium Financing Receivable 45,721 (240,486)
Organization Cost (1,616) 0
Net Cash Provided (Used) by Investing Activities 44,105 (240,486)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (Decrease) in Bank Line Payable (835,882) 192,820
Increase in Bank Overdraft 196,401 0
Insurance of Common Stock 156,937 0
Capital Contribution From Shareholders 42,500 0
Net Cash Provided (Used) by Financing Activities (440,044) 192,820
Net Increase (Decrease) in Cash (12,843) 38,028
Cash at Beginning of Year 56,896 18,868
Cash at End of Year 44,053 56,896
</TABLE>
44
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999
1 Summary of Significant Accounting Policies:
a. Organization Birch Financial, Inc. (the Company) was
incorporated in the state of Nevada on April 20, 1983 as Import
Dynamics, Inc. From April 30, 1985 to April 17, 1991, the
Company changed its names to Peak Performance Products, Inc.,
LumaLure Manufacturing, Inc., Sairam Technologies, Ltd., and
Balanced Environmental Services Tech, Inc. On July 16, 1993,
the Company again changed its name to United States Indemnity &
Casualty, Inc. The Company ceased its operation in 1993 and
had been inactive until December 1999.
In December 1999, the Company=s Board of Directors agreed to
acquire 100% of the outstanding stock of Birch Financial, Inc.,
a Missouri corporation (Birch Missouri), in exchange for
31,553,948 shares of its common stock. At the date of the
consolidated financial statements, substantially all
shareholders of Birch Missouri tendered their securities for
the Company's stock. The Company changed its name to Birch
Financial, Inc.
Birch Missouri was incorporated on February 25, 1999 in the
state of Missouri. Immediately after its incorporation, Birch
Missouri entered into an agreement to acquire 100% of the
outstanding stock of Birch Financial, Inc., a California
corporation (Birch California), in exchange for its own stock.
Neither the Company nor Birch Missouri has significant assets
or business activities. The consolidated financial statements
primarily reflect the financial position, the result of the
operations and the cash flow of Birch California.
Birch California was organized under division 7 of the
Financial Code of California primarily engaging in the
businesses as an insurance premium finance concern. It was
incorporated in California on June 13, 1994. Birch California
finances insurance premiums, that are brokered by the majority
shareholders of the Company. The majority of the finance
contracts are for a term of nine months and are collateralized
by insurance policies with a term of twelve months.
b. Use of Estimates: In preparing the consolidated financial
statements in conformity with generally accepted accounting
principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
c. Fair Value of Financial Instruments: The carrying amount of the
Company and its subsidiaries= financial instruments, which
consists of cash and cash equivalents, premium financing
receivable, bank line payable and accounts payable approximate
their fair values.
45
<PAGE>
d. Interest 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 leveled yield method required by generally
accepted accounting principles for the period covered by these
financial statements has been determined to be immaterial.
e. Equipment and Depreciation: Equipment is carried on the basis
of cost. Depreciation is computed using the straight-line
method over equipment's expected useful lives.
2. Related Party Transactions.
a. The Company and its subsidiaries accrued and paid the major
shareholders of the Company $24,000 each year for management
fees during the years ending December 31, 1999 and 1998.
b. The Company and its subsidiaries had an unfunded premium
financing payable due to a related party of $738,479 and
$403,755 as of December 31, 1999 and 1998, respectively.
c. The Company and its subsidiaries had a cancellation receivable
due from a related party of $142,017 and $174,449 as of
December 31, 1999 and 1998, respectively.
d. For the year ended December 31, 1999, the Company and its
subsidiaries accrued $17,675 and paid $12,500 in incentive
bonus to a related party. For the year ended December 31,
1998, the Company and its subsidiaries accrued $12,500 and
paid $7,500 to the same party.
3. Line of Credit Arrangement
Currently, the Company and its subsidiaries have a $3,500,000 line
of credit arrangement with a financial institution for its normal
operating needs. Borrowing under this line is due on demand and is
collateralized by the Company and its subsidiaries' premium
financing receivable. As of December 31, 1999 and 1998, the balance
of the Company and its subsidiaries' borrowing under the line was
$1,221,645 and $2,057,527, respectively.
4. Income Tax
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement 109, the liability method is used in accounting for income
taxes. There are no material differences between the Company's
financial statements prepared in conformity with the generally
accepted accounting principles and for its income tax purpose.
46
<PAGE>
As of December 31, 1999, the Company had a net operating loss
carryforward of approximately $90,000, which may be used to offset
against future taxable income through 2019, if consolidated tax
returns are filed. The tax benefit of the net operating loss
carryforward is offset by a valuation allowance of the same amount
due to the lack of the records to substantiate the taxable losses in
the past.
5. Reverse Stock Split and Stock Cancellation
On December 14, 1999 the Company authorized a 1000-to-1 reverse
stock split. On the same day the Company authorized a 100-to-1
forward stock split.
In December 1999, the Company authorized the cancellation of
3,700,000 shares of its common stock before its approval of issuing
31,553,948 shares of its common stock for the outstanding stock of
Birch Missouri.
6. The following page represents the selected financial data of the
Company, Birch Missouri and Birch California.
47
<PAGE>
Birch Financial, Inc. and Subsidiaries
Selected Financial Data
[CAPTION]
<TABLE>
Birch Birch Birch
Financial Missouri California Elimination Total
<S> <C> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1999
Interest Income 315,442 315,442
Interest Expenses
and Provision
for Loss 134,546 134,546
Net Interest
Income 180,896 180,896
Other Income 55,037 55,037
Total Income 0 0 235,933 235,933
Operating
Expenses 2,500 243 141,423 144,166
Provision for
Income Tax 28,458 28,458
Net Income
(Loss) (2,500) (243) 66,052 63,309
YEAR ENDED
DECEMBER 31, 1998
Interest Income 309,431 309,431
Interest Expenses
and Provision
for Loss 158,304 158,304
Net Interest
Income 151,127 151,127
Other Income 55,712 55,712
Total Income 206,839 206,839
Operating Expenses 139,309 139,309
Provision for
Income Tax 17,210 17,210
Net Income
(Loss) 50,320 50,320
AS OF
DECEMBER 31, 1999
Cash and
Cash Equivalents 44,053 44,053
Premium Financing
Receivable 2,501,627 2,501,627
Investment in
Subsidiary 506,927 507,170 (1,014,097)
Other Assets 40,000 1,373 184,656 (1,616) 224,413
Total Assets 546,927 508,543 2,730,336 (1,015,713) 2,770,093
Liabilities 1,616 2,223,166 (1,616) 2,223,166
Shareholders
Equity 546,927 506,927 507,170 (1,014,097) 546,927
Liabilities
and Equity 546,927 508,543 2,730,336 (1,015,713) 2,770,093
</TABLE>
48
<PAGE>
CONSOLIDATED FINANCIAL STATEMENTS
OF
BIRCH FINANCIAL INC. AND SUBSIDIARIES
AS OF
JUNE 30, 2000
AND FOR THE SIX MONTHS THEN ENDED
49
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
Consolidated Statement of Financial Conditions
As of June 30, 2000
[CAPTION]
<TABLE>
ASSETS
<S> <C> <C>
Cash and Cash Equivalents 76,486
Premium Financing Receivable
(Net of Unearned Interest of $67,089 ) 2,765,238
Equipment Financing Receivable 37,000
Premium Financing Cancellations Receivable 119,698
Organization Cost
(Net of Accumulated Amortization) 1,050
Prepaid Fees and Other Receivable 90,076
Total Assets 3,089,548
LIABILITIES AND EQUITY
Bank Overdraft 239,965
Unfunded Premium Financing Payable (Note 2) 445,298
Line of Credit Payable (Note 3) 1,730,792
Accrued Interest Payable 2,971
Incentive Bonus Payable (Note 2) 10,000
Management Fees Payable (Note 2) 12,000
Income Tax Liabilities 16,500
Other Accrued Expenses and Payable 12,295
Total Liabilities 2,469,821
Shareholders Equity
Common Stock (Note 5)
(50,000,000 authorized at $0.01 par value
32,083,048 shares issued and outstanding) 320,830
Additional Paid in Capital 354,511
Accumulated Deficit (55,614)
Total Shareholder's Equity 619,727
Total Liabilities and Equity 3,089,548
</TABLE>
50
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
Consolidated Income Statement
For Six Months Ended June 30, 2000
[CAPTION]
<TABLE>
<S> <C>
Interest Income - Premium Financing Contracts 179,057
Interest Income - Bank Accounts 4,567
Total Interest Income 183,624
Interest Expenses 78,833
Net Interest Income 104,791
Bad Debt Loss Recovery 3,424
Net Interest Income After Provision for Loss 108,215
Late Charge Income 26,741
Total Income 134,956
Operating Expenses
Depreciation and Amortization 573
License and Permit 1,575
Management Fee (Note 2) 12,000
Incentive Bonus (Note 2) 10,000
Notary and Postage 229
Professional Fees 12,173
Third Party Administrative Fees 45,895
Telephone 269
Travel Expenses 632
Other Expenses 772
Total Operating Expenses 84,118
Income Before Income Tax 50,838
Provision for Income taxes 16,500
NET INCOME 34,338
</TABLE>
51
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
Consolidated Statement of Changes in Stockholders Equity
As of June 30, 2000
[CAPTION]
<TABLE>
Common Paid In Retained Total
Stock Capital Earning Equity
<S> <C> <C> <C> <C>
Beginning Balance
As of January 1, 1998 8,500 469,750 (87,452) 390,798
1998
Operating Income 50,320 50,320
Balance
As of December 31, 1998 8,500 520,070 (87,452) 441,118
Cancellation of
Common Stock (3,700) 3,700
Fractional Shares Issued in
Reverse Split 491 (491)
Capital Contributed by
Shareholders 42,500 42,500
Issuance of Common Stock 315,539 (277,077) 38,462
1999 Operating income 65,809 (2,500) 63,309
Balance
As of December 31, 1999 320,830 354,511 (89,952) 585,389
6 Month Operating Income 34,338 34,338
Balance
As of June 30, 2000 320,830 354,511 (55,614) 619,727
</TABLE>
52
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
Consolidated Statement of Cash Flow
For Six Months Ending June 30, 2000
Cash Flows From Operations Activities
[CAPTION]
<TABLE>
<S> <C>
Net Income 34,338
Reconciliation of Net Income to
Net Cash Used by Operating Activities:
Depreciation and Amortization 573
Change in Cancellation Receivable 22,319
Change in Bonus Payable (7,675)
Change in Management Fees Payables (12,000)
Change in Prepaid Fees and Other Receivable (9,303)
Change in Unfunded Premium Financing (293,181)
Change in Tax Liabilities 5,476
Change in Accrued Expenses and Payable 1,324
Total Reconciliation (292,467)
Net Cash Used by Operating Activities (258,129)
CASH FLOWS FROM INVESTMENT ACTIVITIES
Decrease (Increase) in
Premium Financing Receivable (263,611)
Equipment Financing Receivable (37,000)
Net Cash Used by Investing Activities (300,611)
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in Bank Line Payable 509,147
Increase in Bank Overdraft 43,564
Net Cash Provided (Used) by Financing Activities 552,711
Net Increase (Decrease) in Cash (6,029)
Cash at Beginning of Year 82,515
Cash at End of Year 76,486
</TABLE>
53
<PAGE>
Birch Financial, Inc. (Formerly United States Indemnity & Casualty, Inc)
And Subsidiaries
Notes to Consolidated Financial Statements
As of June 30, 2000
1 Summary of Significant Accounting Policies:
a. Organization Birch Financial, Inc. (the Company) was
incorporated in the state of Nevada on April 20, 1983 as Import
Dynamics, Inc. From April 30, 1985 to April 17, 1991, the
Company changed its names to Peak Performance Products, Inc.,
LumaLure Manufacturing, Inc., Sairam Technologies, Ltd., and
Balanced Environmental Services Tech, Inc. On July 16, 1993,
the Company again changed its name to United States Indemnity &
Casualty, Inc. The Company ceased its operation in 1993 and
had been inactive until December 1999.
In December 1999, the Company's Board of Directors agreed to
acquire 100% of the outstanding stock of Birch Financial, Inc.,
a Missouri corporation (Birch Missouri), in exchange for
31,553,948 shares of its common stock. The Company changed its
name to Birch Financial, Inc.
Birch Missouri was incorporated on February 25, 1999 in the
state of Missouri. Immediately after its incorporation, Birch
Missouri entered into an agreement to acquire 100% of the
outstanding stock of Birch Financial, Inc., a California
corporation (Birch California), in exchange for its own stock.
Neither the Company nor Birch Missouri has significant assets
or business activities. The consolidated financial statements
primarily reflect the financial position, the result of the
operations and the cash flow of Birch California.
Birch California was organized under division 7 of the
Financial Code of California primarily engaging in the
businesses as an insurance premium finance concern. It was
incorporated in California on June 13, 1994. Birch California
finances insurance premiums, that are brokered by the majority
shareholders of the Company. The majority of the finance
contracts are for a term of nine months and are collateralized
by insurance policies with a term of twelve months.
b. Use of Estimates: In preparing the consolidated financial
statements in conformity with generally accepted accounting
principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and
revenues and expenses during the reporting period. Actual
results could differ from those estimates.
54
<PAGE>
c. Fair Value of Financial Instruments: The carrying amount of the
Company and its subsidiaries= financial instruments, which
consists of cash and cash equivalents, premium financing
receivable, equipment financing receivable, bank line payable
and accounts payable approximate their fair values.
d. Interest Income: Interest income on premium financing contracts
is computed based on the method stipulated in the contracts,
which in all cases is the A Rule of 78's method. The between
the Rule of 78's method of interest recognition and the leveled
yield method required by generally accepted accounting
principles for the period covered by these financial statements
has been determined to be immaterial.
e. Equipment and Depreciation: Equipment is carried on the basis
of cost. Depreciation is computed using the straight-line
method over equipment's expected useful lives.
2. Related Party Transactions.
a. The Company and its subsidiaries accrued $12,000 for the
management services provided by the major shareholders of the
Company during the six months ended June 30, 2000. During the
same period, the Company and its subsidiaries paid $24,000 to
the same parties for the management services fees accrued in
the prior year.
b. The Company and its subsidiaries had an unfunded premium
financing payable due to a related party of $445,298 as of June
30, 2000.
c. The Company and its subsidiaries had a cancellation receivable
due from a related party of $119, 698 as of June 30, 2000.
d. For the six months ending June 30, 2000, the Company and its
subsidiaries accrued $10,000 in incentive bonus to a related
party. During the period, the Company and its subsidiaries
paid the related party $17,675 for the incentive bonus earned
in the prior year.
3. Line of Credit Arrangement
Currently, the Company and its subsidiaries have a $3,500,000 line of
credit arrangement with a financial institution for its normal operating
needs. Borrowing under this line is due on demand and is collateralized
by the Company and its subsidiaries' premium financing receivable. As
of June 30, 2000, the balance of the Company and its subsidiaries'
borrowing under the line was $1,730,792.
4. Income Tax
The Company accounts for income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Under
Statement 109, the liability method is used in accounting for income
taxes. There are no material differences between the Company's
financial statements prepared in conformity with the generally accepted
accounting principles and for its income tax purpose.
55
<PAGE>
As of December 31, 1999, the Company had a net operating loss
carryforward of approximately $90,000, which may be used to offset
against future taxable income through 2019, if consolidated tax returns
are filed. The tax benefit of the net operating loss carryforward is
offset by a valuation allowance of the same amount due to the lack of
the records to substantiate the taxable losses in the past.
5. Reverse Stock Split and Stock Cancellation
On December 14, 1999 the Company authorized a 1000-to-1 reverse stock
split. On the same day the Company authorized a 100-to-1 forward stock
split.
In December 1999, the Company authorized the cancellation of 3,700,000
shares of its common stock before its approval of issuing 31,553,948
shares of its common stock for the outstanding stock of Birch Missouri.
6. The following page represents the selected financial data of the
Company, Birch Missouri and Birch California.
56
<PAGE>
Birch Financial, Inc. and Subsidiaries
Selected Financial Data
[CAPTION]
<TABLE>
<S> <C> <C> <C> <C> <C>
Birch Birch Birch
Financial Missouri California Elimination Total
Six Months Ending
June 30, 2000
Interest Income 183,624 183,624
Interest Expenses and
Provision for Loss 75,409 75,409
Net Interest Income 108,215 108,215
Other Income 26,741 26,741
Total Income 0 0 134,956 134,956
Operating Expenses 4,073 1,173 78,872 84,118
Provision for
Income Tax 16,500 16,500
Net Income (Loss) (4,073) (1,173) 39,584 34,338
As of June 30, 2000
Cash and Cash Equivalents 76,486 44,053
Financing Receivable 2,802,238 2,501,627
Investment
in Subsidiary 583,800 546,754 (1,130,554)
Other Assets 35,927 37,046 173,847 (35,996) 224,413
Total Assets 619,727 583,800 3,052,571 (1,166,550) 2,770,093
Liabilities 2,505,817 (35,996) 2,223,166
Shareholders Equity 619,727 583,800 546,754 (1,130,554) 546,927
Liabilities and Equity 619,727 583,800 3,052,571 (1,166,550) 2,770,093
</TABLE>
57
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
----------
HJ & Associates, Certified Public Accountants, of Salt Lake City,
Utah, and formerly known as "Jones, Jensen & Company," audited our balance
sheets as of December 31, 1999, and 1998, and the related statements of
operations, stockholders' equity and cash flows for the three months ended
December 31, 1999 and 1998, and from inception of development stage on April
20, 1983, through December 31, 1999, and for the years ended September 30,
1999, and 1998. These financial statements are not presented because of the
reverse merger with Birch Missouri.
In connection with our acquisition of Birch Missouri, we engaged
Jimmy Loh, Certified Public Accountant, of Alhambra, California, as our
certifying accountant.
There were no disagreements between Birch Financial and HJ &
Associates, whether resolved or not resolved, on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure which, if not resolved, would have caused HJ & Associates to make
reference to the subject matter of the disagreement in connection with its
report.
The report of HJ & Associates did not contain any adverse opinion or
disclaimer of opinion, and with the exception of a "going concern"
qualification because of our former status as a development stage company with
no significant operating results, were not qualified or modified as to
uncertainty, audit scope or accounting principles.
During the fiscal years ended September 30, 1999, and 1998, and
since then, HJ & Associates has not advised us that any of the following
exists or is applicable:
That the internal controls necessary for us to develop reliable
information has come to its attention that has led it to no longer
be able to rely on management's representations or that has made
it unwilling to be associated with the financial statements
prepared by management;
That HJ & Associates needed to expand significantly the scope of its
audit or that information has come to its attention that if further
investigated may materially impact the fairness or reliability of a
previously issued audit report or the underlying financial
statements or any other financial presentation or cause it to be
unwilling to rely on management's representations or be associated
with our financial statements for the foregoing reasons or any other
reason; or
That HJ & Associates has advised us that information has come to its
attention that it has concluded materially impacts the fairness or
reliability of either a previously issued audit report or the
underlying financial statements for the foregoing reasons or any
other reason.
58
<PAGE>
We have provided HJ & Associates with a copy of the disclosure
provided under this caption, and have advised it to provide us with a letter
addressed to the Securities and Exchange Commission as to whether it agrees or
disagrees with the disclosures made herein. A copy of its response is
attached to the Registration Statement of which this prospectus is a part.
DEALER PROSPECTUS DELIVERY OBLIGATION
-------------------------------------
Until _________, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
59
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors And Officers
-----------------------------------------
Section 78.7502(1) of the Nevada Revised Statutes authorizes a
Nevada corporation to indemnify any director, officer, employee, or corporate
agent "who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, except an action by or
in the right of the corporation" due to his corporate role. Section 78.7502(1)
extends this protection "against expenses, including attorneys' fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he acted
in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful."
Section 78.7502(2) of the NRS also authorizes indemnification of
the reasonable defense or settlement expenses of a corporate director,
officer, employee or agent who is sued, or is threatened with a suit, by or in
the right of the corporation. The party must have been acting in good faith
and with the reasonable belief that his actions were not opposed to the
corporation's best interests. Unless the court rules that the party is
reasonably entitled to indemnification, the party seeking indemnification must
not have been found liable to the corporation.
To the extent that a corporate director, officer, employee, or
agent is successful on the merits or otherwise in defending any action or
proceeding referred to in Section 78.7502(1) or 78.7502(2), Section 78.7502(3)
of the NRS requires that he be indemnified "against expenses, including
attorneys' fees, actually and reasonably incurred by him in connection with
the defense."
Section 78.751(1) of the NRS limits indemnification under Sections
78.7502(1) and 78.7502(2) to situations in which either (1) the stockholders,
(2)the majority of a disinterested quorum of directors, or (3) independent
legal counsel determine that indemnification is proper under the
circumstances.
Pursuant to Section 78.751(2) of the NRS, the corporation may
advance an officer's or director's expenses incurred in defending any action
or proceeding upon receipt of an undertaking. Section 78.751(3)(a) provides
that the rights to indemnification and advancement of expenses shall not be
deemed exclusive of any other rights under any bylaw, agreement, stockholder
vote or vote of disinterested directors. Section 78.751(3)(b) extends the
rights to indemnification and advancement of expenses to former directors,
officers, employees and agents, as well as their heirs, executors, and
administrators.
Regardless of whether a director, officer, employee or agent has
the right to indemnity, Section 78.752 allows the corporation to purchase and
maintain insurance on his behalf against liability resulting from his
corporate role.
Neither Birch Financial's Articles of Incorporation nor its Bylaws
specifically provide for indemnification of directors, officers or controlling
persons against liability under the 1933 Act. However, Article VIII of the
Bylaws provides for:
elimination of directors' liability for breach of fiduciary
duty to Birch Financial;
Company indemnification of any corporate agent in connection
with matters in which the agent acted in good faith and, in
criminal matters, in which he or she had no reason to
believe the conduct was unlawful;
no indemnification when the agent is adjudged liable for
gross negligence or wilful misconduct;
mandatory indemnification by Birch Financial for costs and
expenses when the agent has been successful on the merits of
the case;
Birch Financial to advance the agent's costs upon receipt of
the agent's undertaking to repay all amounts paid if he or
she is not entitled to indemnification; and
Birch Financial to purchase liability insurance for agents,
at its discretion.
Article VIII of Birch Financial's Bylaws provides for mandatory
indemnification by Birch Financial of expenses incurred by directors,
executive officers and employees in cases in which they are not found liable
for negligence or misconduct.
The foregoing is only a summary of the indemnification provisions
of Birch Financial's Articles of Incorporation and Bylaws. See the Exhibit
Index.
Item 25. Other Expenses of Issuance And Distribution
-------------------------------------------
The following table sets forth the expenses which Birch Financial
expects to incur in connection with the issuance and distribution of the
Shares registered hereby. All of these expenses, except for the Commission
registration fee, are estimated:
Securities and Exchange Commission registration fee........$ 1,737.50
Legal fees and expenses....................................$50,000
Accounting fees............................................$ 2,500
Printing and engraving expenses............................$ 500
Transfer agent fees........................................$ 1,500
Miscellaneous..............................................$ 500
--------
Total................................................$56,737.50
Item 26. Recent Sales of Unregistered Securities
---------------------------------------
The following table provides information about all "unregistered"
and "restricted" securities that Birch Financial has sold during the past
three years, and which were not registered under the 1933 Act:
<TABLE> Number
Date of Aggregate
Name of Owner Acquired Shares Consideration
------------- -------- ------ -------------
<S> <C> <C> <C>
54 stockholders of 4-13-00 31,553,948 (1)
Birch Financial, Inc.,
a Missouri corporation (1)
(1) We issued these shares in connection with our Agreement and Plan of
Reorganization with Birch Missouri. We issued the shares in exchange
for 31,553,948 shares of Birch Missouri. See the caption
"Description of Business."
Management believes each of the foregoing persons or entities was
either an "accredited investor," or "sophisticated investor" as defined in
Rule 506 of Regulation D of the Securities and Exchange Commission. Each had
access to all material information about Birch prior to the offer, sale or
issuance of these "restricted securities." We believe these shares were
exempt from the registration requirements of the Securities Act of
1933, as amended (the "1933 Act"), pursuant to Section 4(2) or 3(b) thereof.
Each of the recipients of these shares completed and signed a suitability
letter with respect to his, her or its qualification to invest in our shares.
Each recipient also executed an investment letter in which such recipient
declared his, her or its investment intent with respect to such shares.
Item 27. Exhibits
--------
The following exhibits are filed as a part of this Registration
Statement:
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------ ------------
<S> <C>
3.1 Articles of Incorporation
3.2 Articles of Amendment changing the name of the Company to "Peak
Performance Products, Inc.," changing the Company's capitalization
to 40,000,000 shares at $0.001 per share and effecting a reverse
split on the basis of five for one
3.3 Articles of Amendment changing the name of the Company to
"LumaLure Manufacturing, Inc.," changing the Company's
capitalization to 40,000,000 shares at $0.01 per share and
effecting a reverse split on the basis of ten for one
3.4 Articles of Amendment changing the name of the Company to "Sairam
Technologies, Ltd." and effecting a reverse split on the basis of
seven for one
3.5 Articles of Amendment changing the name of the Company to
"Balanced Environmental Services Tech, Inc."
3.6 Certificate of Amendment authorizing 100,000,000 shares of
preferred stock with a par value of $0.001
3.7 Articles of Amendment changing the name of the Company to "United
States Indemnity & Casualty, Inc.," changing the Company's
capitalization to 50,000,000 shares at $0.01 per share
3.8 Certificate of Amendment effecting a reverse split on the basis of
1,000 for one
3.9 Certificate of Amendment effecting a forward split on the basis of
100 for one
3.10 Certificate of Amendment changing the name of the Company to
"Birch Financial, Inc." and changing the Company's
capitalization
to 63,000,000 shares at $0.01 per share
3.11 Bylaws
5.1 Opinion of Branden T. Burningham, Esq. regarding legality
10.1 Computer Services and Consulting Agreement with AIS, with
amendment
10.2 Credit and Security Agreement with Safeco, with amendments and
exhibits
10.3 Form of Premium Finance Agreement
10.4 Form of Equipment Lease Agreement
16.1 Letter on change in certifying accountant
23.1 Consent of Jimmy Loh, CPA
23.2 Consent of Branden T. Burningham, Esq.
27 Financial Data Schedule
Item 28. Undertakings
------------
Birch Financial hereby undertakes:
(1) To file, during any period in which it offers or sells
securities, a post-effective amendment to this Registration Statement to:
(i) include any prospectus required by Section 10(a)(3) of
the Securities Act;
(ii) reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement; and, notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission pursuant to
Rule 424(b) if, in the aggregate, the changes in the volume and price
represent no more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table in the effective
Registration Statement; and
(iii) include any additional or changed material
information
on the plan of distribution.
(2) For determining liability under the Securities Act, to treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time shall be
deemed to be the initial bona fide offering.
(3) To file a post-effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
SIGNATURES
----------
In accordance with the requirements of the Securities Act of 1933,
the registrant certifies that it has reasonable grounds to believe that it
meets all of the requirements of filing of Form SB-2 and authorized this
registration statement to be signed on its behalf by the undersigned in the
City of Upland, State of California, on November 7, 2000.
BIRCH FINANCIAL, INC., a Nevada
corporation
By /s/ Efraim Donitz
---------------------------------
Efraim Donitz, President, CEO,
Treasurer and Director
In accordance with the requirements of the Securities Act of 1933,
this registration statement was signed by the following person in the
capacities and on the dates stated.
/s/ Efraim Donitz
----------------------------------
Efraim Donitz, President, CEO,
Treasurer and Director
/s/ Nelson L. Colvin
----------------------------------
Nelson L. Colvin, Vice President,
Secretary and Director
/s/ Barry L. Cohen
----------------------------------
Barry L. Cohen, Chairman of the
Board of Directors
/s/ Keith L. Walton
----------------------------------
Keith L. Walton, Vice President and
Director
/s/ Ronald H. Dietz
----------------------------------
Ronald H. Dietz, Director
/s/ Lebo Newman
----------------------------------
Lebo Newman, Director
<PAGE>
Date Filed: November 13, 2000 SEC File No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
EXHIBITS
TO
FORM SB-2 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
Birch Financial, Inc.
</TABLE>
