DCAP
GROUP, INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization) |
36-2476480
(I.R.S
Employer
Identification
No.) |
1158
Broadway, Hewlett, NY 11557
(Address
of Principal Executive Offices)
(516)
374-7600
(Issuer’s
Telephone Number, Including Area Code)
________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed
Since
Last Report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes_X__
No____
APPLICABLE
ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE
PRECEDING
FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a court. Yes __ No
__
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,728,524 shares as of October 31,
2005.
Transitional
Small Business Disclosure Format (check one): Yes __
No X
INDEX
DCAP
GROUP, INC. AND SUBSIDIARIES
PART
I. |
FINANCIAL
INFORMATION |
|
|
Item
1. |
Financial
Statements |
|
|
|
Condensed
Consolidated Balance Sheet - September 30, 2005 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Nine months ended September
30,
2005 and 2004 (Unaudited) |
|
|
|
Condensed
Consolidated Statements of Income - Three months ended September
30,
2005 and 2004 (Unaudited) |
|
|
|
Condensed
Consolidated Statements of Cash Flows - Nine months ended
September
30, 2005 and 2004 (Unaudited) |
|
|
|
Notes
to Condensed Consolidated Financial Statements - Nine months ended
September
30, 2005 and 2004 (Unaudited) |
|
|
Item
2. |
Management's
Discussion and Analysis or Plan of Operation |
Item
3. |
Controls
and Procedures |
|
|
PART
II. |
OTHER
INFORMATION |
|
|
Item
1. |
Legal
Proceedings |
Item
2. |
Unregistered
Sales of Equity Securities and Use of Proceeds |
Item
3. |
Defaults
Upon Senior Securities |
Item
4. |
Submission
of Matters to a Vote of Security Holders |
Item
5. |
Other
Information |
Item
6. |
Exhibits
|
|
|
SIGNATURES |
Explanatory
Note
All
references in this Quarterly Report to numbers of common shares and per share
information give retroactive effect to the one-for-five reverse split of our
common shares effected as of August 26, 2004.
Forward-Looking
Statements
This
Quarterly Report contains forward-looking statements as that term is defined in
the federal securities laws. The events described in forward-looking statements
contained in this Quarterly Report may not occur. Generally these statements
relate to business plans or strategies, projected or anticipated benefits or
other consequences of our plans or strategies, projected or anticipated benefits
from acquisitions to be made by us, or projections involving anticipated
revenues, earnings or other aspects of our operating results. The words "may,"
"will," "expect," "believe," "anticipate," "project," "plan," "intend,"
"estimate," and "continue," and their opposites and similar expressions are
intended to identify forward-looking statements. We caution you that these
statements are not guarantees of future performance or events and are subject to
a number of uncertainties, risks and other influences, many of which are beyond
our control, that may influence the accuracy of the statements and the
projections upon which the statements are based. Factors which may affect our
results include, but are not limited to, the risks and uncertainties discussed
in Item 6 of our Annual Report on Form 10-KSB for the year ended December 31,
2004 under “Factors That May Affect Future Results and Financial
Condition”.
Any one
or more of these uncertainties, risks and other influences could materially
affect our results of operations and whether forward-looking statements made by
us ultimately prove to be accurate. Our actual results, performance and
achievements could differ materially from those expressed or implied in these
forward-looking statements. We undertake no obligation to publically update or
revise any forward-looking statements, whether from new information, future
events or otherwise.
DCAP
GROUP, INC. AND
SUBSIDIARIES |
|
Condensed
Consolidated Balance Sheet (Unaudited) |
|
September
30, 2005 |
|
|
|
Assets |
|
|
|
|
|
|
|
Current
Assets |
|
|
|
|
|
|
|
Cash
and cash equivalents |
|
|
|
|
$ |
2,024,769 |
|
Accounts
receivable, net of allowance for
doubtful accounts of $27,000 |
|
|
|
|
|
1,724,796 |
|
Finance
contracts receivable |
|
$ |
20,172,040 |
|
|
|
|
Less: Deferred interest |
|
|
(1,581,700 |
) |
|
|
|
Less: Allowance for finance receivable losses |
|
|
(25,997 |
) |
|
18,564,343 |
|
Prepaid
expenses and other current assets |
|
|
|
|
|
232,256 |
|
Deferred
income taxes |
|
|
|
|
|
51,200 |
|
Total
Current Assets |
|
|
|
|
|
22,597,364 |
|
Property
and Equipment, net |
|
|
|
|
|
303,633 |
|
Goodwill |
|
|
|
|
|
1,238,551 |
|
Other
Intangibles, net |
|
|
|
|
|
208,683 |
|
Deferred
Income Taxes |
|
|
|
|
|
3,600 |
|
Deposits
and Other Assets |
|
|
|
|
|
414,485 |
|
Total
Assets |
|
|
|
|
$ |
24,766,316 |
|
Liabilities
and Stockholders’ Equity |
|
|
|
|
|
|
|
Current
Liabilities: |
|
|
|
|
|
|
|
Revolving
credit line |
|
|
|
|
$ |
11,489,685 |
|
Accounts
payable and accrued expenses |
|
|
|
|
|
831,921 |
|
Premiums
payable |
|
|
|
|
|
4,440,791 |
|
Current
portion of long-term debt |
|
|
|
|
|
235,000 |
|
Income
taxes payable |
|
|
|
|
|
150,251 |
|
Other
current liabilities |
|
|
|
|
|
169,553 |
|
Total
Current Liabilities |
|
|
|
|
|
17,317,201 |
|
Long-Term
Debt |
|
|
|
|
|
1,333,151 |
|
Other
Liabilities |
|
|
|
|
|
35,825 |
|
Mandatorily
Redeemable Preferred Stock |
|
|
|
|
|
780,000 |
|
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity: |
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares
issued 3,505,447 |
|
|
|
|
|
35,055
|
|
Preferred
stock; $.01 par value; authorized
1,000,000 shares; 0 shares issued and outstanding |
|
|
|
|
|
-
|
|
Capital
in excess of par |
|
|
|
|
|
11,334,279 |
|
Deficit |
|
|
|
|
|
(4,890,640 |
) |
|
|
|
|
|
|
6,478,694 |
|
Treasury
stock, at cost, 776,923 shares |
|
|
|
|
|
(1,178,555 |
) |
Total
Stockholders’ Equity |
|
5,300,139 |
|
Total
Liabilities and Stockholders’ Equity |
$ |
24,766,316 |
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES |
|
Condensed
Consolidated Statements of Income (Unaudited) |
|
Nine
Months Ended September 30, |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Commissions
and fees |
|
$ |
5,461,000 |
|
$ |
5,326,539 |
|
Premium
finance revenue |
|
|
5,359,499 |
|
|
6,049,173 |
|
Total
Revenues |
|
|
10,820,499 |
|
|
11,375,712 |
|
|
|
|
|
|
|
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
General
and administrative expenses |
|
|
6,720,444 |
|
|
6,405,108 |
|
Provision
for finance receivable losses |
|
|
1,923,245 |
|
|
1,939,932 |
|
Depreciation
and amortization |
|
|
338,861 |
|
|
313,423 |
|
Premium
finance interest expense |
|
|
548,680 |
|
|
556,641 |
|
Total
Operating Expenses |
|
|
9,531,230 |
|
|
9,215,104 |
|
|
|
|
|
|
|
|
|
Operating
Income |
|
|
1,289,269 |
|
|
2,160,608 |
|
|
|
|
|
|
|
|
|
Other
(Expense) Income: |
|
|
|
|
|
|
|
Interest
income |
|
|
14,633 |
|
|
7,212 |
|
Interest
expense |
|
|
(254,070 |
) |
|
(400,470 |
) |
Interest
expense - mandatorily redeemable preferred stock |
|
|
(29,371 |
) |
|
(33,900 |
) |
Total
Other Expense |
|
|
(268,808 |
) |
|
(427,158 |
) |
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes |
|
|
1,020,461 |
|
|
1,733,450 |
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes |
|
|
409,159 |
|
|
637,578 |
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
611,302 |
|
$ |
1,095,872 |
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share: |
|
|
|
|
|
|
|
Basic |
|
$ |
0.22 |
|
$ |
0.44 |
|
Diluted |
|
$ |
0.20 |
|
$ |
0.35 |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding |
|
|
|
|
|
|
|
Basic |
|
|
2,723,215 |
|
|
2,491,333 |
|
Diluted |
|
|
3,271,246 |
|
|
3,244,947 |
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES |
|
Condensed
Consolidated Statements of Income (Unaudited) |
|
Three
Months Ended September 30, |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
Commissions
and fees |
|
$ |
1,822,832 |
|
$ |
1,853,700 |
|
Premium
finance revenue |
|
|
1,720,232 |
|
|
2,094,087 |
|
Total
Revenues |
|
|
3,543,064 |
|
|
3,947,787 |
|
|
|
|
|
|
|
|
|
Operating
Expenses: |
|
|
|
|
|
|
|
General
and administrative expenses |
|
|
2,342,163 |
|
|
2,229,858 |
|
Provision
for finance receivable losses |
|
|
682,955 |
|
|
725,161 |
|
Depreciation
and amortization |
|
|
113,345 |
|
|
102,957 |
|
Premium
finance interest expense |
|
|
195,477 |
|
|
212,265 |
|
Total
Operating Expenses |
|
|
3,333,940 |
|
|
3,270,241 |
|
|
|
|
|
|
|
|
|
Operating
Income |
|
|
209,124 |
|
|
677,546 |
|
|
|
|
|
|
|
|
|
Other
(Expense) Income: |
|
|
|
|
|
|
|
Interest
income |
|
|
6,537 |
|
|
1,771 |
|
Interest
expense |
|
|
(78,773 |
) |
|
(132,015 |
) |
Interest
expense - mandatorily redeemable preferred stock |
|
|
(9,750 |
) |
|
(11,300 |
) |
Total
Other Expense |
|
|
(81,986 |
) |
|
(141,544 |
) |
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes |
|
|
127,138 |
|
|
536,002 |
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes |
|
|
51,850 |
|
|
161,191 |
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
75,288 |
|
$ |
374,811 |
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share: |
|
|
|
|
|
|
|
Basic |
|
$ |
0.03 |
|
$ |
0.15 |
|
Diluted |
|
$ |
0.03 |
|
$ |
0.12 |
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding |
|
|
|
|
|
|
|
Basic |
|
|
2,727,533 |
|
|
2,512,497 |
|
Diluted |
|
|
3,268,981 |
|
|
3,245,876 |
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES |
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) |
|
Nine
months ended September 30, |
|
2005 |
|
2004 |
|
|
|
|
|
|
|
Cash
Flows From Operating Activities: |
|
|
|
|
|
Net
income |
|
$ |
611,302 |
|
$ |
1,095,872 |
|
Adjustments
to reconcile net income to net cash
provided by operating activities: |
|
|
|
|
|
|
|
Depreciation
and amortization |
|
|
338,861 |
|
|
313,423 |
|
Amortization
of warrants |
|
|
52,212 |
|
|
44,100 |
|
Changes
in operating assets and liabilities: |
|
|
|
|
|
|
|
Decrease
(increase) in assets: |
|
|
|
|
|
|
|
Accounts
receivable |
|
|
1,186,444 |
|
|
(176,721 |
) |
Prepaid
expenses and other current assets |
|
|
23,319 |
|
|
(123,606 |
) |
Deposits
and other assets |
|
|
(171,141 |
) |
|
(114,474 |
) |
Increase
(decrease) in liabilities: |
|
|
|
|
|
|
|
Premiums
payable |
|
|
1,412 |
|
|
(110,581 |
) |
Accounts
payable and accrued expenses |
|
|
(876,235 |
) |
|
(419,670 |
) |
Taxes
payable |
|
|
(280,242 |
) |
|
657,532 |
|
Other
current liabilities |
|
|
(17,799 |
) |
|
152,849 |
|
Net
Cash Provided by Operating Activities |
|
|
868,133 |
|
|
1,318,724 |
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities: |
|
|
|
|
|
|
|
Decrease
(increase) in finance contracts receivable - net |
|
|
2,867,691 |
|
|
(4,884,598 |
) |
Decrease
in notes and other receivables - net |
|
|
13,664 |
|
|
12,493 |
|
Purchase
of property and equipment |
|
|
(15,093 |
) |
|
(129,605 |
) |
Net
Cash Provided by (Used in) Investing Activities |
|
|
2,866,262 |
|
|
(5,001,710 |
) |
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities: |
|
|
|
|
|
|
|
Principal
payments on long-term debt |
|
|
(2,129,301 |
) |
|
(158,263 |
) |
Proceeds
from revolving credit line |
|
|
46,052,834 |
|
|
51,895,399 |
|
Payments
on revolving credit line |
|
|
(46,158,808 |
) |
|
(47,351,288 |
) |
Proceeds
from exercise of stock options and warrants |
|
|
9,750 |
|
|
194,997 |
|
Net
Cash (Used in) Provided by Financing Activities |
|
|
(2,225,525 |
) |
|
4,580,845 |
|
|
|
|
|
|
|
|
|
Net
Increase in Cash and Cash Equivalents |
|
|
1,508,870 |
|
|
897,859 |
|
Cash
and Cash Equivalents, beginning of period |
|
|
515,899 |
|
|
1,349,304 |
|
Cash
and Cash Equivalents, end of period |
|
$ |
2,024,769 |
|
$ |
2,247,163 |
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 (UNAUDITED)
1.
|
The
Condensed Consolidated Balance Sheet as of September 30, 2005, the
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2005 and 2004 and the Condensed Consolidated
Statements of Cash Flows for the nine months ended September 30, 2005 and
2004 have been prepared by us without audit. In our opinion, the
accompanying unaudited condensed consolidated financial statements contain
all adjustments necessary to present fairly in all material respects our
financial position as of September 30, 2005, results of operations for the
three and nine months ended September 30, 2005 and 2004 and cash flows for
the nine months ended September 30, 2005 and
2004. |
This
report should be read in conjunction with our Annual Report on Form 10-KSB for
the year ended December 31, 2004.
The
results of operations and cash flows for the nine months ended September 30,
2005 are not necessarily indicative of the results to be expected for the full
year.
2.
|
Summary
of Significant Accounting Policies: |
a. Principles
of consolidation
The
accompanying consolidated financial statements include the accounts of all
subsidiaries and joint ventures in which we have a majority voting interest or
voting control. All significant intercompany accounts and transactions have been
eliminated.
b. Revenue
recognition
We
recognize commission revenue from insurance policies at the beginning of the
contract period, except for commissions that were received annually on a
contingent basis for 2004, for which we recognized the commission revenue
ratably during the fiscal year based on estimates of the contingent revenue to
be received. Refunds of commissions on the cancellation of insurance policies
are reflected at the time of cancellation. During the nine months ended
September 30, 2004, approximately $1,069,000 was recognized as contingent
commission revenue. There has
been an industry-wide change in the method by which insurance brokers are
compensated by insurers, many of which no longer pay contingent commissions. As
a result, in 2005, our base commissions have increased, and no contingent
commission revenue has been recognized for the nine months ended September 30,
2005.
Franchise
fee revenue on initial franchisee fees is recognized when substantially all of
our contractual requirements under the franchise agreement are completed.
Franchisees also pay a monthly franchise fee plus an applicable percentage of
co-op advertising expense. We are obligated to provide marketing and training
support to each franchisee.
Automobile
club dues are recognized equally over the contract period.
For our
premium finance operations, we are using the interest method to recognize
interest income over the life of each loan in accordance with Statement of
Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.”
Upon the
establishment of a premium finance contract, we record the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest is amortized to interest income using the interest method over
the life of each loan. The weighted average interest rate charged with respect
to financed insurance policies was approximately 26.5% and 26.1% per annum for
the nine months ended September 30, 2005 and 2004, respectively.
Delinquency
fees are earned when collected. Upon completion of collection efforts, after
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
c. Website
Development Costs
Technology
and content costs are generally expensed as incurred, except for certain costs
relating to the development of internal-use software, including those relating
to operating our website, that are capitalized and depreciated over two years. A
total of $0 and $12,945 in such costs was incurred during the nine months ended
September 30, 2005 and 2004, respectively.
d. Allowance
for finance receivable losses
Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium finance involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks are made prior to the
decision to extend credit to a customer. Losses on finance receivables include
an estimate of future credit losses on premium finance accounts. Credit losses
on premium finance accounts occur when the unearned premiums received from the
insurer upon cancellation of a financed policy are inadequate to pay the balance
of the premium finance account. After collection attempts are exhausted, the
remaining account balance, including unrealized interest, is written off. We
review historical trends of such losses relative to finance receivable balances
to develop estimates of future losses. However, actual write-offs may differ
materially from the write-off estimates that we used. For the nine months ended
September 30, 2005 and 2004, the provision for finance receivable losses was
approximately $2,148,606 (before estimated recoveries of $225,361 which reduced
the provision for finance receivable losses) and $1,939,932, respectively, and
actual write-offs for such periods (net of recoveries of previous write-offs)
were approximately $2,188,568 and $2,023,627, respectively.
e. Reclassifications
Certain
reclassifications (including reclassification of interest expense on long-term
debt from premium finance interest expense to other (expense) income-interest
expense) have been made to the consolidated financial statements for the nine
and three months ended September 30, 2004 to conform with the classifications
used for the nine and three months ended September 30, 2005.
We
currently have two reportable business segments: Insurance and Premium Finance.
The Insurance segment sells retail auto, motorcycle, boat, life, business, and
homeowner's insurance and franchises. In addition, this segment offers tax
preparation services and automobile club services for roadside emergencies.
Insurance revenues are derived from activities within the United States, and all
long-lived assets are located within the United States. The Premium Finance
segment offers property and casualty policyholders loans to finance the policy
premiums.
Summarized
financial information concerning our reportable segments is shown in the
following tables:
Nine
Months Ended
September
30, 2005 |
|
|
Insurance |
|
|
Premium
Finance |
|
|
Other
(1) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from
external customers |
|
$ |
5,461,000 |
|
$ |
5,359,499 |
|
$ |
- |
|
$ |
10,820,499 |
|
Interest
income |
|
|
2,820 |
|
|
- |
|
|
11,813 |
|
|
14,633 |
|
Interest
expense |
|
|
42,185 |
|
|
548,680 |
|
|
241,256 |
|
|
832,121 |
|
Depreciation
and
amortization |
|
|
122,886 |
|
|
176,611 |
|
|
39,364 |
|
|
338,861 |
|
Segment
profit (loss)
before income taxes |
|
|
1,259,965 |
|
|
1,202,276 |
|
|
(1,441,780 |
) |
|
1,020,461 |
|
Segment
profit (loss) |
|
|
755,979 |
|
|
721,365 |
|
|
(866,042 |
) |
|
611,302 |
|
Segment
assets |
|
|
3,469,241 |
|
|
20,178,784 |
|
|
1,118,291 |
|
|
24,766,316 |
|
_____________
(1)
|
Column
represents corporate-related items and, as it relates to segment profit
(loss), income, expense and assets not allocated to reportable
segments. |
Nine
Months Ended
September
30, 2004 |
|
|
Insurance |
|
|
Premium
Finance |
|
|
Other
(1) |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from
external customers |
|
$ |
5,326,539 |
|
$ |
6,049,173 |
|
$ |
- |
|
$ |
11,375,712 |
|
Interest
income |
|
|
7,212 |
|
|
- |
|
|
- |
|
|
7,212 |
|
Interest
expense |
|
|
433,187 |
|
|
556,641 |
|
|
1,183 |
|
|
991,011 |
|
Depreciation
and
amortization |
|
|
128,458 |
|
|
161,934 |
|
|
23,031 |
|
|
313,423 |
|
Segment
profit (loss)
before income taxes |
|
|
1,284,412 |
|
|
1,755,074 |
|
|
(1,306,036 |
) |
|
1,733,450 |
|
Segment
profit (loss) |
|
|
770,647 |
|
|
1,053,044 |
|
|
(727,819 |
) |
|
1,095,872 |
|
Segment
assets |
|
|
3,915,060 |
|
|
25,680,697 |
|
|
1,025,004 |
|
|
30,620,761 |
|
________________
(1) |
Column
represents corporate-related items and, as it relates to segment profit
(loss), income, expense and assets not allocated to reportable
segments. |
4.
|
Stock
Options
We
have elected the disclosure only provisions of Statement of Financial
Accounting Standard No. 123, “Accounting for Stock-Based Compensation”
(“FASB 123”) in accounting for our employee stock options. Accordingly, no
compensation expense has been recognized. Had we recorded compensation
expense for the stock options based on the fair value at the grant date
for awards in the nine and three months ended September 30, 2005 and 2004
consistent with the provisions of SFAS 123, our net income and net income
per share would have been adjusted as
follows: |
|
|
Nine
Months Ended
September
30, |
Three
Months Ended
September
30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported |
|
$ |
611,302 |
|
$ |
1,095,872 |
|
$ |
75,288 |
|
$ |
374,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee compensation expense determined under fair
value based method, net of related tax effects |
|
|
(124,000 |
) |
|
(50,000 |
) |
|
(41,000 |
) |
|
(17,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income |
|
$ |
487,302 |
|
$ |
1,045,872 |
|
$ |
34,288 |
|
$ |
357,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported |
|
$ |
0.22 |
|
$ |
0.44 |
|
$ |
0.03 |
|
$ |
0.15 |
|
Basic
- pro forma |
|
$ |
0.18 |
|
$ |
0.42 |
|
$ |
0.01 |
|
$ |
0.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported |
|
$ |
0.20 |
|
$ |
0.35 |
|
$ |
0.03 |
|
$ |
0.12 |
|
Diluted
- pro forma |
|
$ |
0.16 |
|
$ |
0.33 |
|
$ |
0.01 |
|
$ |
0.11 |
|
5.
|
Net
Income Per Share
Basic
net income per share is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflect, in periods in which they have a
dilutive effect, the impact of common shares issuable upon exercise of
stock options and conversion of mandatorily redeemable preferred
stock. |
The
reconciliation is as follows:
|
|
Nine
Months Ended
September
30, |
Three
Months Ended
September
30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding |
|
|
2,723,215 |
|
|
2,491,333 |
|
|
2,727,533 |
|
|
2,512,497 |
|
Effect
of Dilutive Securities, Common Stock
Equivalents |
|
|
548,031 |
|
|
753,614 |
|
|
541,448 |
|
|
733,379 |
|
Weighted
Average Number of Shares Outstanding,
used for computing diluted earnings per share |
|
|
3,271,246 |
|
|
3,244,947 |
|
|
3,268,981 |
|
|
3,245,876 |
|
Net
income available to common shareholders for the computation of diluted earnings
per share is computed as follows:
|
|
Nine
Months Ended
September
30, |
Three
Months Ended
September
30, |
|
|
|
2005 |
|
|
2004 |
|
|
2005 |
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income |
|
$ |
611,302 |
|
$ |
1,095,872 |
|
$ |
75,288 |
|
$ |
374,811 |
|
Interest
Expense on Dilutive Convertible Preferred Stock |
|
|
29,371 |
|
|
33,900 |
|
|
9,750 |
|
|
11,300 |
|
Net
Income Available to Common Shareholders for Diluted Earnings Per
Share |
|
$ |
640,673 |
|
$ |
1,129,772 |
|
$ |
85,038 |
|
$ |
386,111 |
|
6.
|
Conversion
of Mandatorily Redeemable Preferred Stock
On
January 15, 2005, the preferred stockholder converted 124 Series A
preferred shares into 49,600 of our common shares.
|
7.
|
Subordinated
Debt and Warrants
Effective
May 25, 2005, the holders of $1,500,000 outstanding principal amount of
our subordinated debt agreed to extend the maturity date of the debt from
January 10, 2006 to September 30, 2007. This extension was given to
satisfy a requirement of our premium finance lender that arose in
connection with the increase in our revolving line of credit to
$25,000,000 and the extension of the line to June 30, 2007. In
consideration for the extension of the due date of our subordinated debt,
we extended the expiration date of warrants held by the debtholders for
the purchase of 97,500 shares of our common stock
|
from January 10, 2006 to September 30, 2007. The
extension of the warrants was valued at $160,260 and is being amortized as
additional interest expense over the extension period.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
We
operate 25 storefronts, including 19 Barry Scott locations acquired through our
August 2002 acquisition of Barry Scott Companies, Inc., and five Atlantic
Insurance locations acquired through our May 2004 acquisition of substantially
all the assets of AIA Acquisition Corp. We also have 47 franchised DCAP
locations.
Our
insurance storefronts serve as insurance agents or brokers and place various
types of insurance on behalf of customers. We focus on automobile, motorcycle
and homeowner’s insurance and our customer base is primarily individuals rather
than businesses.
The
stores receive commissions from insurance companies for their services. We
receive fees from the franchised locations in connection with their use of the
DCAP name. Neither we nor the stores currently serve as an insurance company and
therefore do not assume underwriting risks. The stores also offer automobile
club services for roadside assistance and income tax preparation services.
Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
offers premium financing to clients of DCAP, Barry Scott and Atlantic Insurance
offices, as well as non-affiliated insurance agencies. We currently operate
within the states of New York, Pennsylvania and New Jersey.
Critical
Accounting Policies
Our
consolidated financial statements include accounts of DCAP Group, Inc. and all
majority-owned and controlled subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements and related notes. In preparing these financial statements, our
management has utilized information available including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by our management in
formulating its estimates inherent in these financial statements might not
materialize. In addition, application of the critical accounting policies below
involves the exercise of judgment and use of assumptions as to future
uncertainties and, as a result, actual results could differ from these
estimates. Further, other companies may utilize different estimates, which may
impact comparability of our results of operations to those of companies in
similar businesses.
Commission
and fee income
We
recognize commission revenue from insurance policies at the beginning of the
contract period, except for commissions that were received annually on a
contingent basis for 2004, for which we recognized the commission revenue
ratably during the fiscal year based on estimates of the contingent revenue to
be received. Refunds of commissions on the cancellation of insurance policies
are reflected at the time of cancellation. During the nine months ended
September 30, 2004, approximately $1,069,000 was recognized as contingent
commission revenue. There has
been an industry-wide change in the method by which insurance brokers are
compensated by insurers, many of which no longer pay contingent commissions. As
a result, in 2005, our base commissions have increased, and no contingent
commission revenue has been recognized for the nine months ended September 30
2005.
Franchise
fee revenue from initial franchise fees is recognized when substantially all of
our contractual requirements under the franchise agreement are completed.
Franchisees also pay a monthly franchise fee plus an applicable percentage of
co-op advertising expense. We are obligated to provide marketing and training
support to each franchisee.
Automobile
club dues are recognized equally over the contract period.
Finance
income, fees and receivables
For our
premium finance operations, we are using the interest method to recognize
interest income over the life of each loan in accordance with Statement of
Financial Accounting Standard No. 91, “Accounting for Nonrefundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases.”
Upon the
establishment of a premium finance contract, we record the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest is amortized to interest income using the interest method over
the life of each loan.
Delinquency
fees are earned when collected. Upon completion of collection efforts, after
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
Allowance
for finance receivable losses
Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium finance involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks are made prior to the
decision to extend credit to a customer. Losses on finance receivables include
an estimate of future credit losses on premium finance accounts. Credit losses
on premium finance accounts occur when the unearned premiums received from the
insurer upon cancellation of a financed policy are inadequate to pay the balance
of the premium finance account. After collection attempts are exhausted, the
remaining account balance, including unrealized interest, is written off. We
review historical trends of such losses relative to finance receivable balances
to develop estimates of future losses. However, actual write-offs may differ
materially from the write-off
estimates that we used. For the nine months ended
September 30, 2005 and 2004, the provision for finance receivable losses was
approximately $2,148,606 (before estimated recoveries of $225,361 which reduced
the provision for finance receivable losses) and $1,939,392, respectively, and
actual write-offs for such periods (net of recoveries of previous write-offs)
were approximately $2,188,568 and $2,023,627, respectively. If our provision for
finance receivable losses was understated by 5% because our actual write-offs
were greater than anticipated, the effect would have been a reduction in our
earnings per share by approximately $0.02 (basic) for the nine months ended
September 30, 2005 and 2004.
Goodwill
and intangible assets
The
carrying value of goodwill was initially reviewed for impairment as of
January 1, 2002, and is reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount might not be recoverable. If the
fair value of the operations to which goodwill relates is less than the carrying
amount of those operations, including unamortized goodwill, the carrying amount
of goodwill is reduced accordingly with a charge to expense. Based on our most
recent analysis, we believe that no impairment of goodwill exists at September
30, 2005.
Stock-based
compensation
We apply
the intrinsic value-based method of accounting prescribed by Accounting
Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations, to account for stock-based employee compensation plans
and report pro forma disclosures in our Form 10-QSB filings by estimating the
fair value of options issued and the related expense in accordance with SFAS No.
123. Under this method, compensation cost is recognized for awards of common
shares or stock options to our directors, officers and employees only if the
quoted market price of the stock at the grant date (or other measurement date,
if later) is greater than the amount the grantee must pay to acquire the
stock.
Results
of Operations
Our
operating income for the nine months ended September 30, 2005 was $1,289,269 as
compared to $2,160,608 for the nine months ended September 30,
2004.
During
the nine months ended September 30, 2005, revenues from our insurance-related
operations were $5,461,000 as compared to $5,326,539 for the nine months ended
September 30, 2004. The revenue increase of $134,461 was primarily attributable
to a change in underwriting in New York and the sale of three franchises in
2005. There is a greater availability for coverage in the voluntary marketplace,
thus reducing the need to place clients in the New York Auto Insurance Plan
(“NYAIP”), the involuntary or residual market. We are paid a higher commission
rate on the voluntary policies, both for new and renewal business.
Premium
finance revenues decreased $689,674 during the nine months ended September 30,
2005 as compared to the nine months ended September 30, 2004. The total number
of policies that we financed during the first nine months of 2005 increased
slightly over the first nine months of 2004; however, the growth occurred
outside the New York City metropolitan area. This non-
New York City market generates lower premium levels
and, therefore, lower loan sizes. As a result, there was a decline in premium
finance revenue.
Our
general and administrative expenses for the nine months ended September 30, 2005
were $314,336 more than for the nine months ended September 30, 2004. This
increase was primarily due to our increased advertising and marketing efforts in
2005, increased salaries (due to, among other things, the hiring of John J.
Willis as our Chief Operating Officer in October 2004) and increased consulting
fees. Mr. Willis resigned his position effective as of October 31,
2005.
Our
provision for finance receivable losses for the first nine months of 2005 was
$16,687 less than for the first nine months of 2004. In early 2005, the NYAIP,
at the behest of the New York Department of Insurance (the “Department”),
notified all carriers that it has always been the Department’s position that
policy premiums were not to be increased without specific underwriting
information. Certain carriers had been increasing premiums, but without
documentation. This unwarranted increase resulted in an increase of earned
premiums by such carriers and thus, upon cancellation, an unwarranted reduction
in the return premium to the insured (or in the case of a policy which had been
premium financed, a reduction in the return premium to the finance company). One
large carrier acknowledged that it had followed this flawed underwriting, and
began making refunds late in the first quarter of 2005. We anticipate further
refunds from this carrier and are exploring our options regarding other
carriers, which, to date, have not offered refunds. Refunds on previously
charged-off accounts offset our provision for finance receivable
losses in the
first nine months of 2005.
Our
depreciation and amortization expense for the nine months ended September 30,
2005 was $25,438 more than for the nine months ended September 30, 2004. This
increase was primarily the result of the amortization of loan origination costs
incurred in connection with our revolving loan agreement entered into in
December 2004.
Our
premium finance interest expense during the nine months ended September 30, 2005
was $7,961 less than for the nine months ended September 30, 2004. This decrease
was the result of the repayment of a portion of our subordinated loan with
proceeds of our revolving credit line and a lower floating interest rate on the
new revolving credit line entered into in December 2004.
Our
interest expense for the nine months ended September 30, 2005 was $146,500 less
than for the nine months ended September 30, 2004. This decrease was the result
of our repaying a portion of our subordinated loan in 2005.
During
the nine months ended September 30, 2005, our provision for income taxes was
$409,159 as opposed to $637,578 for the nine months ended September 30, 2004.
This was due to the lower income before income taxes in 2005 notwithstanding the
utilization of available net operating loss carryforwards in 2004.
Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $1,259,965 during the nine months ended September 30,
2005 as compared to a net profit before income taxes of $1,284,412 during the
nine months ended September 30, 2004. This decrease was primarily due to
increased advertising expense in 2005. Our premium finance operations, on a
stand-alone basis, generated a net profit before
income taxes of $1,202,276 during the nine months ended September 30, 2005 as
compared to a net profit before income taxes of $1,755,074 during the nine
months ended September 30, 2004. The decrease was primarily due to reduced
premium finance revenue in 2005 as discussed above. Loss before income taxes
from corporate-related items not allocable to reportable segments was $1,441,780
during the nine months ended September 30, 2005 as compared to $1,306,036 during
the nine months ended September 30, 2004. This increase was primarily due to
increased executive compensation and consulting fees.
Liquidity
and Capital Resources
As of
September 30, 2005, we had $2,024,769 in cash and cash equivalents and working
capital of $5,280,163. As of December 31, 2004, we had $515,899 in cash and cash
equivalents and working capital of $5,678,700.
Cash and
cash equivalents increased by $1,508,870 between December 31, 2004 and September
30, 2005 primarily due to the following:
· |
Net
cash provided by operating activities during the nine months ended
September 30, 2005 was $868,133 primarily due to our net income for the
period of $611,303, our depreciation and amortization of $338,861, a
decrease in accounts receivable of $1,186,444 and a net increase in
premiums payable of $1,412. The decrease in accounts receivable is
primarily attributable to the collection in 2005 of contingent fees
receivable. No such contingent fees were collectible in 2005 since
payments of these fees was discontinued by the insurance carriers in 2005.
Premiums payable represents the amount of insurance premiums due to
insurance carriers on policies for which we provide premium financing.
Upon the customer entering into a premium financing agreement with us, the
customer makes a down payment to the insurance carrier generally equal to
15% of the estimated premium. We agree to lend to the customer the
remaining 85% of the estimated premium. We make a payment of 10% of the
estimated premium to the carrier at the time of the application for
insurance. The remaining balance of 75% of the estimated premium is our
premium payable. Prior to October 2004, we remitted the balance of the
unpaid premium upon receipt of the first periodic loan payment due from
the customer. In order to better manage our credit risk, effective October
2004, we strengthened our controls and began to remit the balance of the
premium to the carrier only after receipt of the first periodic loan
payment from the customer and confirmation from the carrier of the actual
premium amount. If the actual premium is greater than the amount
previously estimated by the carrier, we require that the customer remit
the difference to the carrier or amend the financing agreement for the
revised amount prior to paying the remaining amount due the carrier.
Premiums payable fluctuate from period to period depending upon the volume
of premium financing contracts entered into. At September 30, 2005,
amounts released for payment to insurers but not cleared by our bank were
classified as premiums payable. No such reclassification was made at
December 31, 2004, resulting in an increase in premiums payable at
September 30, 2005. The increase was offset by a decline in the dollar
amount of premium finance contracts entered into in 2005. The cash
provided by operating activities was offset by a decrease in accounts
payable and accrued expenses of $876,235 resulting from payments to our
franchisees of their portion of the contingent receivable discussed above
and a decrease in income taxes payable of $280,242 resulting from payments
of income taxes in 2005. |
· |
Though
fluctuations in our premium finance business impact our cash position and
daily operations, our cash flows from operating activities do not reflect
changes in the premium finance contract receivables or borrowing under our
revolving credit facility associated with that business. Changes in the
premium finance contract receivables are considered investing activities
as they include the making and collection of loans and borrowings under
our revolving line of credit are considered financing
activities. |
· |
Net
cash of $2,866,262 was provided by investing activities during the nine
months ended September 30, 2005 primarily due to a decrease in our net
finance contracts receivable of $2,867,691. This was the result of a
reduction in the dollar amount of premium finance contracts entered into
in 2005. |
· |
Net
cash used by financing activities during the nine months ended September
30, 2005 was $2,225,525 primarily due to proceeds of $46,052,834 from our
revolving loan from Manufacturers and Traders Trust Co. (“M&T”) to
fund our growing premium finance business, offset by payments of
$46,158,808 on the revolving loan and payments of a portion of our
subordinated loan of $2,000,000. |
Our
premium finance operations are financed pursuant to a $25,000,000 revolving line
of credit from M&T. Subject to certain conditions, M&T has agreed to
arrange an additional $10,000,000 credit facility with other lenders on a “best
efforts” basis. The line of credit bears interest at either (i) M&T’s prime
rate or (ii) LIBOR plus 2.5%, matures on June 30, 2007 and is secured by
substantially all of our assets. We can borrow against the line to the extent of
85% of eligible premium finance receivables. As of September 30, 2005,
$11,489,685 was outstanding under the line. As of September 30, 2005, of the
$20,172,040 reflected on the Balance Sheet as “Finance contracts receivable,”
approximately $15,515,000 represents eligible receivables for purposes of our
finance credit agreement.
We have
no current commitments for capital expenditures. However, we may, from time to
time, consider acquisitions of complementary businesses, products or
technologies.
In
connection with our initial acquisition of the line of credit from M&T, we
obtained a $3,500,000 secured subordinated loan to support our premium finance
operations. In January 2005, we utilized the M&T line of credit to repay
$1,000,000 of the subordinated debt. Effective May 10, 2005, we utilized the
line of credit to repay an additional $1,000,000 of the subordinated debt. The
remaining balance of the loan was due in January 2006 and carries interest at
the rate of 12-5/8% per annum. Effective May 25, 2005, we obtained an extension
of the maturity date of the remaining subordinated debt to September 30, 2007.
We have the right to prepay the subordinated debt (subject to M&T’s consent)
without penalty.
Off-Balance
Sheet Arrangements
We have
no off-balance sheet arrangements that have or are reasonably likely to have a
current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Item
3. CONTROLS
AND PROCEDURES
Our Chief
Executive Officer and Chief Financial Officer conducted an evaluation of the
effectiveness of our disclosure controls and procedures. Based on this
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of September 30,
2005 in alerting him in a timely manner to material information required to be
included in our SEC reports. In addition, no change in our internal control over
financial reporting occurred during the fiscal quarter ended September 30, 2005
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
PART
II. |
OTHER
INFORMATION |
|
|
|
Item
1. |
LEGAL
PROCEEDINGS |
|
|
|
|
None |
|
|
|
|
Item
2. |
UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS |
|
|
|
|
None |
|
|
|
|
Item
3. |
DEFAULTS
UPON SENIOR SECURITIES |
|
|
|
|
None |
|
|
|
|
Item
4. |
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS |
|
|
|
|
None |
|
|
|
|
Item
5. |
OTHER
INFORMATION |
|
|
|
|
None |
|
|
|
|
Item
6. |
EXHIBITS |
|
|
|
|
3(a) |
Restated
Certificate of Incorporation1 |
|
|
|
|
3(b) |
Certificate
of Designation of Series A Preferred Stock2
|
|
|
|
|
3(c) |
By-laws,
as amended3 |
|
|
|
|
31 |
Rule
13a-14(a)/15d-14(a) Certification as adopted pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 |
|
|
|
|
32 |
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 |
___________
1
Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the period ended September 30, 2004 and incorporated herein by
reference.
2 Denotes
document filed as an exhibit to our Current Report on Form 8-K for an event
dated May 28, 2003 and incorporated herein by
reference.
3 Denotes
documents filed as an exhibit to our Quarterly Report on Form 10-QSB for the
period ended June 30, 2004 and our Current Report on Form 8-K for an event dated
January 5, 2005 and incorporated herein by
reference.
SIGNATURES
In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
|
DCAP GROUP,
INC. |
|
|
|
Date: November 9,
2005 |
By: |
/s/ Barry B.
Goldstein |
|
Barry
B. Goldstein, |
|
President (Principal Executive,
Financial and Account
Officer) |