UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-QSB
(Mark
One)
[X]
|
Quarterly
report under Section 13 or 15(d) of the Securities Exchange Act of
1934
|
|
|
For
the quarterly period ended September
30, 2006
|
|
[
]
|
Transition
report under Section 13 or 15(d) of the Exchange Act
|
|
|
For
the transition period from to
|
|
|
Commission
File Number: 0-1665
|
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____
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes ____ No X
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: 2,896,024 shares as of October 31,
2006.
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, 2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Nine months ended September 30,
2006
and 2005 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Three months ended September
30, 2006
and 2005 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Nine months ended September
30,
2006 and 2005 (Unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements - Nine months ended
September 30, 2006 and 2005 (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
|
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,
2005 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, 2006
|
|
|
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
1,214,924
|
|
Accounts
receivable, net of allowance for
doubtful
accounts of $58,700
|
|
|
|
|
|
1,307,564
|
|
Finance
contracts receivable
|
|
$
|
17,866,052
|
|
|
|
|
Less:
Deferred interest
|
|
|
(1,367,585
|
)
|
|
|
|
Less:
Allowance for finance receivable losses
|
|
|
(226,029
|
)
|
|
16,272,438
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
299,452
|
|
Deferred
income taxes
|
|
|
|
|
|
77,000
|
|
Total
Current Assets
|
|
|
|
|
|
19,171,378
|
|
Property
and Equipment, net
|
|
|
|
|
|
331,406
|
|
Goodwill
|
|
|
|
|
|
2,513,978
|
|
Other
Intangibles, net
|
|
|
|
|
|
373,006
|
|
Notes
Receivable, net
|
|
|
|
|
|
3,788,730
|
|
Deposits
and Other Assets
|
|
|
|
|
|
154,125
|
|
Total
Assets
|
|
|
|
|
$
|
26,332,623
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Revolving
credit line
|
|
|
|
|
$
|
11,852,707
|
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
893,954
|
|
Premiums
payable
|
|
|
|
|
|
3,458,743
|
|
Current
portion of long-term debt
|
|
|
|
|
|
2,010,947
|
|
Income
tax payable
|
|
|
|
|
|
29,066
|
|
Other
current liabilities
|
|
|
|
|
|
165,249
|
|
Total
Current Liabilities
|
|
|
|
|
|
18,410,666
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
1,101,163
|
|
Deferred
Income Tax
|
|
|
|
|
|
37,000
|
|
Other
Liabilities
|
|
|
|
|
|
1,845
|
|
Mandatorily
Redeemable Preferred Stock
|
|
|
|
|
|
780,000
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares
issued
3,672,947
|
|
|
|
|
|
36,730
|
|
Preferred
stock; $.01 par value; authorized
1,000,000
shares; 0 shares issued and outstanding
|
|
|
|
|
|
-
|
|
Capital
in excess of par
|
|
|
|
|
|
11,636,254
|
|
Deficit
|
|
|
|
|
|
(4,492,480
|
)
|
|
|
|
|
|
|
7,180,504
|
|
Treasury
stock, at cost, 776,923 shares
|
|
|
|
|
|
(1,178,555
|
)
|
Total
Stockholders’ Equity
|
|
6,001,949
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
26,332,623
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
Nine
Months Ended September 30,
|
|
2006
|
|
2005
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
5,390,085
|
|
$
|
5,461,000
|
|
Premium
finance revenue
|
|
|
3,085,956
|
|
|
3,951,434
|
|
Total
Revenues
|
|
|
8,476,041
|
|
|
9,412,434
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
6,724,954
|
|
|
6,720,444
|
|
Provision
for finance receivable losses
|
|
|
496,456
|
|
|
515,180
|
|
Depreciation
and amortization
|
|
|
319,302
|
|
|
338,861
|
|
Premium
finance interest expense
|
|
|
604,219
|
|
|
548,680
|
|
Total
Operating Expenses
|
|
|
8,144,931
|
|
|
8,123,165
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
331,110
|
|
|
1,289,269
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,531
|
|
|
14,633
|
|
Interest
income - notes receivable
|
|
|
858,546
|
|
|
-
|
|
Interest
expense
|
|
|
(388,872
|
)
|
|
(254,070
|
)
|
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(29,250
|
)
|
|
(29,371
|
)
|
Gain
on sale of store
|
|
|
81,105
|
|
|
-
|
|
Total
Other Income (Expense)
|
|
|
525,060
|
|
|
(268,808
|
)
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
856,170
|
|
|
1,020,461
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
342,468
|
|
|
409,159
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
513,702
|
|
$
|
611,302
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.22
|
|
Diluted
|
|
$
|
0.17
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
2,886,372
|
|
|
2,723,215
|
|
Diluted
|
|
|
3,243,030
|
|
|
3,271,246
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
Three
Months Ended September 30,
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
1,636,855
|
|
$
|
1,822,832
|
|
Premium
finance revenue
|
|
|
939,255
|
|
|
1,196,267
|
|
Total
Revenues
|
|
|
2,576,110
|
|
|
3,019,099
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
2,120,989
|
|
|
2,342,163
|
|
Provision
for finance receivable losses
|
|
|
168,514
|
|
|
158,990
|
|
Depreciation
and amortization
|
|
|
94,681
|
|
|
113,345
|
|
Premium
finance interest expense
|
|
|
196,669
|
|
|
195,477
|
|
Total
Operating Expenses
|
|
|
2,580,853
|
|
|
2,809,975
|
|
|
|
|
|
|
|
|
|
Operating
Income (Loss)
|
|
|
(4,743
|
)
|
|
209,124
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
Interest
income
|
|
|
1,250
|
|
|
6,537
|
|
Interest
income - notes receivable
|
|
|
324,298
|
|
|
-
|
|
Interest
expense
|
|
|
(134,208
|
)
|
|
(78,773
|
)
|
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(9,750
|
)
|
|
(9,750
|
)
|
Total
Other Income (Expense)
|
|
|
181,590
|
|
|
(81,986
|
)
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
176,847
|
|
|
127,138
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
70,739
|
|
|
51,850
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
106,108
|
|
$
|
75,288
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.04
|
|
$
|
0.03
|
|
Diluted
|
|
$
|
0.04
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
2,896,024
|
|
|
2,727,533
|
|
Diluted
|
|
|
3,241,240
|
|
|
3,268,981
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Nine
months ended September 30,
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
513,702
|
|
$
|
611,302
|
|
Adjustments
to reconcile net income to net cash (used in)
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
319,302
|
|
|
338,861
|
|
Bad
debt expense
|
|
|
1,200
|
|
|
-
|
|
Accretion
of discount on notes receivable
|
|
|
(658,546
|
)
|
|
-
|
|
Amortization
of warrants
|
|
|
58,221
|
|
|
52,212
|
|
Gain
on sale of store
|
|
|
(81,105
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
390,739
|
|
|
1,186,444
|
|
Prepaid
expenses and other current assets
|
|
|
(67,001
|
)
|
|
23,319
|
|
Deposits
and other assets
|
|
|
(137,797
|
)
|
|
(171,141
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Premiums
payable
|
|
|
(702,218
|
)
|
|
1,412
|
|
Accounts
payable and accrued expenses
|
|
|
228,375
|
|
|
(876,235
|
)
|
Taxes
payable
|
|
|
(39,793
|
)
|
|
(280,242
|
)
|
Other
current liabilities
|
|
|
(31,850
|
)
|
|
(17,799
|
)
|
Net
Cash (Used in) Provided by Operating Activities
|
|
|
(206,771
|
)
|
|
868,133
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Decrease
in finance contracts receivable - net
|
|
|
242,585
|
|
|
2,867,691
|
|
Decrease
in notes and other receivables - net
|
|
|
9,852
|
|
|
13,664
|
|
Purchase
of notes
|
|
|
(1,771,707
|
)
|
|
-
|
|
Purchase
of agencies
|
|
|
(832,654
|
)
|
|
-
|
|
Purchase
of property and equipment
|
|
|
(86,869
|
)
|
|
(15,093
|
)
|
Net
Cash (Used in) Provided by Investing Activities
|
|
|
(2,438,793
|
)
|
|
2,866,262
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(235,000
|
)
|
|
(2,129,301
|
)
|
Proceeds
from revolving credit line
|
|
|
41,785,558
|
|
|
46,052,834
|
|
Payments
on revolving credit line
|
|
|
(38,539,375
|
)
|
|
(46,158,808
|
)
|
Proceeds
from exercise of stock options
|
|
|
191,250
|
|
|
9,750
|
|
Payments
on note payable-related party
|
|
|
(1,303,434
|
)
|
|
-
|
|
Net
Cash Provided by (Used in) Financing Activities
|
|
|
1,898,999
|
|
|
(2,225,525
|
)
|
|
|
|
|
|
|
|
|
Net
(Decrease) Increase in Cash and Cash Equivalents
|
|
|
(746,565
|
)
|
|
1,508,870
|
|
Cash
and Cash Equivalents, beginning of period
|
|
|
1,961,489
|
|
|
515,899
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
1,214,924
|
|
$
|
2,024,769
|
|
Supplemental
Schedule of Non-Cash Investing
and
Financing Activities:
|
|
|
|
|
|
|
|
Note
payable issued for purchase of notes receivable
|
|
$
|
1,303,434
|
|
$
|
-
|
|
Note
payable issued for purchase of agencies
|
|
$
|
522,949
|
|
$
|
-
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
1. |
The
Condensed Consolidated Balance Sheet as of September 30, 2006, the
Condensed Consolidated Statements of Income for the three and nine
months
ended September 30, 2006 and 2005 and the Condensed Consolidated
Statements of Cash Flows for the nine months ended September 30,
2006 and
2005 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, 2006, results of operations
for the
three and nine months ended September 30, 2006 and 2005 and cash
flows for
the nine months ended September 30, 2006 and
2005.
|
This
report should be read in conjunction with our Annual Report on Form 10-KSB
for
the year ended December 31, 2005.
The
results of operations and cash flows for the nine months ended September 30,
2006 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. Refunds of commissions on the cancellation of insurance
policies are reflected at the time of cancellation.
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% per annum for the nine
months ended September 30, 2006 and 2005.
Delinquency
fees are recognized when collected. Upon completion of collection efforts,
after
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
c. 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 principal balance is written off against the allowance for finance
receivable losses and the unrealized actual interest and late fees are charged
against the premium finance revenue. 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, 2006 and 2005, the
provision for finance receivable losses was $496,456 and $580,683 (before
estimated recoveries of $65,503 for the 2005 period which reduced the provision
for finance receivable losses), respectively, and actual principal write-offs
for such periods (net of recoveries of previous write-offs) were $477,293 and
$617,099, respectively.
d. Reclassifications
Certain
reclassifications (including the reclassification of the premium finance revenue
(interest and late fees) write-offs from the “Provision for finance receivable
losses” to “Premium finance revenue” (see below)) have been made to the
consolidated financial statements for the nine and three months ended September
30, 2005 to conform to the classifications used for the nine and three months
ended September 30, 2006. Beginning in 2005, we were able to obtain a complete
detail of the interest and fee write-offs for the premium finance
receivables. Effective January 1, 2006, we began reporting the premium
finance revenue, net of the interest and fee write-offs as illustrated
below.
Nine
Months Ended September 30, 2005
Statement
of Income Accounts
|
|
Originally
Reported
|
|
Reclassifications
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
finance revenue
|
|
$
|
5,359,499
|
|
$
|
1,408,065
|
|
$
|
3,951,434
|
|
Provision
for finance receivable losses
|
|
|
1,923,245
|
|
|
(1,408,065
|
)
|
|
515,180
|
|
Net
|
|
$
|
3,436,254
|
|
$
|
0
|
|
$
|
3,436,254
|
|
Three
Months Ended September 30, 2005
Statement
of Income Accounts
|
|
|
Originally
Reported
|
|
|
Reclassifications
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
finance revenue
|
|
$
|
1,720,232
|
|
$
|
523,965
|
|
$
|
1,196,267
|
|
Provision
for finance receivable losses
|
|
|
682,955
|
|
|
(523,965
|
)
|
|
158,990
|
|
Net
|
|
$
|
1,037,277
|
|
$
|
0
|
|
$
|
1,037,277
|
|
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 for the nine months
ended September 30, 2006 and 2005 is shown in the following tables:
Nine
Months Ended
September
30, 2006
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
5,390,085
|
|
$
|
3,085,956
|
|
$
|
-
|
|
$
|
8,476,041
|
|
Interest
income
|
|
|
3,388
|
|
|
-
|
|
|
143
|
|
|
3,531
|
|
Interest
income -notes receivable
|
|
|
-
|
|
|
-
|
|
|
858,546
|
|
|
858,546
|
|
Interest
expense
|
|
|
70,650
|
|
|
604,219
|
|
|
347,472
|
|
|
1,022,341
|
|
Depreciation
and
Amortization
|
|
|
168,806
|
|
|
118,446
|
|
|
32,050
|
|
|
319,302
|
|
Segment
profit (loss)
before
income taxes
|
|
|
986,205
|
|
|
618,073
|
|
|
(748,108
|
)
|
|
856,170
|
|
Segment
profit (loss)
|
|
|
591,723
|
|
|
370,844
|
|
|
(448,865
|
)
|
|
513,702
|
|
Segment
assets
|
|
|
4,812,297
|
|
|
17,099,637
|
|
|
4,420,689
|
|
|
26,332,623
|
|
____________
|
(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, 2005
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
5,461,000
|
|
$
|
3,951,434
|
|
$
|
-
|
|
$
|
9,412,434
|
|
Interest
income
|
|
|
2,903
|
|
|
-
|
|
|
11,730
|
|
|
14,633
|
|
Interest
income -notes receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
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.
|
Summarized
financial information concerning our reportable segments for the three months
ended September 30, 2006 and 2005 is shown in the following tables:
Three
Months Ended
September
30, 2006
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
1,636,855
|
|
$
|
939,255
|
|
$
|
-
|
|
$
|
2,576,110
|
|
Interest
income
|
|
|
1,217
|
|
|
-
|
|
|
43
|
|
|
1,250
|
|
Interest
income -notes receivable
|
|
|
-
|
|
|
-
|
|
|
324,298
|
|
|
324,298
|
|
Interest
expense
|
|
|
24,031
|
|
|
196,669
|
|
|
119,927
|
|
|
340,627
|
|
Depreciation
and
Amortization
|
|
|
58,314
|
|
|
25,104
|
|
|
11,263
|
|
|
94,681
|
|
Segment
profit (loss)
before
income taxes
|
|
|
235,755
|
|
|
207,842
|
|
|
(266,550
|
)
|
|
176,847
|
|
Segment
profit (loss)
|
|
|
141,453
|
|
|
124,585
|
|
|
(159,930
|
)
|
|
106,108
|
|
____________
|
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
Three
Months Ended
September
30, 2005
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
1,822,832
|
|
$
|
1,196,267
|
|
$
|
-
|
|
$
|
3,019,099
|
|
Interest
income
|
|
|
724
|
|
|
-
|
|
|
5,813
|
|
|
6,537
|
|
Interest
income -notes receivable
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
expense
|
|
|
13,216
|
|
|
195,477
|
|
|
75,307
|
|
|
284,000
|
|
Depreciation
and
Amortization
|
|
|
40,921
|
|
|
59,302
|
|
|
13,122
|
|
|
113,345
|
|
Segment
profit (loss)
before
income taxes
|
|
|
294,400
|
|
|
304,712
|
|
|
(475,974
|
)
|
|
127,138
|
|
Segment
profit (loss)
|
|
|
179,040
|
|
|
182,494
|
|
|
(286,246
|
)
|
|
75,288
|
|
____________
|
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
4. |
Employee
Stock Compensation
|
In
November 1998, we adopted the 1998 Stock Option Plan, which provides for the
issuance of incentive stock options and non-statutory stock options. Under
this
plan, options to purchase not more than 400,000 shares of our Common Stock
were
permitted to be granted, at a price to be determined by our Board of Directors
or the Stock Option Committee at the time of grant. During 2002, we increased
the number of shares of Common Stock authorized to be issued pursuant to the
1998 Stock Option Plan to 750,000. Incentive stock options granted under this
plan expire no later than ten years from date of grant (except no later than
five years for a grant to a 10% stockholder). Our Board of Directors or the
Stock Option Committee will determine the expiration date with respect to
non-statutory options granted under this plan.
In
December 2005, our shareholders ratified the adoption of the 2005 Equity
Participation Plan, which provides for the issuance of incentive stock options,
non-statutory stock options and restricted stock. Under this plan, a maximum
of
300,000 shares of Common Stock may be issued pursuant to options granted and
restricted stock issued. Incentive stock options granted under this plan expire
no later than ten years from date of grant (except no later than five years
for
a grant to a 10% stockholder). Our Board of Directors or the Stock Option
Committee will determine the expiration date with respect to non-statutory
options, and the vesting provisions for restricted stock, granted under this
plan.
Effective
January 1, 2006, our plans are accounted for in accordance with the recognition
and measurement provisions of Statement of Financial Accounting Standards
(“FAS”) No. 123 (revised 2004), Share-Based Payment (“FAS 123(R)”), which
replaces FAS No. 123, Accounting for Stock-Based Compensation, and supersedes
Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued
to Employees, and related interpretations. FAS 123(R) requires compensation
costs related to share-based payment transactions, including employee stock
options, to be recognized in the financial statements. In addition, we adhere
to
the guidance set forth within Securities and Exchange Commission (“SEC”) Staff
Accounting Bulletin (“SAB”) No. 107, which provides the Staff's views regarding
the interaction between SFAS No. 123(R) and certain SEC rules and regulations
and provides interpretations with respect to the valuation of share-based
payments for public companies.
Prior
to
January 1, 2006, we accounted for similar transactions in accordance with APB
No. 25 which employed the intrinsic value method of measuring compensation
cost.
Accordingly, compensation expense was not recognized for fixed stock options
if
the exercise price of the option equaled or exceeded the fair value of the
underlying stock at the grant date.
While
FAS
No. 123 encouraged recognition of the fair value of all stock-based awards
on
the date of grant as an expense over the vesting period, companies were
permitted to continue to apply the intrinsic value-based method of accounting
prescribed by APB No. 25 and disclose certain pro forma amounts as if the fair
value approach of SFAS No. 123 had been applied. In December 2002, FAS No.
148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative methods
of transition for a voluntary change to the fair value method of accounting
for
stock-based employee compensation, required more prominent pro forma disclosures
in both the annual and interim financial statements. We complied with these
disclosure requirements for all applicable periods prior to January 1,
2006.
In
adopting FAS 123(R), we applied the modified prospective approach to transition.
Under the modified prospective approach, the provisions of FAS 123(R) are to
be
applied to new awards and to awards modified, repurchased, or cancelled after
the required effective date. Additionally, compensation cost for the portion
of
awards for which the requisite service has not been rendered that are
outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As
a
result of the adoption of FAS 123(R), our results for the nine and three month
period ended September 30, 2006 include share-based compensation expense
totaling approximately $32,000 and $12,000, respectively. Such amounts have
been
included in the Condensed Consolidated Statements of Income within general
and
administrative expenses. Stock compensation expense recorded under APB No.
25 in
the Consolidated Statements of Operations for both the nine and three months
ended September 30, 2005 totaled $0.
Stock
option compensation expense in 2006 is the estimated fair value of options
granted amortized on a straight-line basis over the requisite service period
for
entire portion of the award.
The
weighted average estimated fair value of stock options granted in the three
months and nine months ended September 30, 2006 was $1.62 per share. There
were
no stock options granted in the three months and nine months ended September
30,
2005. The fair value of options at the date of grant was estimated using the
Black-Scholes option pricing model. During 2006, we took into consideration
the
guidance under SFAS 123(R) and SAB No. 107 when reviewing and updating
assumptions. The expected volatility is based upon historical volatility of
our
stock and other contributing factors. The expected term is based upon
observation of actual time elapsed between date of grant and exercise of options
for all employees. Previously such assumptions were determined based on
historical data.
The
assumptions made in calculating the fair values of options for the nine months
and three months ended September 30, 2006 are as follows:
Expected
term (in years)
|
5
|
Expected
volatility
|
101%
|
Expected
dividend yield
|
0%
|
Risk-free
interest rate
|
5%
|
The
following table addresses the additional disclosure requirements of FAS 123(R)
in the period of adoption. The table illustrates the effect on net income and
earnings per share as if the fair value recognition provisions of FAS No. 123
had been applied to all outstanding and unvested awards in the prior year
comparable period.
|
|
|
Nine
Months
Ended
September
30,
|
|
|
Three
Months Ended
September
30,
|
|
|
|
|
2005
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
611,302
|
|
$
|
75,288
|
|
|
|
|
|
|
|
|
|
Add:
Stock-based compensation included in reported net income
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based compensation expense determined under
fair
value based method for all awards, net of related tax
effects
|
|
|
(124,000
|
)
|
|
(41,000
|
)
|
|
|
|
|
|
|
|
|
Pro
Forma Net Income
|
|
$
|
487,302
|
|
$
|
34,288
|
|
|
|
|
|
|
|
|
|
Net
income per share:
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.22
|
|
$
|
0.03
|
|
Basic
- pro forma
|
|
$
|
0.18
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.20
|
|
$
|
0.03
|
|
Diluted
- pro forma
|
|
$
|
0.16
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
We
granted 10,000 options under the 2005 Equity Participation Plan during the
three
months and nine months ended September 30, 2006, at an exercise price of $1.87
per share.
The
following table represents our stock options granted, exercised, and forfeited
during the first nine months of 2006.
Stock
Options
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
Outstanding
at January 1, 2006
|
|
|
328,025
|
|
$
|
2.09
|
|
|
|
|
|
|
|
Granted
|
|
|
10,000
|
|
$
|
1.87
|
|
|
|
|
|
|
|
Exercised
|
|
|
(127,500
|
)
|
$
|
1.50
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(27,225
|
)
|
$
|
2.84
|
|
|
|
|
|
|
|
Outstanding
at
September
30, 2006
|
|
|
183,300
|
|
$
|
2.38
|
|
|
1.73
|
|
$
|
50,508
|
|
Vested
and Exercisable
at
September 30, 2006
|
|
|
167,781
|
|
$
|
2.24
|
|
|
1.51
|
|
$
|
49,771
|
|
The
aggregate intrinsic value of the options exercised for the nine months ended
September 30, 2006 and 2005 was $135,150 and $33,868, respectively.
As
of
September 30, 2006, there was approximately $59,000 of total unrecognized
compensation costs related to unvested stock option awards. The $59,000 is
expected to vest over the weighted average of 1.46 years.
The
following table represents the change in non-vested stock options during the
first nine months of 2006.
|
|
|
Options
|
|
|
Weighted
Average Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
Nonvested
at December 31, 2005
|
|
|
30,788
|
|
$
|
1.11
|
|
Granted
|
|
|
10,000
|
|
|
1.87
|
|
Vested
|
|
|
10,494
|
|
|
1.49
|
|
Forfeited
|
|
|
14,775
|
|
|
2.27
|
|
Nonvested
at September 30, 2006
|
|
|
15,519
|
|
|
1.76
|
|
The
total
fair value of shares vested during the nine month period ended September 30,
2006 was $15,636.
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
2,886,372
|
|
|
2,723,215
|
|
|
2,896,024
|
|
|
2,727,533
|
|
Effect
of Dilutive Securities, common stock
equivalents
|
|
|
356,658
|
|
|
548,031
|
|
|
345,216
|
|
|
541,448
|
|
Weighted
Average Number of Shares Outstanding,
used
for computing diluted earnings per share
|
|
|
3,243,030
|
|
|
3,271,246
|
|
|
3,241,240
|
|
|
3,268,981
|
|
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,
|
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
513,702
|
|
$
|
611,302
|
|
$
|
106,108
|
|
$
|
75,288
|
|
Interest
Expense on Dilutive Convertible
Preferred
Stock
|
|
|
29,250
|
|
|
29,371
|
|
|
9,750
|
|
|
9,750
|
|
Net
Income Available to Common Shareholders
for
Diluted Earnings Per Share
|
|
$
|
542,952
|
|
$
|
640,673
|
|
$
|
115,858
|
|
$
|
85,038
|
|
6. Business
Acquisitions
Effective
January 1, 2006, we acquired substantially all of the assets of Accurate Agency
of Western New York, Inc., Louisons Associates Limited and Accurate Agency,
Inc.
(collectively, “Accurate”), insurance brokerage firms with a total of four
offices located in and around Rochester, New York. The results of Accurate’s
operations have been included in the consolidated financial statements since
that date. The acquisition allows for the expansion of our geographical
footprint.
The
aggregate purchase price was $1,600,000, including $800,000 of cash with the
balance paid through the issuance of an $800,000 non-interest bearing note
payable over 72 months commencing on January 10, 2007. The note has been
recorded at its estimated present value of $612,481. Our initial allocation
of
the purchase price is subject to adjustment.
Our
condensed consolidated statements of income include the revenue and expenses
of
Accurate from January 1, 2006. Had the transaction taken place on January 1,
2005, on a pro forma basis, the effect on the reported amounts for the nine
months ended September 30, 2005 is considered to be insignificant.
7. |
Purchase
of Notes Receivable
|
On
January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two
surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the
aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued
interest of $1,794,688. The aggregate purchase price for the Surplus Notes
was
$3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month
promissory note which provides for interest at the rate of 7.5% per annum.
The
promissory note was paid in full on July 28, 2006. CMIC is a New York property
and casualty insurer. Eagle is a New Jersey property and casualty insurer under
the administrative supervision of the New Jersey Department of Banking and
Insurance and owns approximately 10% of our outstanding common stock. The
Surplus Notes acquired by us are past due and provide for interest at the prime
rate or 8.5% per annum, whichever is less. Payments of principal and interest
on
the Surplus Notes may only be made out of the surplus of CMIC and require the
approval of the New York State Department of Insurance. During the nine months
ended September 30, 2006, an interest payment of $125,000 was received from
CMIC. The discount on the Surplus Notes and the accrued interest at the time
of
acquisition are being accreted over a 30 month period, the estimated period
to
collect such amounts. Such accretion amount, together with interest on the
Surplus Notes for the period ended September 30, 2006, is included in our
Statement of Income as “Interest income-notes receivable.”
8. |
Revolving
Credit Facility
|
On
July
28, 2006, we and our subsidiary, Payments, Inc., entered into a new revolving
line of credit (the “New Revolver”) with Manufacturers and Traders Trust Co.
(the “Bank”), which provides for a decrease in the credit line from $25,000,000
to $20,000,000 and the elimination of the Bank’s agreement to arrange an
additional $10,000,000 credit facility with other lenders on a “best efforts”
basis. The New Revolver bears interest, at our option, at either the Bank’s
prime lending rate (8.25% at September 30, 2006) or LIBOR (5.32% at September
30, 2006) plus 2.25%, and matures on September 30, 2008. The
line
of credit also allows for a $2,500,000 term loan (of the $20,000,000 credit
line
availability) to be used to provide liquidity for ongoing working capital
purposes. Any draws against the term line bear interest at LIBOR plus 2.75%.
As
of July 28, 2006, we made our first draw against the term line of $1,300,000.
The draw is being paid back quarterly over 30 months with interest payable
monthly. The New Revolver eliminates the personal guaranty required of our
CEO
of $1,250,000 but continues his obligation on an unlimited wind-down guaranty
and his personal guaranty as to misrepresentations that relate to dishonest
or
fraudulent acts committed by him or known but not timely reported by him. The
New Revolver also allows for a reduction of life insurance coverage on the
life
of our CEO from $4,000,000 to $1,500,000.
During
the nine months ended September 30, 2006, we sold one of our retail stores
for
$125,000 in cash and notes. The sale of the store resulted in a gain of $81,105.
In addition, concurrently with the sale, the purchaser entered into a franchise
agreement with us.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
There
are
71 store locations owned or franchised by us of which 65 are located in New
York
State. In the New York metropolitan area, there are 43 DCAP franchises and
one
joint venture DCAP store. There are also 18 Barry Scott locations and four
Accurate locations outside the New York metropolitan area (all located in
central and western New York State). There are five Atlantic Insurance locations
in eastern Pennsylvania. All of the Barry Scott, Atlantic Insurance and Accurate
locations are wholly-owned by us.
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, Atlantic Insurance
and
Accurate 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 those commissions that were receivable annually,
for
which we recognized the commission revenue ratably. Refunds of commissions
on
the cancellation of insurance policies are reflected at the time of
cancellation.
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
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. The weighted average interest rate charged with respect
to financed insurance policies was approximately 26.5% and 26.5% per annum
for
the nine months ended September 30, 2006 and 2005, 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.
Allowance
for finance receivable losses
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 loan amount,
which includes accrued interest and late fees. The majority of these shortfalls
result in the write-off of the remaining principal balance against the allowance
for finance receivable losses and the unrealized actual interest and late fees
are charged against the premium finance revenue. 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, 2006
and 2005, the provision for finance receivables losses was $496,456 and
$580,683 (before estimated recoveries of $65,503 for the 2005 period which
reduced the provision for finance receivable losses), respectively, and actual
principal write-offs for such periods (net recoveries of previous write-offs)
were $477,293 and $617,099, respectively. If our provision for finance
receivable losses was understated by 10% because our actual write-offs were
greater than anticipated, the effect would have been a reduction in our earnings
per share by approximately $0.01 (basic) for the nine months ended September
30,
2006 and 2005.
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, 2006.
Stock-based
compensation
Prior
to
January 1, 2006, we applied 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 reported 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. Effective January 1, 2006, we have begun
to comply with the recent accounting pronouncements from the Financial
Accounting Standards Board (“FASB”) issued Statement of Financial Accounting
Standard (“SFAS”) No. 123 (revised 2004) “Share-Based Payment” (SFAS No. 123R)
which requires us to include the compensation cost using the same method
discussed above in our Statement of Income.
Results
of Operations
Nine
Months ended September 30, 2006 compared to Nine Months ended September 30,
2005
Our
operating income for the nine months ended September 30, 2006 was $331,110
as
compared to $1,289,269 for the nine months ended September 30,
2005.
During
the nine months ended September 30, 2006, revenues from our insurance-related
operations were $5,390,085 as compared to $5,461,000 for the nine months ended
September 30, 2005. The revenue decrease of $70,915 was primarily attributable
to a reduction in commissions received by our locations caused by a reduction
in
renewal commission rates and the elimination of certain other compensation
by
one of our major insurance carriers, offset by revenues of Accurate whose assets
were acquired effective January 1, 2006.
Premium
finance revenues decreased $865,478 during the nine months ended September
30,
2006 as compared to the nine months ended September 30, 2005. The total number
of policies that we financed during the first nine months of 2006 decreased
slightly from the first nine months of 2005. Also, there was a decline in the
number of loans originated in downstate New York, which carries a higher average
loan size, and an increase in loans originated in central and northern New
York
State at a lower average loan size. As a result, our average loan size declined
resulting in a decline in our premium finance revenue.
Our
general and administrative expenses for the nine months ended September 30,
2006
were $4,510 more than for the nine months ended September 30, 2005. The increase
in general and administrative expenses was primarily due to the expenses related
to Accurate whose assets were acquired effective January 1, 2006, offset by
a
decrease in executive salaries due to the resignation in October 2005 of John
Willis, our former Chief Operating Officer, and a decrease in advertising
expenses.
Our
provision for finance receivable losses for the nine months ended September
30,
2006 was $18,724 less than for the nine months ended September 30, 2005. This
was caused by a decrease in volume in the nine months ended September 30, 2006,
offset by a one-time actual and anticipated recovery recorded in the nine months
ended September 30, 2005 of amounts previously charged-off (no similar items
were recorded in the nine months ended September 30, 2006).
Our
depreciation and amortization expense during the nine months ended September
30,
2006 was $19,559 less than for the nine months ended September 30, 2005. This
decrease was primarily the result of our amortizing our loan origination costs
incurred in connection with our revolving loan agreement entered into in
December 2004 over the life of the revolving credit agreement entered into
in
July 2006.
Our
premium finance interest expense during the nine months ended September 30,
2006
was $55,539 more than for the nine months ended September 30, 2005. This
increase was the result of an increase in LIBOR, offset by a decrease in the
average outstanding balance of our revolving credit line for the nine months
ended September 30, 2006 compared to the nine months ended September 30,
2005.
During
the nine months ended September 30, 2006, we purchased $3,750,000 of surplus
notes of Commercial Mutual Insurance Company (“CMIC”) at a price of $3,075,141.
Accrued but unpaid interest totaled $1,794,688 at the time of the purchase.
This
transaction resulted in interest income-notes receivable of $858,546 during
the
nine months ended September 30, 2006. No such interest-bearing notes were owned
by us during the nine months ended September 30, 2005.
Our
interest expense for the nine months ended September 30, 2006 was $134,802
more
than for the nine months ended September 30, 2005. This increase was a result
of
interest on the promissory notes given in connection with the Accurate
acquisition and the purchase of the CMIC surplus notes, and the borrowing
against our revolving credit line to purchase the CMIC surplus notes (no similar
items were recorded in the nine months ended September 30, 2005), offset by
a
reduction caused by our repaying a portion of our subordinated debt in
2005.
During
the nine months ended September 30, 2006, we sold one of our stores, resulting
in a gain of $81,105. No such sale occurred during the nine months ended
September 30, 2005.
During
the nine months ended September 30, 2006, our provision for income taxes was
$342,468 as opposed to $409,159 for the nine months ended September 30, 2005.
This was due to the lower income before income taxes in 2006.
Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $986,205 during the nine months ended September 30,
2006
as compared to a net profit before income taxes of $1,259,965 during the nine
months ended September 30, 2005. This decrease was primarily due to decreased
revenues (exclusive of the revenues of the Accurate stores that were acquired
effective January 1, 2006). Our
premium finance operations, on a stand-alone basis, generated a net profit
before income taxes of $618,073 during the nine months ended September 30,
2006
as compared to a net profit before income taxes of $1,202,276 during the nine
months ended September 30, 2005. The
decrease was primarily due to reduced premium finance revenue in 2006 as
discussed above. Loss before income taxes from corporate-related items not
allocable to reportable segments was $748,108 during the nine months ended
September 30, 2006 as compared to $1,441,780 during the nine months ended
September 30, 2005. This decrease was primarily due to an increase in interest
income-notes receivable related to the purchase of the surplus notes issued
by
CMIC and a decrease in executive compensation.
Three
Months ended September 30, 2006 compared to Three Months ended September 30,
2005
Our
operating loss for the three months ended September 30, 2006 was $4,743 as
compared to operating income of $209,124 for the three months ended September
30, 2005.
During
the three months ended September 30, 2006, revenues from our insurance-related
operations were $1,636,855 as compared to $1,822,832 for the three months ended
September 30, 2005. The revenue decrease of $185,977 was primarily attributable
to a reduction in commissions received by our locations caused by a reduction
in
renewal commission rates and the elimination of certain other compensation
by
one of our major insurance carriers, offset by revenues of Accurate whose assets
were acquired effective January 1, 2006.
Premium
finance revenues decreased $257,012 during the three months ended September
30,
2006 as compared to the three months ended September 30, 2005. The total number
of premium loans that we financed during the third quarter of 2006 decreased
slightly from the third quarter of 2005. Also, there was a decline in the number
of loans originated in downstate New York, which carries a higher average loan
size, and an increase in loans originated in central and northern New York
State
at a lower average loan size. As a result, our average loan size declined
resulting in a decline in our premium finance revenue.
Our
general and administrative expenses for the three months ended September 30,
2006 were $221,174 less than for the three months ended September 30, 2005.
The
decrease in general and administrative expenses was primarily due to a decrease
in executive salaries due to the resignation in October 2005 of John Willis,
our
former Chief Operating Officer, and a decrease in advertising expenses, offset
by the expenses related to Accurate whose assets were acquired effective January
1, 2006.
Our
provision for finance receivable losses for the third quarter of 2006 was $9,524
more than for the third quarter of 2005. This was caused by an increase in
write
offs in the third quarter of 2006, offset by a decrease in volume of contracts
written in the third quarter of 2006.
Our
depreciation and amortization expense during the three months ended September
30, 2006 was $18,664 less than for the three months ended September 30, 2005.
This decrease was primarily the result of our amortizing our loan origination
costs incurred in connection with our revolving loan agreement entered into
in
December 2004 over the life of the revolving credit agreement entered into
in
July 2006.
Our
premium finance interest expense during the three months ended September 30,
2006 was $1,192 more than for the three months ended September 30, 2005.
This
increase was the result of an increase in LIBOR, offset by a decrease in the
average outstanding balance of our revolving credit line for the three months
ended September 30, 2006 compared to the three months ended September 30,
2005.
On
January 31, 2006, we purchased $3,750,000 of surplus notes of CMIC at a price
of
$3,075,141. Accrued but unpaid interest totaled $1,794,688 at the time of the
purchase. This transaction resulted in interest income-notes receivable of
$324,298 during the three months ended September 30, 2006. No such
interest-bearing notes were owned by us during the three months ended September
30, 2005.
Our
interest expense for the three months ended September 30, 2006 was $55,435
more
than for the three months ended September 30, 2005. This increase was a result
of interest on the promissory notes given in connection with the Accurate
acquisition and the purchase of the CMIC surplus notes, and the borrowing
against our revolving credit line to purchase the CMIC surplus notes (no similar
items were recorded in the third quarter of 2005), offset by a reduction caused
by our repaying a portion of our subordinated debt in 2005.
During
the three months ended September 30, 2006, our provision for income taxes was
$70,739 as opposed to $51,850 for the three months ended September 30, 2005.
This was due to the higher income before income taxes in 2006.
Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $235,755 during the three months ended September 30,
2006
as compared to a net profit before income taxes of $294,400 during the three
months ended September 30, 2005. This decrease was primarily due to decreased
revenues (exclusive of the revenues of the Accurate stores that were acquired
effective January 1, 2006). Our
premium finance operations, on a stand-alone basis, generated a net profit
before income taxes of $207,842 during the three months ended September 30,
2006
as compared to a net profit before income taxes of $304,712 during the three
months ended September 30, 2005. The
decrease was primarily due to reduced premium finance revenue in 2006 as
discussed above. Loss
before income taxes from corporate-related items not allocable to reportable
segments was $266,550 during the three months ended September 30, 2006 as
compared to $475,974 during the three months ended September 30, 2005. This
decrease was primarily due to an increase in interest income-notes receivable
related to the recent purchase of the surplus notes issued by CMIC and a
decrease in executive compensation.
Liquidity
and Capital Resources
As
of
September 30, 2006, we had $1,214,924 in cash and cash equivalents and working
capital of $760,712. As of December 31, 2005, we had $1,961,489 in cash and
cash
equivalents and working capital of $5,321,837.
During
the nine months ended September 30, 2006, our cash and cash equivalents
decreased by $746,565. This was due to the following:
· |
Net
cash used in operating activities during the nine months ended September
30, 2006 was $206,771 primarily due to the following: (i) an decrease
in
premiums payable of $702,218 and the accretion of discount on notes
receivable of $658,546, offset by (ii) our net income for the period
of
$513,702, our depreciation and amortization of $319,302, a decrease
in
accounts receivable of $390,739, and an increase in accounts payable
and
accrued expenses of $228,375. Premiums payable have declined due
to a
change in our mix of business. We finance premiums for assigned risk
plans, where the loan is funded in two stages, generally over a 30
day
period. We also finance premiums with carriers where the entire loan
is
funded at inception. As our mix of business has changed to include
less
assigned risk loans and more direct carrier loans, there is a reduction
in
the amount of our premium liability. The decrease in accounts receivable
is the result of a January 2006 payment of a revenue accrual from
an
insurance company, which did not continue in 2006. The increase in
accounts payable and accrued expenses was attributable to the purchase
of
Accurate as well as our ability to increase payment terms of certain
vendors.
|
· |
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 borrowings
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 $2,438,793 was used in investing activities during the nine
months
ended September 30, 2006 primarily due to the following: (i) the
use of
$1,771,707 in cash to purchase the surplus notes issued by CMIC and
the
use of $832,654 in cash to purchase the Accurate agency and another
agency’s book of business in the nine months ended September 30, 2006,
offset by (ii) a decrease in our net finance contracts receivable
of
$242,585.
|
· |
Net
cash provided by financing activities during the nine months ended
September 30, 2006 was $1,898,999 primarily due to the following:
(i)
proceeds of $41,785,558 from our revolving credit line from Manufacturers
and Traders Trust Co. (“M&T”) for premium finance purposes and for the
purchase of the surplus notes issued by CMIC, offset by (ii) payments
of
$38,539,375 on the revolving credit line, $1,303,434 on the related
party
note, and $235,000 of long-term
debt.
|
Our
premium finance operations are financed pursuant to a $20,000,000 revolving
line
of credit from M&T entered into on July 28, 2006, which replaced our
revolving line of credit agreement with M&T dated December 27, 2004. The
line of credit bears interest at either (i) M&T’s prime rate or (ii) LIBOR
plus 2.25%, matures on September 30, 2008 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, 2006, $11,852,707 was
outstanding under the loan. As of September 30, 2006, of the $17,866,052
reflected on the Balance Sheet as “Finance contracts receivable,” approximately
$14,445,721 represents eligible receivables for purposes of our finance credit
agreement. The line of credit also allows for a $2,500,000 term loan (of the
$20,000,000 credit line availability) to be used to provide liquidity for
ongoing working capital purposes. Any draws against this line bear interest
at
LIBOR plus 2.75%. As of July 28, 2006, we made our first draw of $1,300,000
against the term line. The draw is being paid back quarterly over 30 months
with
interest payable monthly.
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. In May 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.
On
January 31, 2006, we purchased $3,750,000 of surplus notes issued by CMIC for
a
price of $3,075,141, of which $1,303,434 was paid by delivery of a six month
promissory note which provided for interest at the rate of 7.5% per annum.
The
promissory note was paid in full on July 28, 2006. Accrued but unpaid interest
on the surplus notes totaled $1,794,688 at the time of the
purchase.
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,
2006 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,
2006
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
|
(a) Not
applicable
(b) Not
applicable
(c) Issuer
repurchases during the quarter:
Small
Business Issuer Purchases of Equity Securities
Period
|
|
|
(a)
Total
Number of Shares Purchased(1)
|
|
|
(b)
Average
Price Paid per Share
|
|
|
(c)
Total
Number of Shares Purchased as Part of Publicly Announced Plans or
Programs
|
|
|
(d)
Maximum
Number of Shares that May Yet Be Purchased Under the Plans or
Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/1/06
- 7/31/06
|
|
|
2,390
|
|
$
|
1.99
|
|
|
-
|
|
|
-
|
|
8/1/06
- 8/31/06
|
|
|
1,306
|
|
$
|
2.22
|
|
|
-
|
|
|
-
|
|
9/1/06
- 9/30/06
|
|
|
895
|
|
$
|
2.18
|
|
|
-
|
|
|
-
|
|
Total
|
|
|
4,591
|
|
$
|
2.09
|
|
|
-
|
|
|
-
|
|
(1)
Represents
shares acquired by “affiliated purchaser”.
Item
3.
|
|
DEFAULTS
UPON SENIOR SECURITIES
|
None
Item
4.
|
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY
HOLDERS
|
Our
Annual Meeting of Stockholders was held on September 22, 2006. The following
is
a listing of the votes cast for or withheld with respect to each nominee for
director.
|
Number
of Shares
|
|
For
|
Withheld
|
|
|
|
Barry
B. Goldstein
|
2,104,047
|
11,402
|
Morton
L. Certilman
|
2,030,305
|
13,744
|
Jay
M. Haft
|
1,990,361
|
53,688
|
David
A. Lyons
|
2,032,867
|
11,182
|
Jack
D. Seibald
|
2,032,867
|
11,182
|
Robert
M. Wallach
|
1,800,166
|
243,883
|
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
document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the
period ended September 30, 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 13, 2006 |
By: |
/s/ Barry
B.
Goldstein |
|
Barry
B. Goldstein |
|
President
(Principal
Executive, Financial
and
Accounting Officer)
|