DCAP Group, Inc. Form 10-QSB for quarter ended March 31, 2007
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 March
31, 2007
|
|
[
]
|
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
|
36-2476480
|
(State
or other jurisdiction of incorporation or organization)
|
(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 in 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: 2,962,024 shares as of April 30,
2007.
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 - March 31, 2007 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Three months ended March 31,
2007 and
2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Three months ended March
31, 2007
and 2006 (Unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements - Three months ended
March
31, 2007 and 2006 (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 made or 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,
2006 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)
|
|
March
31, 2007 |
|
Assets
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
1,047,343
|
|
Accounts
receivable, net of allowance for
doubtful
accounts of $66,000
|
|
|
|
|
|
1,112,391
|
|
Finance
contracts receivable
|
|
$
|
16,252,948
|
|
|
|
|
Less:
Deferred interest
|
|
|
(1,270,150
|
)
|
|
|
|
Less:
Allowance for finance receivable losses
|
|
|
(205,264
|
)
|
|
14,777,534
|
|
Prepaid
income taxes
|
|
|
|
|
|
188,294 |
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
189,379
|
|
Deferred
income taxes
|
|
|
|
|
|
76,000
|
|
Total
Current Assets
|
|
|
|
|
|
17,390,941
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
|
|
|
367,664
|
|
Goodwill
|
|
|
|
|
|
2,601,257
|
|
Other
Intangibles, net
|
|
|
|
|
|
315,603
|
|
Notes
Receivable, net
|
|
|
|
|
|
4,207,284
|
|
Deposits
and Other Assets
|
|
|
|
|
|
230,440
|
|
Total
Assets
|
|
|
|
|
$
|
25,113,189
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
Revolving
credit line
|
|
|
|
|
$
|
10,165,638
|
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
878,151
|
|
Premiums
payable
|
|
|
|
|
|
3,533,023
|
|
Current
portion of long-term debt
|
|
|
|
|
|
655,800
|
|
Other
current liabilities
|
|
|
|
|
|
234,295
|
|
Total
Current Liabilities
|
|
|
|
|
|
15,466,907
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
|
|
|
2,283,226
|
|
Deferred
Income Tax
|
|
|
|
|
|
396,000
|
|
Mandatorily
Redeemable Preferred Stock
|
|
|
|
|
|
780,000
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares;
issued
3,738,947
|
|
|
|
|
|
37,390
|
|
Preferred
stock; $.01 par value; authorized
1,000,000
shares; 0 shares issued and outstanding
|
|
|
|
|
|
-
|
|
Capital
in excess of par
|
|
|
|
|
|
11,737,224
|
|
Deficit
|
|
|
|
|
|
(4,409,003
|
)
|
|
|
|
|
|
|
7,365,611
|
|
Treasury
stock, at cost, 776,923 shares
|
|
|
|
|
|
(1,178,555
|
)
|
Total
Stockholders’ Equity
|
|
6,187,056
|
|
Total
Liabilities and Stockholders’ Equity
|
$
|
25,113,189
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
Three
Months Ended March 31,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
Commissions
and fees
|
|
$
|
1,613,239
|
|
$
|
1,893,177
|
|
Premium
finance revenue
|
|
|
790,695
|
|
|
974,513
|
|
Total
Revenues
|
|
|
2,403,934
|
|
|
2,867,690
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
2,062,821
|
|
|
2,289,509
|
|
Provision
for finance receivable losses
|
|
|
163,056
|
|
|
169,625
|
|
Depreciation
and amortization
|
|
|
96,458
|
|
|
111,304
|
|
Premium
finance interest expense
|
|
|
165,818
|
|
|
189,097
|
|
Total
Operating Expenses
|
|
|
2,488,153
|
|
|
2,759,535
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
|
(84,219
|
)
|
|
108,155
|
|
|
|
|
|
|
|
|
|
Other
(Expense) Income:
|
|
|
|
|
|
|
|
Gain
on sale of book of business
|
|
|
62,467
|
|
|
-
|
|
Interest
income
|
|
|
1,353
|
|
|
1,358
|
|
Interest
income - notes receivable
|
|
|
324,298
|
|
|
212,293
|
|
Interest
expense
|
|
|
(132,705
|
)
|
|
(100,872
|
)
|
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(9,750
|
)
|
|
(9,750
|
)
|
Total
Other Income
|
|
|
245,663
|
|
|
103,029
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
161,444
|
|
|
211,184
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
72,650
|
|
|
84,404
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
88,794
|
|
$
|
126,780
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.03
|
|
$
|
0.04
|
|
Diluted
|
|
$
|
0.03
|
|
$
|
0.04
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
|
|
|
|
|
Basic
|
|
|
2,941,491
|
|
|
2,866,746
|
|
Diluted
|
|
|
3,283,525
|
|
|
3,238,861
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
Condensed
Consolidated Statements of Cash Flows
(Unaudited)
|
Three
months ended March 31,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
88,794
|
|
$
|
126,780
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
96,458
|
|
|
111,304
|
|
Accretion
of discount on notes receivable
|
|
|
(246,951
|
)
|
|
(164,637
|
)
|
Amortization
of warrants
|
|
|
19,305
|
|
|
19,611
|
|
Stock
based payments
|
|
|
5,000
|
|
|
10,000
|
|
Gain
on sale of book of business
|
|
|
(62,467
|
)
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
334,590
|
|
|
286,483
|
|
Prepaid
expenses and other current assets
|
|
|
(92,424
|
)
|
|
(10,318
|
)
|
Deposits
and other assets
|
|
|
2,172
|
|
|
(107,694
|
)
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
Premiums
payable
|
|
|
470,774
|
|
|
675,051
|
|
Accounts
payable and accrued expenses
|
|
|
(135,030
|
)
|
|
302,433
|
|
Taxes
payable
|
|
|
73,109
|
|
|
(201,399
|
)
|
Other
current liabilities
|
|
|
68,149
|
|
|
(3,801
|
)
|
Net
Cash Provided by Operating Activities
|
|
|
621,479
|
|
|
1,043,813
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
Decrease
(increase) in finance contracts receivable - net
|
|
|
321
|
|
|
(1,702,770
|
)
|
Decrease
in notes and other receivables - net
|
|
|
35,663
|
|
|
4,870
|
|
Purchase
of notes
|
|
|
-
|
|
|
(1,771,707
|
)
|
Proceeds
from sale of book of business
|
|
|
63,000
|
|
|
-
|
|
Purchase
of agencies
|
|
|
-
|
|
|
(832,654
|
)
|
Purchase
of property and equipment
|
|
|
(51,825
|
)
|
|
(10,135
|
)
|
Net
Cash Provided by (Used in) Investing Activities
|
|
|
47,159
|
|
|
(4,312,394
|
)
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(130,000
|
)
|
|
-
|
|
Proceeds
from revolving credit line
|
|
|
10,293,546
|
|
|
15,457,856
|
|
Payments
on revolving credit line
|
|
|
(11,080,253
|
)
|
|
(12,979,566
|
)
|
Proceeds
from exercise of stock options
|
|
|
99,000
|
|
|
191,250
|
|
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(817,707
|
)
|
|
2,669,540
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(149,069
|
)
|
|
(599,041
|
)
|
Cash
and Cash Equivalents, beginning of period
|
|
|
1,196,412
|
|
|
1,961,489
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
1,047,343
|
|
$
|
1,362,448
|
|
|
|
|
|
|
|
|
|
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
|
|
$
|
-
|
|
$
|
550,371
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE
MONTHS ENDED MARCH 31, 2007 AND 2006 (UNAUDITED)
1. |
The
Condensed Consolidated Balance Sheet as of March 31, 2007, the Condensed
Consolidated Statements of Income for the three months ended March
31,
2007 and 2006 and the Condensed Consolidated Statements of Cash Flows
for
the three months ended March 31, 2007 and 2006 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 March
31, 2007, results of operations for the three months ended March
31, 2007
and 2006 and cash flows for the three months ended March 31, 2007
and
2006.
|
This
report should be read in conjunction with our Annual Report on Form 10-KSB
for
the year ended December 31, 2006.
The
results of operations and cash flows for the three months ended March 31, 2007
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.
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. During the three months ended March 31, 2007 and
2006, approximately $50,000 and $0, respectively, was recognized as initial
franchise fee income.
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 26.6% per
annum
for the three months ended March 31, 2007 and 2006, 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. |
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 three months ended March 31, 2007 and 2006, the provision
for finance receivable losses was $163,056 and $169,625, respectively, and
actual principal write-offs for such periods (net of recoveries of previous
write-offs) were $169,819 and $150,519, respectively.
d. 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 $43,160 and $29,785 in such costs was incurred during the three months
ended March 31, 2007 and 2006, respectively.
e. Reclassifications
Certain
reclassifications have been made to the consolidated financial statements for
the three months ended March 31, 2006 to conform to the classifications used
for
the three months ended March 31, 2007.
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:
|
Three
Months
Ended
March
31, 2007
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
1,613,239
|
|
$
|
790,695
|
|
$
|
-
|
|
$
|
2,403,934
|
|
Interest
income
|
|
|
1,269
|
|
|
-
|
|
|
84
|
|
|
1,353
|
|
Interest
income - notes receivable
|
|
|
-
|
|
|
-
|
|
|
324,298
|
|
|
324,298
|
|
Interest
expense
|
|
|
31,070
|
|
|
165,818
|
|
|
111,385
|
|
|
308,273
|
|
Depreciation
and
amortization
|
|
|
59,870
|
|
|
25,469
|
|
|
11,119
|
|
|
96,458
|
|
Segment
profit (loss)
before
income taxes
|
|
|
238,087
|
|
|
68,846
|
|
|
(145,489
|
)
|
|
161,444
|
|
Segment
profit (loss)
|
|
|
130,948
|
|
|
37,865
|
|
|
(80,019
|
)
|
|
88,794
|
|
Segment
assets
|
|
|
4,986,760
|
|
|
15,410,643
|
|
|
4,715,786
|
|
|
25,113,189
|
|
______________
(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
March
31, 2006
|
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$
|
1,893,177
|
|
$
|
974,513
|
|
$
|
-
|
|
$
|
2,867,690
|
|
Interest
income
|
|
|
1,273
|
|
|
-
|
|
|
85
|
|
|
1,358
|
|
Interest
expense - notes receivable
|
|
|
-
|
|
|
-
|
|
|
212,293
|
|
|
212,293
|
|
Interest
expense
|
|
|
23,111
|
|
|
189,097
|
|
|
87,511
|
|
|
299,719
|
|
Depreciation
and
amortization
|
|
|
54,027
|
|
|
46,985
|
|
|
10,292
|
|
|
111,304
|
|
Segment
profit (loss)
before
income taxes
|
|
|
340,354
|
|
|
134,931
|
|
|
(264,101
|
)
|
|
211,184
|
|
Segment
profit (loss)
|
|
|
204,282
|
|
|
80,958
|
|
|
(158,460
|
)
|
|
126,780
|
|
Segment
assets
|
|
|
4,674,796
|
|
|
19,563,487
|
|
|
3,898,762
|
|
|
28,137,045
|
|
________________
(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 of our common shares 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 common shares 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 common shares 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.
Our
results for the three month periods ended March 31, 2007 and 2006 include
share-based compensation expense totaling approximately $5,000 and $10,000,
respectively. Such amounts have been included in the Condensed Consolidated
Statements of Income within general and administrative expenses.
Stock
option compensation expense in 2007 and 2006 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award.
We
did
not grant any options under either plan during the three months ended March
31,
2007 or 2006.
The
following table represents our stock options granted, exercised, and forfeited
during the first quarter of 2007.
Stock
Options
|
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at
January
1, 2007
|
|
|
193,300
|
|
$
|
2.09
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(66,000
|
)
|
$
|
1.50
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
|
|
|
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at
March
31, 2007
|
|
|
127,300
|
|
$
|
2.78
|
|
|
2.07
|
|
$
|
53,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable
at
March 31, 2007
|
|
|
110,017
|
|
$
|
2.81
|
|
|
1.75
|
|
$
|
45,758
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 2007 is calculated as the difference between the exercise price of
the
underlying options and the market price of our common shares for the shares
that
had exercise prices that were lower than the $2.40 closing price of our common
shares on March 31, 2007. We received cash proceeds from options exercised
in the three months ended March 31, 2007 and 2006 of approximately $99,000
and
$191,000, respectively.
As
of
March 31, 2007, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $37,000. Unamortized compensation
cost as of March 31, 2007 is expected to be recognized over a remaining
weighted-average vesting period of 1.15 years.
|
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 for the three months ended March 31, 2007 and 2006 is as
follows:
Three
Months Ended March 31,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
2,941,491
|
|
|
2,866,746
|
|
Effect
of Dilutive Securities, common share equivalents
|
|
|
342,034
|
|
|
372,115
|
|
Weighted
Average Number of Shares Outstanding,
used
for computing diluted earnings per share
|
|
|
3,283,525
|
|
|
3,238,861
|
|
Net
income available to common shareholders for the computation of diluted earnings
per share is computed as follows:
Three
Months Ended March 31,
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
88,794
|
|
$
|
126,780
|
|
Interest
Expense on Dilutive Convertible Preferred Shares
|
|
|
9,750
|
|
|
9,750
|
|
Net
Income Available to Common Shareholders for
Diluted
Earnings Per Share
|
|
$
|
98,544
|
|
$
|
136,530
|
|
6. |
Extension
of Maturity Date of Subordinated
Debt
|
Effective
March 23, 2007, the holders of approximately $1,385,000 outstanding principal
amount of our subordinated debt agreed to extend the maturity date of the debt
from September 30, 2007 to September 30, 2008. In consideration for the
extension of the due date of the subordinated debt, we extended the expiration
date of warrants held by the debtholders for the purchase of 90,000 of our
common shares from September 30, 2007 to September 30, 2008.
7. |
Exchange
of Preferred Shares
|
Effective
March 23, 2007, the holder of our Series A preferred shares exchanged such
shares for an equal number of Series B preferred shares. The terms of the Series
B preferred shares are identical to those of the Series A preferred shares,
except that they are mandatorily redeemable on April 30, 2008 (as opposed to
April 30, 2007 for the Series A preferred shares).
8. |
Sale
of Book of Business
|
In
March
2007, we sold the book of business of one of our stores for $63,000 in cash.
The
sale resulted in a gain of $62,467.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
There
are
70 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. There
are also 18 Barry Scott locations and four Accurate Agency 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 Agency 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; however,
as discussed below, Commercial Mutual Insurance Company is seeking to convert
from an advance premium insurance company to a stock property and casualty
insurance company. In the event of such conversion, the surplus notes issued
by
Commercial Mutual and held by us may be converted into a controlling equity
interest in Commercial Mutual.
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.
We
also
offer automobile club services for roadside emergencies. Income tax preparation
services are also offered in connection with the franchise operation of the
DCAP
stores.
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. 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.
Franchise
fee income is recognized when substantially all of our contractual requirements
under the franchise agreement are completed.
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 (“SFAS”) 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 26.6% per annum
for
the three months ended March 31, 2007 and 2006, 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 three months ended March 31, 2007
and
2006, the provision for finance receivables losses was approximately $163,056
and $169,625, respectively, and actual principal write-offs for such periods
(net recoveries of previous write-offs) were approximately $169,819 and
$150,519, respectively. If our provision for finance receivable losses was
understated by 15% 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 three months ended March 31, 2007 and
2006.
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 March
31,
2007.
Stock-Based
Compensation
We
account for stock-based compensation in accordance with SFAS No. 123 (revised
2004) “Share-Based Payment” (“SFAS 123R”). Under the provisions of SFAS 123R,
stock-based compensation cost is estimated at the grant date based on the
award’s fair-value as calculated by a Black Scholes Merton option pricing model
(the “Black Scholes model”) and is recognized as expense ratably over the
requisite service period. The Black Scholes model requires various highly
judgmental assumptions including volatility, forfeiture rates, and expected
option life. If any of the assumptions used in the model change significantly,
stock-based compensation expense may differ materially in the future from that
recorded in the current period.
Income
Taxes
Effective
January 1, 2007, we began to measure and record tax contingency accruals in
accordance with Financial Accounting Standards Board Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN 48”). Under FIN 48, we
recognize the tax benefit from an uncertain tax position only if it is more
likely than not that the tax position will be sustained upon examination by
the
taxing authorities, based on the technical merits of the position. We measure
tax benefits in our financial statements from such a position as the largest
benefit that has a greater than 50% likelihood of being realized upon ultimate
settlement. The impact on our reassessment of our tax positions in
accordance with FIN 48 did not have a material impact on our results of
operations, financial condition or liquidity.
Results
of Operations
Our
net
income for the three months ended March 31, 2007 was $88,794 as compared to
$126,780 for the three months ended March 31, 2006.
During
the three months ended March 31, 2007, revenues from our insurance-related
operations were $1,613,239 as compared to $1,893,177 for the three months ended
March 31, 2006. The revenue decrease of $279,938 was primarily attributable
to
the sale of fewer insurance policies in 2007 than in 2006. Such reduction in
sales was generally caused by the continued heightened competition from the
voluntary insurance market which is offering lower premium rates to the
non-standard insured.
Premium
finance revenues decreased $183,818 during the three months ended March 31,
2007
as compared to the three months ended March 31, 2006. This decrease is a direct
result of the decrease in the number of policies sold as discussed in the
paragraph above.
Our
general and administrative expenses for the three months ended March 31, 2007
were $226,688 less than for the three months ended March 31, 2006. This decrease
was primarily due to a reduction in variable compensation paid to employees
due
to a reduction in policies sold, no bonus, if any, having as yet been determined
for our Chief Executive Officer during the first quarter of 2007 (a bonus was
provided during the first quarter of 2006) and a decrease in fees paid to
service our premium finance operations, offset by an increase in advertising
expenses.
Our
provision for finance receivable losses for the first quarter of 2007 was $6,569
less than for the first quarter of 2006. This was the result of a lower
provision for finance receivable losses in the first quarter of 2007 caused
by a
decrease in volume, offset by greater write off of principal amounts of our
finance contracts receivable in 2007 as compared to 2006.
Our
depreciation and amortization expense for the three months ended March 31,
2007
was $14,846 less than for the three months ended March 31, 2006. This decrease
was primarily the result of reducing our deferred debt expense asset (which
is
the basis for a portion of our amortization expense) when we reduced our
revolving credit line in July 2006.
Our
premium finance interest expense during the three months ended March 31, 2007
was $23,279 less than for the three months ended March 31, 2006. This decrease
was the result of a decrease in the average outstanding balance of our revolving
credit line for the three months ended March 31, 2007 compared to the three
months ended March 31, 2006.
Our
interest income - notes receivable for the three months ended March 31, 2007
was
$112,005 more than for the three months ended March 31, 2006. On January 31,
2006, we purchased surplus notes of Commercial Mutual Insurance Company. We
recorded two months of interest in the first quarter of 2006 as compared to
three months of interest in the first quarter of 2007.
Our
interest expense for the three months ended March 31, 2007 was $31,833 more
than
for the three months ended March 31, 2006. This increase was the result of
borrowings against our revolving credit line to pay off the promissory note
given in connection with the purchase of the Commercial Mutual surplus
notes.
During
the three months ended March 31, 2007, our provision for income taxes was
$72,650 as opposed to $84,404 for the three months ended March 31, 2006. This
was due primarily to the lower income before income taxes in 2007.
Our
insurance-related operations, on a stand-alone basis, generated a net profit
before income taxes of $238,087 during the three months ended March 31, 2007
as
compared to a net profit before income taxes of $340,354 during the three months
ended March 31, 2006. This decrease was primarily due to decreased revenues,
offset by a reduction in variable compensation paid on commissions generated
and
the gain on the sale of the book of business of one of our stores. Our premium
finance operations, on a stand-alone basis, generated a net profit before income
taxes of $68,846 during the three months ended March 31, 2007 as compared to
a
net profit before income taxes of $134,931 during the three months ended March
31, 2006. The decrease was primarily due to reduced premium finance revenue
in
2007, offset by a reduction in fees paid to service our premium finance
operations. Loss before income taxes from corporate-related items not allocable
to reportable segments was $145,489 during the three months ended March 31,
2007
as compared to $264,101 during the three months ended March 31, 2006. This
decrease was primarily due to an increase in interest income-notes receivable
related to the purchase of the surplus notes issued by Commercial Mutual, and
the absence of a bonus determination for our Chief Executive Officer during
the
initial quarter of 2007.
Liquidity
and Capital Resources
As
of
March 31, 2007, we had $1,047,343 in cash and cash equivalents and working
capital of $1,924,034. As of December 31, 2006, we had $1,196,412 in cash and
cash equivalents and working capital of $2,031,120.
During
the three months ended March 31, 2007, our cash and cash equivalents decreased
by $149,069. This was due primarily to the following:
· |
Net
cash provided by operating activities during the three months ended
March
31, 2007 was $621,479 primarily due to the following: (i) a decrease
in
accounts receivable of $334,590 and an increase in premiums payable
of
$470,774, offset by (ii) the accretion of discount on notes receivable
of
$246,951. The decrease in accounts receivable is primarily the result
of a
January 2007 payment of a revenue accrual from an insurance company,
which
did not continue in 2007 and the conversion of certain amounts from
franchisees into notes receivable. The increase in premiums payable
is the
result of our financing more policies in March 2007 than in December
2006.
|
· |
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 used in financing activities during the three months ended March
31,
2007 was $817,707 primarily due to the following: (i) proceeds of
$10,293,546 from our revolving credit line with Manufacturers and
Traders
Trust Company (“M&T”) for premium finance purposes and for the
purchase of the surplus notes issued by Commercial Mutual Insurance
Company, offset by (ii) payments of $11,080,253 on the revolving
credit
line.
|
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 June 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 March 31, 2007, $10,165,638 was outstanding under
the
line. As of March 31, 2007, of the $16,252,948 reflected on the Balance Sheet
as
“Finance contracts receivable,” approximately $12,887,318 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 repayable in quarterly principal installments of $130,000 each,
commencing September 1, 2006. The remaining principal balance is payable on
June
30, 2008. Interest is 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. During 2005, we utilized the M&T line of credit to repay an
aggregate of $2,000,000 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. In May 2005, we obtained an extension of the maturity date of the
remaining subordinated debt to September 30, 2007. In March 2007, holders of
approximately $1,385,000 of the outstanding principal amount of the subordinated
debt agreed to extend the maturity date of the debt from September 30, 2007
to
September 30, 2008. We have the right to prepay the subordinated debt (subject
to M&T’s consent) without penalty.
Commercial
Mutual Insurance Company
On
January 31, 2006, we purchased $3,750,000 of surplus notes issued by
Commercial
Mutual
Insurance Company 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.
In
March
2007, Commercial Mutual’s Board of Directors adopted a resolution to convert
Commercial Mutual from an advance premium insurance company to a stock property
and casualty insurance company. In the event the conversion occurs, we may
be
able to convert the surplus notes we hold into a controlling equity interest
in
Commercial Mutual.
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
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated
to
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required
disclosures.
As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered
by
this Quarterly Report, under the supervision and with the participation of
our
Chief Executive Officer and Chief Financial Officer, we evaluated 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 that
date.
There
was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
PART
II. OTHER
INFORMATION
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|
|
Item
1.
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LEGAL
PROCEEDINGS
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|
|
|
None
|
|
|
Item
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
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None
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Item
3.
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DEFAULTS
UPON SENIOR SECURITIES
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None
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Item
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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None
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Item
5.
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OTHER
INFORMATION
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None
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Item
6.
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EXHIBITS
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3(a)
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Restated
Certificate of Incorporation1
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3(b)
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Certificate
of Designation of Series A Preferred
Stock2
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3(c)
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Certificate
of Designation of Series B Preferred
Stock3
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3(d)
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By-laws,
as amended4
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31
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Rule
13a-14(a)/15d-14(a) Certification as adopted pursuant to Section
302 of
the Sarbanes-Oxley Act of 2002
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32
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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
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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 Annual Report on Form 10-KSB for the year ended December
31, 2006 and incorporated herein by reference.
4 Denotes
document filed as an exhibit to our Quarterly Report on Form 10-QSB for
the
period ended June 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.
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DCAP
GROUP, INC.
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Date: May
11,
2007 |
By: |
/s/ Barry
B.
Goldstein |
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Barry
B. Goldstein |
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President
(Principal
Executive, Financial and
Accounting Officer)
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