form10qsb.htm
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 June 30, 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 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: 2,970,524 shares as of July 31,
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 – June 30, 2007 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Six months ended June 30, 2007
and
2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income – Three months ended June 30, 2007 and
2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Six months ended June 30,
2007 and
2006 (Unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements - Six months ended
June 30,
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 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.
PART
I. FINANCIAL INFORMATION
Item
1. FINANCIAL
STATEMENTS
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Balance Sheet (Unaudited)
|
|
June
30, 2007
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
950,142
|
|
Accounts
receivable, net of allowance for
doubtful
accounts of $20,000
|
|
|
|
|
|
1,014,244
|
|
Finance
contracts receivable
|
|
$ |
15,322,568
|
|
|
|
|
|
Less: Deferred
interest
|
|
|
(1,183,535 |
) |
|
|
|
|
Less:
Allowance for finance receivable losses
|
|
|
(193,705 |
) |
|
|
13,945,328
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
162,248
|
|
Deferred
income taxes
|
|
|
|
|
|
|
76,000
|
|
Total
Current Assets
|
|
|
|
|
|
|
16,147,962
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
505,389
|
|
Goodwill
|
|
|
|
|
|
|
2,601,257
|
|
Other
Intangibles, net
|
|
|
|
|
|
|
290,260
|
|
Notes
Receivable, net
|
|
|
|
|
|
|
4,531,582
|
|
Deposits
and Other Assets
|
|
|
|
|
|
|
219,704
|
|
Total
Assets
|
|
|
|
|
|
$ |
24,296,154
|
|
Liabilities
and Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Revolving
credit line
|
|
|
|
|
|
$ |
9,858,960
|
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
|
726,146
|
|
Premiums
payable
|
|
|
|
|
|
|
3,072,612
|
|
Current
portion of long-term debt and lease obligations
|
|
|
|
|
|
|
743,320
|
|
Mandatorily
redeemable preferred stock
|
|
|
|
|
|
|
780,000
|
|
Other
current liabilities
|
|
|
|
|
|
|
155,507
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
15,336,545
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt and Capital Lease Obligations
|
|
|
|
|
|
|
2,148,695
|
|
Deferred
Income Tax
|
|
|
|
|
|
|
477,623
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares
issued
3,747,447
|
|
|
|
37,475
|
|
Preferred
stock; $.01 par value; authorized
1,000,000
shares; 0 shares issued and outstanding
|
|
|
|
-
|
|
Capital
in excess of par
|
|
|
|
11,755,339
|
|
Deficit
|
|
|
|
(4,273,743 |
) |
|
|
|
|
7,518,071
|
|
Treasury
stock, at cost, 781,423 shares
|
|
|
|
(1,185,780 |
) |
Total
Stockholders’ Equity
|
|
|
|
6,333,291
|
|
Total
Liabilities and Stockholders’ Equity
|
|
|
$ |
24,296,154
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
Six Months
Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
and fees
|
|
$ |
3,126,859
|
|
|
$ |
3,753,230
|
|
Premium
finance revenue
|
|
|
1,641,868
|
|
|
|
2,146,701
|
|
Total
Revenues
|
|
|
4,768,727
|
|
|
|
5,899,931
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
4,013,228
|
|
|
|
4,603,965
|
|
Provision
for finance receivable losses
|
|
|
275,610
|
|
|
|
327,942
|
|
Depreciation
and amortization
|
|
|
188,619
|
|
|
|
224,621
|
|
Premium
finance interest expense
|
|
|
332,980
|
|
|
|
407,550
|
|
Total
Operating Expenses
|
|
|
4,810,437
|
|
|
|
5,564,078
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
|
(41,710 |
) |
|
|
335,853
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,908
|
|
|
|
2,282
|
|
Interest
income – notes receivable
|
|
|
648,597
|
|
|
|
534,247
|
|
Interest
expense
|
|
|
(249,691 |
) |
|
|
(254,664 |
) |
Interest
expense – mandatorily redeemable preferred stock
|
|
|
(19,500 |
) |
|
|
(19,500 |
) |
Gain
on sale of stores
|
|
|
65,767
|
|
|
|
81,105
|
|
Total
Other Income (Expense)
|
|
|
449,081
|
|
|
|
343,470
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
407,371
|
|
|
|
679,323
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
183,317
|
|
|
|
271,729
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
224,054
|
|
|
$ |
407,594
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.08
|
|
|
$ |
0.14
|
|
Diluted
|
|
$ |
0.07
|
|
|
$ |
0.13
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,954,538
|
|
|
|
2,881,466
|
|
Diluted
|
|
|
3,284,096
|
|
|
|
3,243,846
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
Three
Months Ended June 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
and fees
|
|
$ |
1,513,620
|
|
|
$ |
1,860,052
|
|
Premium
finance revenue
|
|
|
851,173
|
|
|
|
1,172,188
|
|
Total
Revenues
|
|
|
2,364,793
|
|
|
|
3,032,240
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,950,407
|
|
|
|
2,314,456
|
|
Provision
for finance receivable losses
|
|
|
112,554
|
|
|
|
158,317
|
|
Depreciation
and amortization
|
|
|
92,161
|
|
|
|
113,317
|
|
Premium
finance interest expense
|
|
|
167,162
|
|
|
|
218,452
|
|
Total
Operating Expenses
|
|
|
2,322,284
|
|
|
|
2,804,542
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
42,509
|
|
|
|
227,698
|
|
|
|
|
|
|
|
|
|
|
Other
Income (Expense):
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,555
|
|
|
|
923
|
|
Interest
income – notes receivable
|
|
|
324,299
|
|
|
|
321,955
|
|
Interest
expense
|
|
|
(116,986 |
) |
|
|
(153,792 |
) |
Interest
expense – mandatorily redeemable preferred stock
|
|
|
(9,750 |
) |
|
|
(9,750 |
) |
Gain
on sale of store
|
|
|
3,300
|
|
|
|
81,105
|
|
Total
Other Income (Expense)
|
|
|
203,418
|
|
|
|
240,441
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
245,927
|
|
|
|
468,139
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
110,667
|
|
|
|
187,325
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
135,260
|
|
|
$ |
280,814
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.05
|
|
|
$ |
0.10
|
|
Diluted
|
|
$ |
0.04
|
|
|
$ |
0.09
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,967,442
|
|
|
|
2,896,024
|
|
Diluted
|
|
|
3,284,523
|
|
|
|
3,248,668
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
Six
months ended June 30,
|
|
2007
|
|
|
2006
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
224,054
|
|
|
$ |
407,594
|
|
Adjustments
to reconcile net income to net cash
provided
by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
188,618
|
|
|
|
224,621
|
|
Bad
debt expense
|
|
|
-
|
|
|
|
1,200
|
|
Deferred
income taxes
|
|
|
183,317
|
|
|
|
-
|
|
Accretion
of discount on notes receivable
|
|
|
(493,902 |
) |
|
|
(411,592 |
) |
Amortization
of warrants
|
|
|
26,757
|
|
|
|
38,916
|
|
Stock-based
payments
|
|
|
10,000
|
|
|
|
10,000
|
|
Gain
on sale of store
|
|
|
(65,767 |
) |
|
|
(81,105 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
432,737
|
|
|
|
380,320
|
|
Prepaid
expenses and other current assets
|
|
|
(65,293 |
) |
|
|
13,444
|
|
Deposits
and other assets
|
|
|
(150,536 |
) |
|
|
(67,689 |
) |
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Premiums
payable
|
|
|
10,363
|
|
|
|
(592,694 |
) |
Accounts
payable and accrued expenses
|
|
|
(287,036 |
) |
|
|
261,280
|
|
Taxes
payable
|
|
|
159,709
|
|
|
|
(18,174 |
) |
Other
current liabilities
|
|
|
(10,638 |
) |
|
|
(24,429 |
) |
Net
Cash Provided by Operating Activities
|
|
|
162,383
|
|
|
|
131,692
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in finance contracts receivable – net
|
|
|
832,527
|
|
|
|
(1,071,130 |
) |
Decrease
in notes and other receivables – net
|
|
|
93,394
|
|
|
|
9,852
|
|
Purchase
of notes
|
|
|
-
|
|
|
|
(1,771,701 |
) |
Proceeds
from sale of stores
|
|
|
66,300
|
|
|
|
-
|
|
Purchase
of agencies
|
|
|
-
|
|
|
|
(832,654 |
) |
Purchase
of property and equipment
|
|
|
(136,179 |
) |
|
|
(40,238 |
) |
Net
Cash Provided by (Used in) Investing Activities
|
|
|
856,042
|
|
|
|
(3,705,877 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(283,509 |
) |
|
|
-
|
|
Proceeds
from revolving credit line
|
|
|
20,447,842
|
|
|
|
28,307,721
|
|
Payments
on revolving credit line
|
|
|
(21,541,228 |
) |
|
|
(25,887,220 |
) |
Proceeds
from exercise of stock options
|
|
|
112,200
|
|
|
|
191,250
|
|
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(1,264,695 |
) |
|
|
2,611,751
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(246,270 |
) |
|
|
(962,434 |
) |
Cash
and Cash Equivalents, beginning of period
|
|
|
1,196,412
|
|
|
|
1,961,489
|
|
Cash
and Cash Equivalents, end of period
|
|
$ |
950,142
|
|
|
$ |
999,055
|
|
|
|
|
|
|
|
|
|
|
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
|
|
Capital
lease
obligations
|
|
$ |
89,818
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX
MONTHS ENDED JUNE 30, 2007 AND 2006 (UNAUDITED)
1.
|
The
Condensed Consolidated Balance Sheet as of June 30, 2007, the Condensed
Consolidated Statements of Income for the three and six months ended
June
30, 2007 and 2006 and the Condensed Consolidated Statements of Cash
Flows
for the six months ended June 30, 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 June 30, 2007, results of operations for the three
and six
months ended June 30, 2007 and 2006 and cash flows for the six months
ended June 30, 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 six months ended June 30, 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.
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. During
the six months ended June 30, 2007 and 2006, approximately $110,000 and $25,000,
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 26.4% and
26.5% per
annum for the six months ended June 30, 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 six months ended June 30, 2007 and 2006, the provision
for finance receivable losses was $275,610 and $327,942,
respectively, and actual principal write-offs for such periods (net of
recoveries of previous write-offs) were $301,441 and $299,296,
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 $45,684 and $-0- in such costs was incurred during
the six months ended June 30, 2007 and 2006, respectively.
Certain
reclassifications have been made to the consolidated financial statements for
the six and three months ended June 30, 2006 to conform to the classifications
used for the six and three months ended June 30, 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 for the six months
ended June 30, 2007 and 2006 is shown in the following tables:
Six
Months Ended
June
30, 2007
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$ |
3,126,859
|
|
|
$ |
1,641,868
|
|
|
$ |
-
|
|
|
$ |
4,768,727
|
|
Interest
income
|
|
|
2,933
|
|
|
|
-
|
|
|
|
975
|
|
|
|
3,908
|
|
Interest
income –notes
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
648,597
|
|
|
|
648,597
|
|
Interest
expense
|
|
|
40,553
|
|
|
|
332,980
|
|
|
|
228,638
|
|
|
|
602,171
|
|
Depreciation
and
amortization
|
|
|
116,274
|
|
|
|
50,938
|
|
|
|
21,407
|
|
|
|
188,619
|
|
Segment
profit (loss)
before
income taxes
|
|
|
402,999
|
|
|
|
241,886
|
|
|
|
(237,514 |
) |
|
|
407,371
|
|
Segment
profit (loss)
|
|
|
221,649
|
|
|
|
133,037
|
|
|
|
(130,632 |
) |
|
|
224,054
|
|
Segment
assets
|
|
|
4,789,307
|
|
|
|
14,597,126
|
|
|
|
4,909,721
|
|
|
|
24,296,154
|
|
____________
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
Six
Months Ended
June
30, 2006
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$ |
3,753,230
|
|
|
$ |
2,146,701
|
|
|
$ |
-
|
|
|
$ |
5,899,931
|
|
Interest
income
|
|
|
2,172
|
|
|
|
-
|
|
|
|
110
|
|
|
|
2,282
|
|
Interest
income –notes
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
534,247
|
|
|
|
534,247
|
|
Interest
expense
|
|
|
46,619
|
|
|
|
407,550
|
|
|
|
227,545
|
|
|
|
681,714
|
|
Depreciation
and
amortization
|
|
|
110,492
|
|
|
|
93,342
|
|
|
|
20,787
|
|
|
|
224,621
|
|
Segment
profit (loss)
before
income taxes
|
|
|
750,450
|
|
|
|
410,431
|
|
|
|
(481,558 |
) |
|
|
679,323
|
|
Segment
profit (loss)
|
|
|
450,270
|
|
|
|
246,259
|
|
|
|
(288,935 |
) |
|
|
407,594
|
|
Segment
assets
|
|
|
4,722,707
|
|
|
|
18,483,913
|
|
|
|
3,901,497
|
|
|
|
27,083,114
|
|
____________
(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 June 30, 2007 and 2006 is shown in the following tables:
Three
Months Ended
June
30, 2007
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$ |
1,513,620
|
|
|
$ |
851,173
|
|
|
$ |
-
|
|
|
$ |
2,364,793
|
|
Interest
income
|
|
|
1,664
|
|
|
|
-
|
|
|
|
891
|
|
|
|
2,555
|
|
Interest
income –notes
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
324,299
|
|
|
|
324,299
|
|
Interest
expense
|
|
|
19,275
|
|
|
|
167,162
|
|
|
|
107,461
|
|
|
|
293,898
|
|
Depreciation
and
amortization
|
|
|
56,404
|
|
|
|
25,469
|
|
|
|
10,288
|
|
|
|
92,161
|
|
Segment
profit (loss)
before
income taxes
|
|
|
164,912
|
|
|
|
173,040
|
|
|
|
(92,025 |
) |
|
|
245,927
|
|
Segment
profit (loss)
|
|
|
90,701
|
|
|
|
95,172
|
|
|
|
(50,613 |
) |
|
|
135,260
|
|
____________
(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
June
30, 2006
|
|
Insurance
|
|
|
Premium
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
customers
|
|
$ |
1,860,052
|
|
|
$ |
1,172,188
|
|
|
$ |
-
|
|
|
$ |
3,032,240
|
|
Interest
income
|
|
|
898
|
|
|
|
-
|
|
|
|
25
|
|
|
|
923
|
|
Interest
income –notes
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
321,955
|
|
|
|
321,955
|
|
Interest
expense
|
|
|
23,508
|
|
|
|
218,452
|
|
|
|
140,034
|
|
|
|
381,994
|
|
Depreciation
and
amortization
|
|
|
56,465
|
|
|
|
46,357
|
|
|
|
10,495
|
|
|
|
113,317
|
|
Segment
profit (loss)
before
income taxes
|
|
|
410,097
|
|
|
|
295,782
|
|
|
|
(237,740 |
) |
|
|
468,139
|
|
Segment
profit (loss)
|
|
|
245,988
|
|
|
|
177,469
|
|
|
|
(142,844 |
) |
|
|
280,814
|
|
____________
(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 nonstatutory 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 nonstatutory
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,
nonstatutory 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 nonstatutory options, and the
vesting provisions for restricted stock, granted under this plan.
Our
results for the six and three month periods ended June 30, 2007 include
share-based compensation expense totaling $10,000 and $5,000,
respectively. Our results for the six and three months ended June 30,
2006 include share-based compensation expense totaling approximately $20,000
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 entire portion of the award.
We
did
not grant any options under either plan during the six and three months ended
June 30, 2007 or 2006.
The
following table represents our stock options granted, exercised, and forfeited
during the first six months 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
|
|
|
(74,500 |
) |
|
$ |
1.51
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(39,500 |
) |
|
$ |
1.53
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at
June
30, 2007
|
|
|
79,300
|
|
|
$ |
3.29
|
|
|
|
2.44
|
|
|
$ |
19,660
|
|
Vested
and Exercisable
at
June 30, 2007
|
|
|
70,369
|
|
|
$ |
3.62
|
|
|
|
1.75
|
|
|
$ |
14,035
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
June
30, 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 $2.68 closing price of our common
shares on June 30, 2007. We received cash proceeds from options
exercised in the six months ended June 30, 2007 and 2006 of approximately
$112,000 and $191,000, respectively.
As
of
June 30, 2007, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $17,000. Unamortized compensation
cost as of June 30, 2007 is expected to be recognized over a remaining
weighted-average vesting period of .70 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
shares. The computation of diluted earnings per share excludes
those options and warrants with an exercise price in excess of the
average
market price of our common shares during the periods
presented. The inclusion of such options and warrants in the
computation of diluted earnings per share would have been
anti-dilutive. The number of excluded options and warrants were
149,800 for the three and six months ended June 30, 2007 and 158,000
for
the three and six months ended June 30,
2006.
|
The
reconciliation is as follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
2,954,538
|
|
|
|
2,881,466
|
|
|
|
2,967,442
|
|
|
|
2,896,024
|
|
Effect
of Dilutive Securities, Common Share
Equivalents
|
|
|
329,558
|
|
|
|
362,380
|
|
|
|
317,081
|
|
|
|
352,644
|
|
Weighted
Average Number of Shares Outstanding,
used
for computing diluted earnings per share
|
|
|
3,284,096
|
|
|
|
3,243,846
|
|
|
|
3,284,523
|
|
|
|
3,248,668
|
|
Net
income available to common shareholders for the computation of diluted earnings
per share is computed as follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
224,054
|
|
|
$ |
407,594
|
|
|
$ |
135,260
|
|
|
$ |
280,814
|
|
Interest
Expense on Dilutive Convertible
Preferred
Shares
|
|
|
19,500
|
|
|
|
19,500
|
|
|
|
9,750
|
|
|
|
9,750
|
|
Net
Income Available to Common Shareholders
for
Diluted Earnings Per Share
|
|
$ |
243,554
|
|
|
$ |
427,094
|
|
|
$ |
145,010
|
|
|
$ |
290,564
|
|
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). Such shares have
been classified as a current liability at June 30, 2007 since they are due
within one year.
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.
9. Treasury
Stock
In
June
2007, a shareholder tendered common shares to settle an obligation due us
approximating $7,200. The tendered shares were recorded as an
increase in treasury stock, valued at the balance of the
obligation.
Item
2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Overview
There
are
71 store locations owned or franchised by us of which 66 are located in New
York
State. In the New York metropolitan area, there are 44 DCAP
franchises. There are also 17 Barry Scott locations and five 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;
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 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 26.4% and 26.5% per annum for the six months ended June 30, 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 six months ended June 30,
2007 and 2006, the provision for finance receivable losses was $275,610 and $327,942,
respectively, and actual principal write-offs for such periods (net of
recoveries of previous write-offs) were $301,441 and $299,296,
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 six months ended June 30, 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 June 30,
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
Six
Months ended June 30, 2007 compared to Six Months ended June 30,
2006
Our
net
income for the six months ended June 30, 2007 was $224,054 as compared to
$407,594 for the six months ended June 30, 2006.
During
the six months ended June 30, 2007, revenues from our insurance-related
operations were $3,126,859 as compared to $3,753,230 for the six months ended
June 30, 2006. The revenue decrease of $626,371 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 $504,833 during the six months ended June 30, 2007
as
compared to the six months ended June 30, 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 six months ended June 30, 2007
were
$590,737 less than for the six months ended June 30, 2006. This
decrease was primarily due to a reduction in personnel at our premium finance
operation, a reduction in variable compensation paid to employees due to a
reduction in policies sold at our insurance related operations, no bonus, if
any, having as yet been determined for our Chief Executive Officer during the
first six months of 2007 (a bonus was provided during the first six months
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 six months of 2007 was
$52,332 less than for the first six months of 2006. This was the
result of a lower provision for finance receivable losses in the first six
months of 2007 caused by a decrease in volume.
Our
premium finance interest expense during the six months ended June 30, 2007
was
$74,570 less than for the six months ended June 30, 2006. This
decrease was the result of a decrease in the average outstanding balance of
our
revolving credit line for the six months ended June 30, 2007 compared to the
six
months ended June 30, 2006.
Our
interest income – notes receivable for the six months ended June 30, 2007 was
$114,350 more than for the six months ended June 30, 2006. On January 31, 2006,
we purchased surplus notes of Commercial Mutual Insurance Company. We
recorded five months of interest in the first six months of 2006 as compared
to
six months of interest in the first six months of 2007.
During
the six months ended June 30, 2007, our provision for income taxes was $183,317
as opposed to $271,729 for the six months ended June 30, 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 $402,999 during the six months ended June 30, 2007 as
compared to a net profit before income taxes of $750,450 during the six months
ended June 30, 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 $241,886 during the six months
ended June 30, 2007 as compared to a net profit before income taxes of $410,431
during the six months ended June 30, 2006. The decrease was primarily
due to reduced premium finance revenue in 2007, offset by a reduction in
personnel and fees paid to service our premium finance
operations. Loss before income taxes from corporate-related items not
allocable to reportable segments was $237,514 during the six months ended June
30, 2007 as compared to $481,558 during the six months ended June 30,
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 first six months of 2007.
Three
Months ended June 30, 2007 compared to Three Months ended June 30,
2006
Our
net
income for the three months ended June 30, 2007 was $135,260 as compared to
$280,814 for the three months ended June 30, 2006.
During
the three months ended June 30, 2007, revenues from our insurance-related
operations were $1,513,620 as compared to $1,860,052 for the three months ended
June 30, 2006. The revenue decrease of $346,432 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 $321,015 during the three months ended June 30,
2007
as compared to the three months ended June 30, 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 June 30, 2007
were $364,049 less than for the three months ended June 30,
2006. This decrease was primarily due to a reduction in personnel at
our premium finance operation, a reduction in variable compensation paid to
employees due to a reduction in policies sold at our insurance related
operations, no bonus, if any, having as yet been determined for our Chief
Executive Officer during the first second quarter of 2007 (a bonus was provided
during the second quarter of 2006), a decrease in fees paid to service our
premium finance operations and a decrease in advertising expenses.
Our
provision for finance receivable losses for the three months ended June 30,
2007
was $45,763 less than for the three months ended June 30, 2006. This
was the result of a lower provision for finance receivable losses in 2007 caused
by a decrease in volume.
Our
premium finance interest expense during the three months ended June 30, 2007
was
$51,290 less than for the three months ended June 30, 2006. This
decrease was the result of a decrease in the average outstanding balance of
our
revolving credit line for the three months ended June 30, 2007 compared to
the
three months ended June 30, 2006.
During
the three months ended June 30, 2007, our provision for income taxes was
$110,667 as opposed to $187,325 for the three months ended June 30,
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 $164,912 during the three months ended June 30, 2007
as
compared to a net profit before income taxes of $410,097 during the three months
ended June 30, 2006. This decrease was primarily due to decreased
revenues, offset by a reduction in variable compensation paid on commissions
generated and a decrease in advertising expenses. Our premium finance
operations, on a stand-alone basis, generated a net profit before income taxes
of $173,040 during the three months ended June 30, 2007 as compared to a net
profit before income taxes of $ 295,782 during the three months ended June
30,
2006. The decrease was primarily due to reduced premium finance
revenue in 2007, offset by a reduction in personnel and fees paid to service
our
premium finance operations. Loss before income taxes from
corporate-related items not allocable to reportable segments was $92,025 during
the three months ended June 30, 2007 as compared to $237,740 during the three
months ended June 30, 2006. This decrease was primarily due to a
decrease in compensation expense, including the absence of a bonus determination
for our Chief Executive Officer during the three months ended June 30,
2007.
Liquidity
and Capital Resources
As
of
June 30, 2007, we had $950,142 in cash and cash equivalents and working capital
of $811,417. As of December 31, 2006, we had $1,196,412 in cash and
cash equivalents and working capital of $2,031,120.
During
the six months ended June 30, 2007, our cash and cash equivalents decreased
by
$246,270. This was due primarily to the following:
·
|
Net
cash provided by operating activities during the six months ended
June 30,
2007 was $162,383 primarily due to the following: (i) a
decrease in accounts receivable of $432,737 offset by (ii) the accretion
of discount on notes receivable of $493,902. 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.
|
·
|
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 provided by investing activities during the six months ended
June 30,
2007 was $856,042 primarily due to a decrease in finance contracts
receivable of $832,527. This reduction was caused by the financing
of
fewer insurance policies in 2007 than in
2006.
|
·
|
Net
cash used in financing activities during the six months ended June
30,
2007 was $1,264,695 primarily due to the following: (i) payments
of
$21,541,228 on our revolving credit line with Manufacturers and Traders
Trust Company (“M&T”) for premium finance purposes, offset
by proceeds of $20,447,842 from 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 June 30, 2007,
$9,858,960 was outstanding under the line. As of June 30, 2007, of
the $15,322,568 reflected on the Balance Sheet as “Finance contracts
receivable,” approximately $12,414,022 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.
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 Series B preferred
shares are mandatorily redeemable on April 30, 2008.
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
|
|
|
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
|
|
|
|
|
|
4/1/07
– 4/30/07
|
-
|
-
|
-
|
-
|
5/1/07
– 5/31/07
|
-
|
-
|
-
|
-
|
6/1/07
– 6/30/07
|
4,500
|
$1.61
|
-
|
-
|
Total
|
4,500
|
$1.61
|
-
|
-
|
Item
3.
|
DEFAULTS
UPON SENIOR SECURITIES
|
|
|
|
None
|
|
|
Item
4.
|
SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
|
|
|
|
None
|
|
|
Item
5.
|
OTHER
INFORMATION
|
|
|
|
None
|
|
|
Item
6.
|
EXHIBITS
|
|
|
|
3(a)
|
Restated
Certificate of Incorporation1
|
|
|
|
|
3(b)
|
Certificate
of Designation of Series A Preferred Stock2
|
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(c)
|
Certificate
of Designation of Series B Preferred Stock3
|
|
|
|
|
3(d)
|
|
|
|
|
|
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
|
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.
|
DCAP
GROUP, INC.
|
Dated: August 13,
2007
|
By:
/s/ Barry B. Goldstein
Barry
B. Goldstein
President
(Principal
Executive, Financial
and
Accounting Officer)
|