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 September 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
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
36-2476480
(I.R.S.
Employer
Identification
No.)
|
1158
Broadway, Hewlett, NY 11557
(Address
of Principal Executive Offices)
(516)
374-7600
(Issuer’s
Telephone Number, Including Area Code)
________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed
Since
Last Report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90
days. Yes_X__ No____
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes
____ No X
APPLICABLE
ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE
PRECEDING
FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed
by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a
court. Yes No
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,969,024 shares as of October 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 – September 30, 2007
(Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income - Nine months ended September 30,
2007
and 2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Income – Three months ended September 30, 2007
and 2006 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Nine months ended September
30,
2007 and 2006 (Unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements - Nine months ended
September 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)
|
|
|
|
|
September
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$ |
1,000,725
|
|
Accounts
receivable, net of allowance for
|
|
|
|
|
|
|
|
doubtful
accounts of $20,000
|
|
|
|
|
|
878,761
|
|
Finance
contracts receivable
|
|
$ |
14,732,316
|
|
|
|
|
|
Less:
Deferred Interest
|
|
|
(1,122,336 |
) |
|
|
|
|
Less:
Allowance for doubtful accounts
|
|
|
(186,457 |
) |
|
|
13,423,523
|
|
Prepaid
expenses and other current assets
|
|
|
|
|
|
|
418,291
|
|
Deferred
income taxes
|
|
|
|
|
|
|
76,000
|
|
Total
Current Assets
|
|
|
|
|
|
|
15,797,300
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
|
|
|
|
465,576
|
|
Goodwill
|
|
|
|
|
|
|
2,601,257
|
|
Other
Intangibles, net
|
|
|
|
|
|
|
268,042
|
|
Notes
Receivable, net
|
|
|
|
|
|
|
4,854,318
|
|
Deposits
and Other Assets
|
|
|
|
|
|
|
170,969
|
|
Total
Assets
|
|
|
|
|
|
$ |
24,157,462
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Revolving
credit line
|
|
|
|
|
|
$ |
9,601,676
|
|
Accounts
payable and accrued expenses
|
|
|
|
|
|
|
686,896
|
|
Premiums
payable
|
|
|
|
|
|
|
3,247,542
|
|
Current
portion of long-term debt and capital lease obligations
|
|
|
|
|
|
|
2,091,263
|
|
Mandatorily
redeemable preferred stock
|
|
|
|
|
|
|
780,000
|
|
Other
current liabilities
|
|
|
|
|
|
|
153,677
|
|
Total
Current Liabilities
|
|
|
|
|
|
|
16,561,054
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt and Capital Lease Obligations
|
|
|
|
|
|
|
653,971
|
|
Deferred
Income Taxes
|
|
|
|
|
|
|
532,201
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares;
|
|
|
|
|
|
|
|
|
issued
3,750,447
|
|
|
|
|
|
|
37,505
|
|
Preferred
stock, $.01 par value; authorized
|
|
|
|
|
|
|
|
|
1,000,000
shares; 0 shares issued and outstanding
|
|
|
|
|
|
|
|
|
Capital
in excess of par
|
|
|
|
|
|
|
11,773,130
|
|
Deficit
|
|
|
|
|
|
|
(4,214,619 |
) |
|
|
|
|
|
|
|
7,596,016
|
|
Treasury
stock, at cost, 781,423 shares
|
|
|
|
|
|
|
(1,185,780 |
) |
Total
Stockholders' Equity
|
|
|
|
|
|
|
6,410,236
|
|
Total
Liabilities and Stockholders' Equity
|
|
|
|
|
|
$ |
24,157,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
4
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
|
|
|
Nine
Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
and fees
|
|
$ |
4,486,855
|
|
|
$ |
5,390,085
|
|
Premium
finance revenue
|
|
|
2,419,506
|
|
|
|
3,085,956
|
|
Total
Revenues
|
|
|
6,906,361
|
|
|
|
8,476,041
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
5,849,432
|
|
|
|
6,724,954
|
|
Provision
for finance receivable losses
|
|
|
396,065
|
|
|
|
496,456
|
|
Depreciation
and amortization
|
|
|
287,430
|
|
|
|
319,302
|
|
Premium
finance interest expense
|
|
|
498,519
|
|
|
|
604,219
|
|
Total
Operating Expenses
|
|
|
7,031,446
|
|
|
|
8,144,931
|
|
|
|
|
|
|
|
|
|
|
Operating
(Loss) Income
|
|
|
(125,085 |
) |
|
|
331,110
|
|
|
|
|
|
|
|
|
|
|
Other
(Expense) Income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
7,175
|
|
|
|
3,531
|
|
Interest
income - notes receivable
|
|
|
971,333
|
|
|
|
858,546
|
|
Interest
expense
|
|
|
(368,713 |
) |
|
|
(388,872 |
) |
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(29,250 |
) |
|
|
(29,250 |
) |
Gain
on sale of stores
|
|
|
65,767
|
|
|
|
81,105
|
|
Total
Other Income
|
|
|
646,312
|
|
|
|
525,060
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
521,227
|
|
|
|
856,170
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
238,049
|
|
|
|
342,468
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
283,178
|
|
|
$ |
513,702
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.10
|
|
|
$ |
0.18
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$ |
0.10
|
|
|
$ |
0.17
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,962,683
|
|
|
|
2,886,372
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
3,288,072
|
|
|
|
3,243,030
|
|
See
notes to condensed consolidated financial statements.
5
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Income (Unaudited)
|
|
|
|
|
Three
Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
Commissions
and fees
|
|
$ |
1,359,996
|
|
|
$ |
1,636,855
|
|
Premium
finance revenue
|
|
|
777,638
|
|
|
|
939,255
|
|
Total
Revenues
|
|
|
2,137,634
|
|
|
|
2,576,110
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,836,204
|
|
|
|
2,120,989
|
|
Provision
for finance receivable losses
|
|
|
120,455
|
|
|
|
168,514
|
|
Depreciation
and amortization
|
|
|
98,811
|
|
|
|
94,681
|
|
Premium
finance interest expense
|
|
|
165,539
|
|
|
|
196,669
|
|
Total
Operating Expenses
|
|
|
2,221,009
|
|
|
|
2,580,853
|
|
|
|
|
|
|
|
|
|
|
Operating
Loss
|
|
|
(83,375 |
) |
|
|
(4,743 |
) |
|
|
|
|
|
|
|
|
|
Other
(Expense) Income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
3,267
|
|
|
|
1,249
|
|
Interest
income - notes receivable
|
|
|
322,736
|
|
|
|
324,299
|
|
Interest
expense
|
|
|
(119,022 |
) |
|
|
(134,208 |
) |
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(9,750 |
) |
|
|
(9,750 |
) |
Total
Other Income
|
|
|
197,231
|
|
|
|
181,590
|
|
|
|
|
|
|
|
|
|
|
Income
Before Provision for Income Taxes
|
|
|
113,856
|
|
|
|
176,847
|
|
|
|
|
|
|
|
|
|
|
Provision
for Income Taxes
|
|
|
54,732
|
|
|
|
70,739
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
59,124
|
|
|
$ |
106,108
|
|
|
|
|
|
|
|
|
|
|
Net
Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
0.02
|
|
|
$ |
0.04
|
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
$ |
0.02
|
|
|
$ |
0.04
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,981,024
|
|
|
|
2,896,024
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
3,298,073
|
|
|
|
3,241,240
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
6
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
Condensed
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
income
|
|
$ |
283,178
|
|
|
$ |
513,702
|
|
Adjustments
to reconcile net income to net cash provided by
|
|
|
|
|
|
|
|
|
(used
in) operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
287,430
|
|
|
|
319,302
|
|
Bad
debt expense
|
|
|
-
|
|
|
|
1,200
|
|
Deferred
income taxes
|
|
|
136,201
|
|
|
|
-
|
|
Accretion
of discounts on notes receivable
|
|
|
(740,864 |
) |
|
|
(658,546 |
) |
Amortization
of warrants
|
|
|
34,210
|
|
|
|
58,221
|
|
Stock-based
payments
|
|
|
27,820
|
|
|
|
32,000
|
|
Gain
on sale of store
|
|
|
(65,767 |
) |
|
|
(81,105 |
) |
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
428,854
|
|
|
|
390,739
|
|
Prepaid
expenses and other current assets
|
|
|
(375,741 |
) |
|
|
(67,001 |
) |
Deposits
and other assets
|
|
|
9,221
|
|
|
|
(169,797 |
) |
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Premiums
payable
|
|
|
185,293
|
|
|
|
(702,218 |
) |
Accounts
payable and accrued expenses
|
|
|
(326,285 |
) |
|
|
228,375
|
|
Taxes
payable
|
|
|
261,403
|
|
|
|
(39,793 |
) |
Other
current liabilities
|
|
|
(12,469 |
) |
|
|
(31,850 |
) |
Net
Cash Provided by (Used in) Operating Activities
|
|
|
132,484
|
|
|
|
(206,771 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Decrease
in finance contracts receivable - net
|
|
|
1,354,332
|
|
|
|
242,585
|
|
Decrease
in notes and other receivables - net
|
|
|
59,860
|
|
|
|
9,852
|
|
Proceeds
from sale of stores
|
|
|
66,300
|
|
|
|
-
|
|
Purchase
of agencies
|
|
|
-
|
|
|
|
(832,654 |
) |
Purchase
of property and equipment
|
|
|
(152,695 |
) |
|
|
(86,869 |
) |
Purchase
of notes
|
|
|
-
|
|
|
|
(1,771,707 |
) |
Net
Cash Provided by (Used in) Investing Activities
|
|
|
1,327,797
|
|
|
|
(2,438,793 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt and lease obligations
|
|
|
(417,499 |
) |
|
|
(235,000 |
) |
Proceeds
from revolving credit line
|
|
|
30,233,649
|
|
|
|
41,785,558
|
|
Payments
on revolving credit line
|
|
|
(31,584,318 |
) |
|
|
(38,539,375 |
) |
Proceeds
from exercise of stock options
|
|
|
112,200
|
|
|
|
191,250
|
|
Payments
on note payable-related party
|
|
|
-
|
|
|
|
(1,303,434 |
) |
Net
Cash (Used in) Provided by Financing Activities
|
|
|
(1,655,968 |
) |
|
|
1,898,999
|
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(195,687 |
) |
|
|
(746,565 |
) |
Cash
and Cash Equivalents, beginning of period
|
|
|
1,196,412
|
|
|
|
1,961,489
|
|
Cash
and Cash Equivalents, end of period
|
|
$ |
1,000,725
|
|
|
$ |
1,214,924
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-Cash Investing
|
|
|
|
|
|
|
|
|
and
financing activities:
|
|
|
|
|
|
|
|
|
Note
payable - related party
|
|
$ |
-
|
|
|
$ |
1,303,434
|
|
Note
payable issued for purchase of business
|
|
$ |
-
|
|
|
$ |
522,949
|
|
Capital
lease obligations
|
|
$ |
89,819
|
|
|
$ |
-
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
7
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE
MONTHS ENDED SEPTEMBER 30, 2007 AND 2006 (UNAUDITED)
1.
|
The
Condensed Consolidated Balance Sheet as of September 30, 2007, the
Condensed Consolidated Statements of Income for the three and nine
months
ended September 30, 2007 and 2006 and the Condensed Consolidated
Statements of Cash Flows for the nine months ended September 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 September 30, 2007, results
of
operations for the three and nine months ended September 30, 2007
and 2006
and cash flows for the nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 30, 2007 and 2006, the
provision for finance receivable losses was $396,065 and $496,456,
respectively, and actual principal write-offs for such periods (net of
recoveries of previous write-offs) were $434,328 and $477,293,
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 $48,811 and $19,700 in such costs was incurred
during the nine months ended September 30, 2007 and 2006,
respectively.
Certain
reclassifications have been made to the consolidated financial statements for
the nine and three months ended September 30, 2006 to conform to the
classifications used for the nine and three months ended September 30,
2007.
3.
|
Notes
Receivable, Net:
|
As
of
September 30, 2007, notes receivable consist of two surplus notes, plus accrued
interest, issued by Commercial Mutual Insurance Company (“Commercial
Mutual”). The surplus notes are past due and provide for interest at
the prime rate or 8.5% per annum, whichever is less. Payments of
principal and interest on the surplus notes may only be made out of the surplus
of Commercial Mutual and require the approval of the
Insurance Department of the State of New York.
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. Commercial Mutual has advised us that
it has obtained permission from the Superintendent of Insurance of the State
of
New York to proceed with the conversion process (subject to certain conditions
as discussed below).
The
conversion by Commercial Mutual to a stock property and casualty insurance
company is subject to a number of conditions, including the approval of the
plan
of conversion by the Superintendent of Insurance and Commercial Mutual’s
policyholders. As part of the approval process, the Superintendent of
Insurance is required to have an appraisal performed with respect to the fair
market value of Commercial Mutual. Such appraisal is to be based upon
Commercial Mutual’s latest filings with the Insurance Department and any
significant subsequent developments and is to consider the assets and
liabilities of Commercial Mutual and any other factors bearing on its
value. We, as a holder of the Commercial Mutual surplus notes, at our
option, would be able to exchange the surplus notes for an equitable share
of
the securities or other consideration, or both, of the corporation into which
Commercial Mutual would be converted. Based upon the amount payable
on the surplus notes and the statutory surplus of Commercial Mutual, we believe
that, following any conversion by Commercial Mutual into a stock corporation,
we
could hold a controlling equity interest in Commercial Mutual. It is
anticipated that the conversion will be completed within the next twelve
months. No assurances can be given that the conversion will
occur.
We
currently have two reportable business segments: Insurance and
Premium Finance. The Insurance segment sells retail auto, motorcycle,
boat, life, business, and homeowner's insurance and franchises. In
addition, this segment offers tax preparation services and automobile club
services for roadside emergencies. Insurance revenues are derived
from activities within the United States, and all long-lived assets are located
within the United States. The Premium Finance segment offers property
and casualty policyholders loans to finance the policy premiums.
Summarized
financial information concerning our reportable segments for the nine months
ended September 30, 2007 and 2006 is shown in the following tables:
Nine
Months Ended
|
|
|
|
|
Premium
|
|
|
|
|
|
|
|
September
30, 2007
|
|
Insurance
|
|
|
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
|
|
|
|
|
|
|
|
|
|
|
|
|
customers
|
|
$ |
4,486,855
|
|
|
$ |
2,419,506
|
|
|
$ |
-
|
|
|
$ |
6,906,361
|
|
Interest
income
|
|
|
5,111
|
|
|
|
-
|
|
|
|
2,064
|
|
|
|
7,175
|
|
Interest
income – notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
|
|
-
|
|
|
|
|
|
|
|
971,333
|
|
|
|
971,333
|
|
Interest
expense
|
|
|
63,304
|
|
|
|
498,519
|
|
|
|
334,659
|
|
|
|
896,482
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
180,085
|
|
|
|
75,349
|
|
|
|
31,996
|
|
|
|
287,430
|
|
Segment
profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
494,686
|
|
|
|
365,231
|
|
|
|
(338,690 |
) |
|
|
521,227
|
|
Segment
net profit (loss)
|
|
|
268,581
|
|
|
|
200,878
|
|
|
|
(186,281 |
) |
|
|
283,178
|
|
Segment
assets
|
|
|
4,717,225
|
|
|
|
14,119,423
|
|
|
|
5,320,814
|
|
|
|
24,157,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
Nine
Months Ended
|
|
|
|
|
Premium
|
|
|
|
|
|
|
|
September
30, 2006
|
|
Insurance
|
|
|
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
|
|
|
|
|
|
|
|
|
|
|
|
|
customers
|
|
$ |
5,390,085
|
|
|
$ |
3,085,956
|
|
|
$ |
-
|
|
|
$ |
8,476,041
|
|
Interest
income
|
|
|
3,388
|
|
|
|
-
|
|
|
|
143
|
|
|
|
3,531
|
|
Interest
income – notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
858,546
|
|
|
|
858,546
|
|
Interest
expense
|
|
|
70,650
|
|
|
|
604,219
|
|
|
|
347,472
|
|
|
|
1,022,341
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
168,806
|
|
|
|
118,446
|
|
|
|
32,050
|
|
|
|
319,302
|
|
Segment
profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
986,205
|
|
|
|
529,979
|
|
|
|
(660,014 |
) |
|
|
856,170
|
|
Segment
net profit (loss)
|
|
|
591,723
|
|
|
|
317,988
|
|
|
|
(396,009 |
) |
|
|
513,702
|
|
Segment
assets
|
|
|
4,812,297
|
|
|
|
17,099,637
|
|
|
|
4,420,689
|
|
|
|
26,332,623
|
|
____________
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
Summarized
financial information concerning our reportable segments for the three months
ended September 30, 2007 and 2006 is shown in the following
tables:
Three
Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30, 2007
|
|
Insurance
|
|
|
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
|
|
|
|
|
|
|
|
|
|
|
|
|
customers
|
|
$ |
1,359,996
|
|
|
$ |
777,638
|
|
|
$ |
-
|
|
|
$ |
2,137,634
|
|
Interest
income
|
|
|
2,178
|
|
|
|
-
|
|
|
|
1,089
|
|
|
|
3,267
|
|
Interest
income – notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
322,736
|
|
|
|
322,736
|
|
Interest
expense
|
|
|
22,751
|
|
|
|
165,539
|
|
|
|
106,021
|
|
|
|
294,311
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
63,811
|
|
|
|
24,411
|
|
|
|
10,589
|
|
|
|
98,811
|
|
Segment
profit (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
91,687
|
|
|
|
123,345
|
|
|
|
(101,176 |
) |
|
|
113,856
|
|
Segment
net profit (loss)
|
|
|
46,932
|
|
|
|
67,841
|
|
|
|
(55,649 |
) |
|
|
59,124
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
Three
Months Ended
|
|
|
|
|
September
30, 2006
|
|
Insurance
|
|
|
Finance
|
|
|
Other
(1)
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
from external
|
|
|
|
|
customers
|
|
$ |
1,636,855
|
|
|
$ |
939,255
|
|
|
$ |
-
|
|
|
$ |
2,576,110
|
|
Interest
income
|
|
|
1,216
|
|
|
|
-
|
|
|
|
33
|
|
|
|
1,249
|
|
Interest
income – notes
|
|
|
|
|
|
receivable
|
|
|
-
|
|
|
|
-
|
|
|
|
324,299
|
|
|
|
324,299
|
|
Interest
expense
|
|
|
24,031
|
|
|
|
196,669
|
|
|
|
119,927
|
|
|
|
340,627
|
|
Depreciation
and
|
|
|
|
|
|
|
|
|
|
amortization
|
|
|
58,314
|
|
|
|
25,104
|
|
|
|
11,263
|
|
|
|
94,681
|
|
Segment
profit (loss)
|
|
|
|
|
|
before
income taxes
|
|
|
235,755
|
|
|
|
119,548
|
|
|
|
(178,456 |
) |
|
|
176,847
|
|
Segment
net profit (loss)
|
|
|
141,453
|
|
|
|
71,729
|
|
|
|
(107,074 |
) |
|
|
106,108
|
|
____________
(1)
|
Column
represents corporate-related items and, as it relates to segment
profit
(loss), income, expense and assets not allocated to reportable
segments.
|
5.
|
Employee
Stock Compensation
|
In
November 1998, we adopted the 1998 Stock Option Plan, which provides for the
issuance of incentive stock options and non-statutory stock options. Under
this
plan, options to purchase not more than 400,000 shares of our Common Stock
were
permitted to be granted, at a price to be determined by our Board of Directors
or the Stock Option Committee at the time of grant. During 2002, we increased
the number of shares of Common Stock authorized to be issued pursuant to the
1998 Stock Option Plan to 750,000. Incentive stock options granted under this
plan expire no later than ten years from date of grant (except no later than
five years for a grant to a 10% stockholder). Our Board of Directors or the
Stock Option Committee will determine the expiration date with respect to
non-statutory options granted under this plan.
In
December 2005, our shareholders ratified the adoption of the 2005 Equity
Participation Plan, which provides for the issuance of incentive stock options,
non-statutory stock options and restricted stock. Under this plan, a maximum
of
300,000 shares of Common Stock may be issued pursuant to options granted and
restricted stock issued. Incentive stock options granted under this plan expire
no later than ten years from date of grant (except no later than five years
for
a grant to a 10% stockholder). Our Board of Directors or the Stock Option
Committee will determine the expiration date with respect to non-statutory
options, and the vesting provisions for restricted stock, granted under this
plan.
Our
results for the nine and three month periods ended September 30, 2007 include
share-based compensation expense totaling approximately $19,000 and $9,000,
respectively. Our results for the nine and three months ended
September 30, 2006 include share-based compensation expense totaling
approximately $32,000 and $12,000, respectively. Such amounts have
been included in the Condensed Consolidated Statements of Income within general
and administrative expenses.
Stock
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 nine and three months ended
September 30, 2006. During the three and nine months ended September 30, 2007,
we did not grant any options under the 1998 Stock Option Plan but did grant
59,524 options at $2.52 per share under the 2005 Equity Participation Plan.
The
weighted average fair value of options granted during the three and nine months
ended September 30, 2007 was $.78.
The
following table represents our stock options granted, exercised, and forfeited
during the first nine 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
|
|
|
59,524
|
|
|
$ |
2.52
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(74,500 |
) |
|
$ |
1.51
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/expired
|
|
|
(40,200 |
) |
|
$ |
1.64
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at
September
30, 2007
|
|
|
138,124
|
|
|
$ |
2.94
|
|
|
|
3.35
|
|
|
$ |
9,900
|
|
Vested
and Exercisable
at
September 30, 2007
|
|
|
87,698
|
|
|
$ |
3.40
|
|
|
|
2.57
|
|
|
$ |
7,272
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
September 30, 2007 is calculated as the difference between the exercise price
of
the underlying options and the market price of our shares of Common Stock for
the shares that had exercise prices that were lower than the $2.30 closing
price
of our shares of Common Stock on September 30, 2007. We received cash
proceeds from options exercised in the nine months ended September 30, 2007
and
2006 of approximately $112,000 and $191,000, respectively.
As
of
September 30, 2007, the fair value of unamortized compensation cost related
to
unvested stock option awards was approximately $75,000. Unamortized compensation
cost as of September 30, 2007 is expected to be recognized over a remaining
weighted-average vesting period of .97 years.
Basic
net
income per share is computed by dividing income available to common shareholders
by the weighted-average number of shares of Common Stock outstanding. Diluted
earnings per share reflect, in periods in which they have a dilutive effect,
the
impact of shares of Common Stock issuable upon exercise of stock options and
conversion of mandatorily redeemable Preferred Stock. 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 Stock 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
208,624 for the three and nine months ended September 30, 2007 and 159,800
for
the three and nine months ended September 30, 2006.
The
reconciliation is as follows:
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding
|
|
|
2,962,683
|
|
|
|
2,886,372
|
|
|
|
2,981,024
|
|
|
|
2,896,024
|
|
Effect
of Dilutive Securities, Common Stock
Equivalents
|
|
|
325,389
|
|
|
|
356,658
|
|
|
|
317,049
|
|
|
|
345,216
|
|
Weighted
Average Number of Shares Outstanding,
used
for computing diluted earnings per share
|
|
|
3,288,072
|
|
|
|
3,243,030
|
|
|
|
3,298,073
|
|
|
|
3,241,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders for the computation of diluted earnings
per share
is
computed as follows:
|
|
Nine
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
283,178
|
|
|
$ |
513,702
|
|
|
$ |
59,124
|
|
|
$ |
106,108
|
|
Interest
Expense on Dilutive Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock
|
|
|
29,250
|
|
|
|
29,250
|
|
|
|
9,750
|
|
|
|
9,750
|
|
Net
Income Available to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
Diluted Earnings Per Share
|
|
$ |
312,428
|
|
|
$ |
542,952
|
|
|
$ |
68,874
|
|
|
$ |
115,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Extension
of Maturity Date of Subordinated
Debt
|
Effective
March 23, 2007 and September 30, 2007, the holders of approximately $1,385,000
and $115,000, respectively, 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 97,500 of our shares of Common Stock from
September 30, 2007 to September 30, 2008. The holder of the
$115,000 of subordinated debt is a limited liability company in which our
President, Chairman of the Board and Chief Executive Officer owns a minority
interest.
8.
|
Exchange
of Preferred Stock
|
Effective
March 23, 2007, the holder of our Series A Preferred Stock exchanged such shares
for an equal number of shares of Series B Preferred Stock. The terms of the
Series B Preferred Stock are identical to those of the Series A Preferred Stock,
except that they are mandatorily redeemable on April 30, 2008 (as opposed to
April 30, 2007 for the Series A Preferred Stock). Such shares have
been classified as a current liability at September 30, 2007 since they are
due
within one year.
9.
|
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.
In
June
2007, a shareholder tendered shares of Common Stock 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 DCAP Insurance Barry Scott Agency
locations and five DCAP Insurance Accurate Agency locations outside the New
York metropolitan area (all located in central and western New York State).
There are five DCAP Insurance Atlantic Agency locations in eastern
Pennsylvania. All of the DCAP Insurance Barry Scott Agency, DCAP
Insurance Atlantic Agency and DCAP Insurance 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, DCAP Insurance Barry Scott Agency,
DCAP Insurance Atlantic Agency and DCAP Insurance Accurate Agency 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 nine months ended September
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 nine months ended September
30, 2007 and 2006, the provision for finance receivable losses was $396,065 and $496,456,
respectively, and actual principal write-offs for such periods (net of
recoveries of previous write-offs) were $434,328 and $477,293,
respectively. If our provision for finance receivable losses
was understated by 10% because our actual write-offs were greater than
anticipated, the effect would have been a reduction in our earnings per share
by
approximately $0.01 (basic) for the nine months ended September 30, 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 September
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
Nine
Months ended September 30, 2007 compared to Nine
Months ended September 30, 2006
Our
net
income for the nine months ended September 30, 2007 was $283,178 as compared
to
$513,702 for the nine months ended September 30, 2006.
During
the nine months ended September 30, 2007, revenues from our insurance-related
operations were $4,486,855 as compared to $5,390,085 for the nine months ended
September 30, 2006. The revenue decrease of $903,230 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 $666,450 during the nine months ended September
30,
2007 as compared to the nine months ended September 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 nine months ended September 30,
2007
were $875,522 less than for the nine months ended September 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 stores, our Compensation
Committee determining that no bonus is payable to our Chief Executive Officer
for 2006 (and accordingly no bonus accrual being provided for during
the first nine months of 2007; in contrast, a bonus for 2005 was provided during
the first nine months of 2006), a decrease in fees paid to service our premium
finance operations, and a decrease in advertising expenses, net of
reimbursements.
Our
provision for finance receivable losses for the first nine months of 2007 was
$100,391 less than for the first nine months of 2006. This was the
result of a lower provision for finance receivable losses in the first nine
months of 2007 caused by a decrease in volume.
Our
premium finance interest expense during the nine months ended September 30,
2007
was $105,700 less than for the nine months ended September 30,
2006. This decrease was the result of a decrease in the average
outstanding balance of our revolving credit line for the nine months ended
September 30, 2007 compared to the nine months ended September 30,
2006.
Our
interest income – notes receivable for the nine months ended September 30, 2007
was $112,787 more than for the nine months ended September 30, 2006. On January
31, 2006, we purchased surplus notes of Commercial Mutual Insurance
Company. We recorded eight months of interest in the first nine
months of 2006 as compared to nine months of interest in the first nine months
of 2007.
During
the nine months ended September 30, 2007, our provision for income taxes was
$238,049 as opposed to $342,468 for the nine months ended September 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 $494,686 during the nine months ended September 30,
2007
as compared to a net profit before income taxes of $986,205 during the nine
months ended September 30, 2006. This decrease was primarily due to
decreased revenues, offset by a reduction in variable compensation paid on
commissions generated, a reduction in advertising expense, net of
reimbursements, 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 $365,231 during the nine months
ended September 30, 2007 as compared to a net profit before income taxes of
$529,979 during the nine months ended September 30, 2006. The
decrease was primarily due to reduced premium finance revenue in 2007, offset
by
reductions in personnel, provision for finance receivable losses, fees paid
to
service our premium finance operations, and premium financing interest
expense. Loss before income taxes from corporate-related items not
allocable to reportable segments was $338,690 during the nine months ended
September 30, 2007 as compared to $660,014 during the nine months ended
September 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 a decrease in compensation
expense.
Three
Months ended September 30, 2007 compared to Three Months ended
September 30, 2006
Our
net
income for the three months ended September 30, 2007 was $59,124 as compared
to
$106,108 for the three months ended September 30, 2006.
During
the three months ended September 30, 2007, revenues from our insurance-related
operations were $1,359,996 as compared to $1,636,855 for the three months ended
September 30, 2006. The revenue decrease of $276,859 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 $161,617 during the three months ended September
30,
2007 as compared to the three months ended September 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 September 30,
2007 were $284,785 less than for the three months ended September 30,
2006. This decrease was primarily due to a reduction in variable
compensation paid to employees due to a reduction in policies sold at our
stores, our Compensation Committee determining that no bonus is payable to
our
Chief Executive Officer for 2006 (and accordingly no bonus accrual being
provided for during the third quarter of 2007; in contrast, a bonus for 2005
was
provided during the third quarter of 2006), a decrease in fees paid to service
our premium finance operations and a decrease in advertising expenses, net
of
reimbursements.
Our
provision for finance receivable losses for the three months ended September
30,
2007 was $48,059 less than for the three months ended September 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 September 30,
2007 was $31,130 less than for the three months ended September 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
September 30, 2007 compared to the three months ended September 30,
2006.
During
the three months ended September 30, 2007, our provision for income taxes was
$54,732 as opposed to $70,739 for the three months ended September 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 $91,687 during the three months ended September 30,
2007
as compared to a net profit before income taxes of $235,755 during the three
months ended September 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, net of
reimbursements. Our premium finance operations, on a stand-alone
basis, generated a net profit before income taxes of $123,345 during the three
months ended September 30, 2007 as compared to a net profit before income taxes
of $119,548 during the three months ended September 30, 2006. This
increase was primarily due to reductions in provision for finance receivable
losses, fees paid to service our premium finance operations, and premium
financing interest expense, offset by reduced premium finance revenue in
2007. Loss before income taxes from corporate-related items not
allocable to reportable segments was $101,176 during the three months ended
September 30, 2007 as compared to $178,456 during the three months ended
September 30, 2006. This decrease was primarily due to a decrease in
compensation expense.
Liquidity
and Capital Resources
As
of
September 30, 2007, we had $1,000,725 in cash and cash equivalents and a working
capital deficit of $763,754. As of December 31, 2006, we had
$1,196,412 in cash and cash equivalents and working capital of
$2,031,120.
As
discussed below, during 2007, the holders of $1,500,000 outstanding principal
amount of subordinated debt agreed to extend the maturity date of the debt
from
September 30, 2007 to September 30, 2008. The $1,500,000 principal
balance of these notes is included in our September 30, 2007 balance sheet
under
“Current Liabilities.” In addition, as discussed below, effective
March 23, 2007, the holder of our shares of Series A Preferred Stock (which
were
mandatorily redeemable on April 30, 2007) exchanged such shares for an equal
number of shares of Series B Preferred Stock, which are mandatorily redeemable
on April 30, 2008. The mandatorily redeemable balance of $780,000 is
included in our September 30, 2007 balance sheet under “Current
Liabilities.” We plan to seek to either (i) further extend the
maturity and redemption dates of these subordinated debt and redeemable
Preferred Stock obligations, (ii) refinance the obligations, and/or (iii) extend
the term of our line of credit discussed below and utilize it to satisfy a
portion of the outstanding balance of the obligations.
We
believe that, based on our present cash resources and the anticipated turnover
of our existing receivables, and, assuming that our efforts with regard to
the
subordinated debt and redeemable Preferred Stock obligations, as discussed
above, are successful, we will have sufficient cash on a short-term basis and
over the next 12 months to fund our two operating business segments and our
company-wide working capital needs.
During
the nine months ended September 30, 2007, our cash and cash equivalents
decreased by $195,687. This was due primarily to the
following:
·
|
Net
cash provided by operating activities during the nine months ended
September 30, 2007 was $132,484 primarily due to the
following: (i) net income of $283,178, (ii) non-cash charges to
net income of $485,661, which include depreciation and amortization,
deferred income taxes, amortization of warrants, and stock-based
payments
and (iii) a decrease in accounts receivable of $428,854, which were
offset
primarily by the accretion of discount on notes receivable of
$740,864. 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 due 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 nine months ended
September 30, 2007 was $1,327,797 primarily due to a decrease in
finance
contracts receivable of $1,354,332. This reduction was caused by
the
financing of fewer insurance policies in 2007 than in
2006.
|
·
|
Net
cash used in financing activities during the nine months ended September
30, 2007 was $1,655,968 primarily due to the following: (i) payments
of
$31,584,318 on our revolving credit line with Manufacturers and Traders
Trust Company (“M&T”) for premium finance purposes, offset by proceeds
of $30,233,649 from the revolving credit line and (ii) principal
payments
on long term debt and lease obligations of
$417,499.
|
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. 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 September 30, 2007, $9,601,676
was
outstanding under the line. As of September 30, 2007, of the
$14,732,316 reflected on the Balance Sheet as “Finance contracts receivable,”
approximately $11,734,011 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. During 2007, the holders of the $1,500,000 outstanding
principal amount of 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 Stock exchanged such shares
for an equal number of shares of Series B Preferred Stock. The Series B
Preferred Stock is 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. The surplus notes are past
due and provide for interest at the prime rate or 8.5% per annum, whichever
is
less. Payments of principal and interest on the surplus notes may
only be made out of the surplus of Commercial Mutual and require the approval
of
the Insurance Department of the State of New York.
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. Commercial Mutual has advised us that
it has obtained permission from the Superintendent of Insurance of the State
of
New York to proceed with the conversion process (subject to certain conditions
as discussed below).
The
conversion by Commercial Mutual to a stock property and casualty insurance
company is subject to a number of conditions, including the approval of the
plan
of conversion by the Superintendent of Insurance and Commercial Mutual’s
policyholders. As part of the approval process, the Superintendent of
Insurance is required to have an appraisal performed with respect to the fair
market value of Commercial Mutual. Such appraisal is to be based upon
Commercial Mutual’s latest filings with the Insurance Department and any
significant subsequent developments and is to consider the assets and
liabilities of Commercial Mutual and any other factors bearing on its
value. We, as a holder of the Commercial Mutual surplus notes, at our
option, would be able to exchange the surplus notes for an equitable share
of
the securities or other consideration, or both, of the corporation into which
Commercial Mutual would be converted. Based upon the amount payable
on the surplus notes and the statutory surplus of Commercial Mutual, we believe
that, following any conversion by Commercial Mutual into a stock corporation,
we
could hold a controlling equity interest in Commercial Mutual. It is
anticipated that the conversion will be completed within the next twelve
months. No assurances can be given that the conversion will
occur.
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 principal executive officer and principal 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
principal executive officer and principal financial officer, we evaluated the
effectiveness of our disclosure controls and procedures. Based on
this evaluation, our principal executive officer and principal 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
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Item
2.
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UNREGISTERED
SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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(a) During
the third quarter of 2007, we issued to Timothy M. Madden Consulting LLC
(“Madden”) 3,000 shares of Common Stock in consideration of services
rendered. The above offering of shares was exempt from the
registration requirements of the Securities Act of 1933 pursuant to Section
4(2)
thereof as a transaction not involving any public offering. We
reached this determination based on the following: (i) Madden represented that
it was an “accredited investor” and it acquired the shares for its
own account; (ii) the certificate representing the shares bears a restrictive
legend permitting transfer only upon the registration of the shares or pursuant
to an exemption from such registration requirements; and (iii) we did not offer
or sell the shares by any form of general solicitation or general
advertising.
(b) Not
applicable
(c)
None
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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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.
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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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10
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Employment
Agreement, dated as of August 20, 2007, by and between DCAP Management
Corp. and Curt Hapward
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31(a)
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Rule
13a-14(a)/15d-14(a) Certification of Principal Executive Officer
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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31(b)
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Rule
13a-14(a)/15d-14(a) Certification of Principal Financial Officer
as
adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
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32
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Certification
of Principal Executive Officer and Principal 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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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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By:
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/s/ Barry
B. Goldstein |
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Barry
B. Goldstein |
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President
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By: |
/s/
Victor Brodsky |
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Victor
Brodsky
Chief Accounting Officer
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