form10q.htm
UNITED
STATES
SECURITIES AND EXCHANGE
COMMISSION
WASHINGTON, D.C.
20549
FORM
10-Q
(Mark one)
|
|
|
þ
|
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the quarterly period ended June 30, 2008
OR
|
|
|
o
|
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For
the transition period from _________to _________
Commission
File Number 0-1665
DCAP GROUP, INC.
(Exact
name of registrant as specified in its charter)
|
|
|
Delaware
(State
or other jurisdiction of
incorporation or
organization)
|
|
36-2476480
(I.R.S.
Employer
Identification
Number)
|
1158
Broadway
Hewlett,
NY 11557
(Address
of principal executive offices)
(516) 374-7600
(Registrant’s
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 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 þ No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting company. See
definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
the Exchange Act. (Check one):
|
|
|
|
|
|
|
Large
accelerated filer o
|
|
Accelerated
filero
|
|
Non-accelerated
filer o
(Do
not check if a smaller reporting company)
|
|
Smaller
reporting company þ
|
Indicate
by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes o No þ
As of
August 12, 2008, there were 2,965,870 shares of the registrant’s common stock
outstanding.
DCAP GROUP, INC.
INDEX
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
|
|
|
|
|
|
|
|
|
|
PART
I — FINANCIAL INFORMATION
|
|
|
4
|
|
|
|
Item 1
—
|
|
Condensed
Consolidated Financial Statements
|
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets at June 30, 2008 (Unaudited) and
December 31, 2007
|
|
|
4
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the six months ended June 30,
2008 (Unaudited) and 2007 (Unaudited)
|
|
|
5
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations for the three months ended June 30,
2008 (Unaudited) and 2007 (Unaudited)
|
|
|
6
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows for the six months ended June 30,
2008 (Unaudited) and 2007 (Unaudited)
|
|
|
7
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial
Statements (Unaudited)
|
|
|
8
|
|
|
|
Item 2
—
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
|
|
16
|
|
|
|
Item 3
—
|
|
Quantitative
and Qualitative Disclosures about Market Risk
|
|
|
27
|
|
|
|
Item 4
—
|
|
Controls
and Procedures
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
PART
II — OTHER INFORMATION
|
|
|
28
|
|
|
|
Item 1
—
|
|
Legal
Proceedings
|
|
|
28
|
|
|
|
Item 1A
—
|
|
Risk
Factors
|
|
|
28
|
|
|
|
Item
2 —
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
28
|
|
|
|
Item
3 —
|
|
Defaults
Upon Senior Securities
|
|
|
28
|
|
|
|
Item 4
—
|
|
Submission
of Matters to a Vote of Security Holders
|
|
|
28
|
|
|
|
Item 5
—
|
|
Other
Information
|
|
|
28
|
|
|
|
Item 6
—
|
|
Exhibits
|
|
|
29
|
|
Signatures
|
|
|
30
|
|
EXHIBIT
31(a)
|
EXHIBIT
31(b)
|
EXHIBIT
32
|
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, 2007 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
publicly 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 Sheets
|
|
|
|
|
|
|
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
226,206 |
|
|
$ |
1,030,822 |
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$25,000
at June 30, 2008 and $50,000 at December 31, 2007
|
|
|
597,353 |
|
|
|
801,718 |
|
Tax
refund receivable and prepaid income taxes
|
|
|
440,947 |
|
|
|
76,723 |
|
Prepaid
expenses and other current assets
|
|
|
125,152 |
|
|
|
218,881 |
|
Assets
from discontinued operations
|
|
|
61,636 |
|
|
|
12,651,223 |
|
Total
current assets
|
|
|
1,451,294 |
|
|
|
14,779,367 |
|
Property
and equipment, net
|
|
|
375,331 |
|
|
|
464,824 |
|
Goodwill
|
|
|
2,601,257 |
|
|
|
2,601,257 |
|
Other
intangibles, net
|
|
|
113,288 |
|
|
|
150,910 |
|
Notes
receivable
|
|
|
5,772,526 |
|
|
|
5,170,804 |
|
Deposits
and other assets
|
|
|
64,714 |
|
|
|
78,164 |
|
Total
assets
|
|
$ |
10,378,410 |
|
|
$ |
23,245,326 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
766,847 |
|
|
$ |
630,412 |
|
Current
portion of long-term debt
|
|
|
428,834 |
|
|
|
2,098,989 |
|
Other
current liabilities
|
|
|
154,200 |
|
|
|
154,200 |
|
Liabilities
from discontinued operations
|
|
|
- |
|
|
|
12,517,305 |
|
Mandatorily
redeemable preferred stock
|
|
|
- |
|
|
|
780,000 |
|
Total
current liabilities
|
|
|
1,349,881 |
|
|
|
16,180,906 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
1,947,813 |
|
|
|
499,065 |
|
Deferred
income taxes
|
|
|
410,000 |
|
|
|
408,000 |
|
Mandatorily
redeemable preferred stock
|
|
|
780,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares;
issued
|
|
|
|
|
|
|
|
|
3,771,895
at June 30, 2008 and 3,750,447 shares at December 31, 2007
|
|
|
37,719 |
|
|
|
37,505 |
|
Preferred
stock, $.01 par value; authorized
|
|
|
|
|
|
|
|
|
1,000,000
shares; 0 shares issued and outstanding
|
|
|
- |
|
|
|
- |
|
Capital
in excess of par
|
|
|
11,925,657 |
|
|
|
11,850,872 |
|
Deficit
|
|
|
(4,886,880 |
) |
|
|
(4,545,242 |
) |
|
|
|
7,076,496 |
|
|
|
7,343,135 |
|
Treasury
stock, at cost, 781,423 shares at June 30, 2008 and December 31,
2007
|
|
|
(1,185,780 |
) |
|
|
(1,185,780 |
) |
Total
stockholders' equity
|
|
|
5,890,716 |
|
|
|
6,157,355 |
|
Total
liabilities and stockholders' equity
|
|
$ |
10,378,410 |
|
|
$ |
23,245,326 |
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Commissions
and fee revenue
|
|
$ |
2,623,559 |
|
|
$ |
3,126,859 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
3,142,302 |
|
|
|
3,272,773 |
|
Depreciation
and amortization
|
|
|
144,117 |
|
|
|
137,681 |
|
Total
operating expenses
|
|
|
3,286,419 |
|
|
|
3,410,454 |
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(662,860 |
) |
|
|
(283,595 |
) |
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,904 |
|
|
|
3,908 |
|
Interest
income - notes receivable
|
|
|
601,722 |
|
|
|
648,597 |
|
Interest
expense
|
|
|
(151,752 |
) |
|
|
(249,691 |
) |
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(27,625 |
) |
|
|
(19,500 |
) |
Gain
on sale of book of business
|
|
|
- |
|
|
|
65,767 |
|
Total
other income
|
|
|
425,249 |
|
|
|
449,081 |
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before (benefit from) provision for
income taxes
|
|
|
(237,611 |
) |
|
|
165,486 |
|
(Benefit
from) provision for income taxes
|
|
|
(106,925 |
) |
|
|
74,469 |
|
(Loss)
income from continuing operations
|
|
|
(130,686 |
) |
|
|
91,017 |
|
(Loss)
income from discontinued operations, net of income taxes
|
|
|
(210,952 |
) |
|
|
133,037 |
|
Net
(loss) income
|
|
$ |
(341,638 |
) |
|
$ |
224,054 |
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$ |
(0.04 |
) |
|
$ |
0.03 |
|
(Loss)
income from discontinued operations
|
|
$ |
(0.07 |
) |
|
$ |
0.05 |
|
(Loss)
income per common share
|
|
$ |
(0.11 |
) |
|
$ |
0.08 |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$ |
(0.04 |
) |
|
$ |
0.02 |
|
(Loss)
income from discontinued operations
|
|
$ |
(0.07 |
) |
|
$ |
0.05 |
|
(Loss)
income per common share
|
|
$ |
(0.11 |
) |
|
$ |
0.07 |
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,973,066 |
|
|
|
2,954,538 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,973,066 |
|
|
|
3,284,096 |
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
Three
Months Ended June 30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Commissions
and fee revenue
|
|
$ |
1,306,868 |
|
|
$ |
1,513,620 |
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,481,391 |
|
|
|
1,577,458 |
|
Depreciation
and amortization
|
|
|
72,335 |
|
|
|
66,692 |
|
Total
operating expenses
|
|
|
1,553,726 |
|
|
|
1,644,150 |
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(246,858 |
) |
|
|
(130,530 |
) |
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
718 |
|
|
|
2,555 |
|
Interest
income - notes receivable
|
|
|
294,611 |
|
|
|
324,299 |
|
Interest
expense
|
|
|
(69,030 |
) |
|
|
(116,986 |
) |
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(17,875 |
) |
|
|
(9,750 |
) |
Gain
on sale of book of business
|
|
|
- |
|
|
|
3,300 |
|
Total
other income
|
|
|
208,424 |
|
|
|
203,418 |
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before (benefit from) provision for
income taxes
|
|
|
(38,434 |
) |
|
|
72,888 |
|
(Benefit
from) provision for income taxes
|
|
|
(17,296 |
) |
|
|
32,800 |
|
(Loss)
income from continuing operations
|
|
|
(21,138 |
) |
|
|
40,088 |
|
(Loss)
income from discontinued operations, net of income taxes
|
|
|
(90,842 |
) |
|
|
95,172 |
|
Net
(loss) income
|
|
$ |
(111,980 |
) |
|
$ |
135,260 |
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Per Common Share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.02 |
|
(Loss)
income from discontinued operations
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
(Loss)
income per common share
|
|
$ |
(0.04 |
) |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$ |
(0.01 |
) |
|
$ |
0.01 |
|
(Loss)
income from discontinued operations
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
(Loss)
income per common share
|
|
$ |
(0.04 |
) |
|
$ |
0.04 |
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,977,108 |
|
|
|
2,967,442 |
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,977,108 |
|
|
|
3,284,523 |
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
Six
Months Ended June 30,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(341,638 |
) |
|
$ |
224,054 |
|
Adjustments
to reconcile net (loss) income to net cash
|
|
|
|
|
|
|
|
|
(used
in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
144,117 |
|
|
|
137,680 |
|
Bad
debt expense
|
|
|
29,091 |
|
|
|
- |
|
Accretion
of discount on notes receivable
|
|
|
(493,909 |
) |
|
|
(493,902 |
) |
Amortization
of warrants
|
|
|
11,820 |
|
|
|
26,757 |
|
Stock-based
payments
|
|
|
74,999 |
|
|
|
10,000 |
|
Gain
on sale of book of business
|
|
|
- |
|
|
|
(65,767 |
) |
Deferred
income taxes
|
|
|
(348,000 |
) |
|
|
183,317 |
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
121,354 |
|
|
|
422,219 |
|
Prepaid
expenses and other current assets
|
|
|
(17,499 |
) |
|
|
(79,037 |
) |
Deposits
and other assets
|
|
|
13,450 |
|
|
|
(150,536 |
) |
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
136,435 |
|
|
|
(275,006 |
) |
Income
taxes payable
|
|
|
(14,224 |
) |
|
|
159,709 |
|
Other
current liabilities
|
|
|
- |
|
|
|
(10,638 |
) |
Net
cash (used in) provided by operating activities of continuing
operations
|
|
|
(684,004 |
) |
|
|
88,850 |
|
Operating
activities of discontinued operations
|
|
|
(373,927 |
) |
|
|
73,533 |
|
Net
Cash (Used in) Provided by Operating Activities
|
|
|
(1,057,931 |
) |
|
|
162,383 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Decrease
in notes and other receivables - net
|
|
|
57,335 |
|
|
|
93,394 |
|
Proceeds
from sale of book of business
|
|
|
- |
|
|
|
66,300 |
|
Purchase
of property and equipment
|
|
|
(17,002 |
) |
|
|
(136,179 |
) |
Net
cash provided by investing activities of continuing
operations
|
|
|
40,333 |
|
|
|
23,515 |
|
Investing
activities of discontinued operations
|
|
|
1,008,386 |
|
|
|
832,527 |
|
Net
Cash Provided by Investing Activities
|
|
|
1,048,719 |
|
|
|
856,042 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(233,227 |
) |
|
|
(283,509 |
) |
Proceeds
from exercise of options and warrants
|
|
|
- |
|
|
|
112,200 |
|
Net
cash used in financing activities of continuing operations
|
|
|
(233,227 |
) |
|
|
(171,309 |
) |
Financing
activities of discontinued operations
|
|
|
(562,177 |
) |
|
|
(1,093,386 |
) |
Net
Cash Used in Financing Activities
|
|
|
(795,404 |
) |
|
|
(1,264,695 |
) |
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(804,616 |
) |
|
|
(246,270 |
) |
Cash
and Cash Equivalents, beginning of period
|
|
|
1,030,822 |
|
|
|
1,196,412 |
|
Cash
and Cash Equivalents, end of period
|
|
$ |
226,206 |
|
|
$ |
950,142 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Scheduleof Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Liabilties
assumed by purchaser of premium finance portfolio
|
|
$ |
11,229,060 |
|
|
$ |
- |
|
Reserve
held by purchaser of premium finance portfolio
|
|
$ |
261,363 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SIX
MONTHS ENDED JUNE 30, 2008 AND 2007
1.
Basis of Presentation
The
Condensed Consolidated Balance Sheet as of June 30, 2008, the Condensed
Consolidated Statements of Operations for the six months and three months ended
June 30, 2008 and 2007 and the Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2008 and 2007 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, 2008,
results of operations for the six months and three months ended June 30, 2008
and 2007 and cash flows for the six months ended June 30, 2008 and 2007. This
report should be read in conjunction with our Annual Report on Form 10-KSB for
the year ended December 31, 2007. The consolidated balance sheet at December 31,
2007 was derived from the audited financial statements as of that
date.
The
results of operations and cash flows for the six months ended June 30, 2008 are
not necessarily indicative of the results to be expected for the full
year.
Organization and Nature of
Business
DCAP
Group, Inc. and Subsidiaries (referred to herein as "we" or "us") operate a
network of retail offices and franchise operations engaged in the sale of retail
auto, motorcycle, boat, business, and homeowner's insurance, and until February
1, 2008 provided premium financing of insurance policies for customers of our
offices as well as customers of non-affiliated entities. On February 1, 2008, we
sold our outstanding premium finance loan portfolio. As a result of the sale,
our premium financing operations have been classified as discontinued operations
and prior periods have been restated. The purchaser of the premium finance
portfolio has agreed that, during the five year period ending January 31, 2013
(subject to automatic renewal for successive two year terms under certain
circumstances), it will purchase, assume and service premium finance contracts
originated by us in the states of New York and Pennsylvania. In connection
with such purchases, we will be entitled to receive a fee generally equal to a
percentage of the amount financed. Our continuing operations of the premium
financing business will consist of the revenue earned from placement fees and
any related expenses. We also provide automobile club services for roadside
emergencies and tax preparation services.
2.
Summary of Significant Accounting Policies
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.
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. For our continuing premium
finance operations, we earn placement fees upon the establishment of a premium
finance contract.
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
advertising expense. We are obligated to provide marketing and training support
to each franchisee. During the six months ended June 30, 2008 and
2007, approximately $-0- and $110,000, respectively, was recognized as initial
franchise fee income.
Fees for
income tax preparation are recognized when the services are completed.
Automobile club dues are recognized equally over the contract
period.
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 approximately $3,000 and $46,000 in such capitalized costs were
incurred during the six months ended June 30, 2008 and 2007,
respectively.
Reclassifications
Certain
reclassifications have been made to the consolidated financial statements for
the six months and three months ended June 30, 2007 to conform to the
classifications used for the six months and three months ended June 30,
2008.
3.
Notes Receivable
Purchase of Notes
Receivable
On
January 31, 2006, we purchased from Eagle Insurance Company (“Eagle”) two
surplus notes issued by Commercial Mutual Insurance Company (“CMIC”) in the
aggregate principal amount of $3,750,000 (the “Surplus Notes”), plus accrued
interest of $1,794,688. The aggregate purchase price for the Surplus Notes was
$3,075,141, of which $1,303,434 was paid to Eagle by delivery of a six month
promissory note which provided for interest at the rate of 7.5% per
annum. The promissory note was paid in full on July 28,
2006. CMIC is a New York property and casualty insurer. Eagle is a
New Jersey property and casualty insurer that is subject to an Order of
Liquidation issued by the New Jersey Department of Banking and
Insurance. Eagle owns approximately 10% of our outstanding common
stock. The Surplus Notes acquired by us are past due and provide for
interest at the prime rate or 8.5% per annum, whichever is
less. Payments of principal and interest on the Surplus Notes may
only be made out of the surplus of CMIC and require the approval of the New York
State Department of Insurance. During the six months ended June 30,
2008 and 2007, interest payments totaling $-0- and $125,000, respectively, were
received. The discount on the Surplus Notes and the accrued interest
at the time of acquisition are being accreted over a 30 month period, the
estimated period to collect such amounts. Such accretion amount,
together with interest on the Surplus Notes for the six months and three months
ended June 30, 2008 and 2007, are included in our consolidated statement of
operations as “Interest income-notes receivable.”
Possible Future Conversion
of Notes Receivable
In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company. CMIC has advised us that it has obtained
permission from the Superintendent of Insurance of the State of New York (the
“Superintendent”) to proceed with the conversion process (subject to certain
conditions as discussed below).
The
conversion by CMIC to a stock property and casualty insurance company is subject
to a number of conditions, including the approval of the plan of conversion,
which was filed with the Superintendent on April 25, 2008, by both the
Superintendent and CMIC’s policyholders. As part of the approval
process, the Superintendent had an appraisal performed with respect to the fair
market value of CMIC as of December 31, 2006. In addition, the
Insurance Department conducted a five year examination of CMIC as of December
31, 2006. We, as a holder of the CMIC 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 CMIC would be
converted. Based upon the amount payable on the surplus notes and the
statutory surplus of CMIC, we believe that, following any conversion by CMIC
into a stock corporation, we could hold a controlling equity interest in
CMIC. It is anticipated that the conversion will occur prior to
December 31, 2008. No assurances can be given that the conversion
will occur or as to the terms of the conversion.
Our
Chairman is also Chairman of CMIC and one of our other directors and our Chief
Accounting Officer are also directors of CMIC.
4.
Employee Stock Compensation
In
November 1998, we adopted the 1998 Stock Option Plan, which provides for the
issuance of incentive stock options and non-statutory stock options. Under this
plan, options to purchase not more than 400,000 of our common shares were
permitted to be granted, at a price to be determined by our Board of Directors
or the Stock Option Committee at the time of grant. During 2002, we increased
the number of common shares authorized to be issued pursuant to the 1998 Stock
Option Plan to 750,000. Incentive stock options granted under this plan expire
no later than ten years from date of grant (except no later than five years for
a grant to a 10% stockholder). Our Board of Directors or the Stock Option
Committee will determine the expiration date with respect to non-statutory
options granted under this plan.
In
December 2005, our shareholders ratified the adoption of the 2005 Equity
Participation Plan, which provides for the issuance of incentive stock options,
non-statutory stock options and restricted stock. Under this plan, a maximum of
300,000 common shares may be issued pursuant to options granted and restricted
stock issued. Incentive stock options granted under this plan expire no later
than ten years from date of grant (except no later than five years for a grant
to a 10% stockholder). Our Board of Directors or the Stock Option Committee will
determine the expiration date with respect to non-statutory options, and the
vesting provisions for restricted stock, granted under this plan.
Our
results for the six months and three months ended June 30, 2008 include
share-based compensation expense related to stock options totaling approximately
$48,000 and $24,000, respectively. Our results for the six months and three
months ended June 30, 2007 include share-based compensation expense totaling
approximately $10,000 and $5,000, respectively. Such amounts have been included
in the Condensed Consolidated Statements of Operations within general and
administrative expenses.
Stock
option compensation expense in 2008 and 2007 is the estimated fair value of
options granted amortized on a straight-line basis over the requisite service
period for the entire portion of the award.
We did
not grant any options under either plan during the six months and three months
ended June 30, 2008 or 2007.
The
following table represents our stock options granted, exercised, and forfeited
during the first six months of 2008.
Stock
Options
|
|
Number
of Shares
|
|
|
Weighted
Average Exercise Price per Share
|
|
|
Weighted
Average Remaining Contractual Term
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at January 1, 2008
|
|
|
268,624 |
|
|
$ |
2.55 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
$ |
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
(22,800 |
) |
|
$ |
2.89 |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
245,824 |
|
|
$ |
2.52 |
|
|
|
3.81 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at June 30, 2008
|
|
|
130,405 |
|
|
$ |
2.81 |
|
|
|
3.44 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at June
30, 2008 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 $1.01 closing price of our common
shares on June 30, 2008. We received cash proceeds from options
exercised in the six months ended June 30, 2008 and 2007 of approximately $-0-
and $112,000, respectively.
As of
June 30, 2008, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $67,000. Unamortized compensation
cost as of June 30, 2008 is expected to be recognized over a remaining
weighted-average vesting period of 2.22 years.
5.
Net (Loss) Income Per Share
Basic net
(loss) income per share is computed by dividing (loss) 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. For the six months and three
months ended June 30, 2007, the inclusion of 149,800 of options and warrants in
the computation of diluted earnings per share would have been
anti-dilutive. During the six months and three months ended June 30,
2008, we recorded a loss available to common shareholders and, as a result, the
weighted average number of common shares used in the calculation of basic and
diluted loss per share is the same, and have not been adjusted for the effects
of 655,324 potential common shares from unexercised stock options and warrants,
and the conversion of convertible preferred shares, which were anti-dilutive for
such period.
The
reconciliation is as follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
2,973,066 |
|
|
|
2,954,538 |
|
|
|
2,977,108 |
|
|
|
2,967,442 |
|
Effect
of dilutive securities, common share equivalents
|
|
|
- |
|
|
|
329,558 |
|
|
|
- |
|
|
|
317,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
used
for computing diluted earnings per share
|
|
|
2,973,066 |
|
|
|
3,284,096 |
|
|
|
2,977,108 |
|
|
|
3,284,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations available to common shareholders for
the computation of diluted earnings (loss) per share is computed as
follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations
|
|
$ |
(130,686 |
) |
|
$ |
91,017 |
|
|
$ |
(21,138 |
) |
|
$ |
40,088 |
|
Interest
expense on dilutive convertible preferred stock
|
|
|
- |
|
|
|
19,500 |
|
|
|
- |
|
|
|
9,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations available
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
common shareholders for diluted earnings (loss) per share
|
|
$ |
(130,686 |
) |
|
$ |
110,517 |
|
|
$ |
(21,138 |
) |
|
$ |
49,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders for the computation of diluted
earnings per share is computed as follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(341,638 |
) |
|
$ |
224,054 |
|
|
$ |
(111,980 |
) |
|
$ |
135,260 |
|
Interest
expense on dilutive convertible preferred stock
|
|
|
- |
|
|
|
19,500 |
|
|
|
- |
|
|
|
9,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders for
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
earnings (loss) per share
|
|
$ |
(341,638 |
) |
|
$ |
243,554 |
|
|
$ |
(111,980 |
) |
|
$ |
145,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
Term Loan and Subordinated Notes
In June
2008, the maturity date of our M&T term loan was extended to December 31,
2008. Principal payments of $55,174 are due on the first day of each month and
one final payment on the maturity date. The first principal payment was paid on
June 30, 2008, reducing the balance of the term loan to $334,286. Interest at
the rate of LIBOR plus 2.75% is payable monthly.
In August
2008, the maturity date of our $1,500,000 subordinated note obligation has been
extended from September 30, 2008 to July 10, 2009 (or earlier if certain
conditions are met). In exchange for this extension, the holders will receive an
aggregate incentive payment equal to $10,000 times the number of months (or
partial months) the debt is outstanding after September 30, 2008 through the
maturity date. If a prepayment of principal reduces the debt below $1,500,000,
the incentive payment for all subsequent months will be reduced in proportion to
any such reduction to the debt. The aggregate incentive payment is due upon full
repayment of the debt.
Jack
Seibald, one of our directors and a principal stockholder, indirectly holds
approximately $288,000 of the principal amount of the subordinated
debt. In addition, a limited liability company of which Barry
Goldstein, our Chief Executive Officer, is a minority member holds $115,000 of
the principal amount of the subordinated debt.
7.
Exchange of Preferred Stock
Effective
April 16, 2008, the holder of our Series B preferred shares, AIA Acquisition
Corp. (“AIA”), exchanged such shares for an equal number of preferred shares,
the terms of which are substantially identical to those of the Series B
preferred shares, except that they are mandatorily redeemable on April 30, 2009
(as opposed to April 30, 2008 for the Series B preferred shares) and they
provide for dividends at the rate of 10% per annum (as compared to 5% per annum
for the Series B preferred shares). In August 2008, the redemption date was
further extended to July 31, 2009. The current aggregate redemption amount for
the preferred shares is $780,000, plus accumulated and unpaid
dividends. The preferred shares are convertible into our common
shares at a price of $2.50 per share. Members of the family of Barry
B. Goldstein, our Chief Executive Officer, are principal stockholders of
AIA.
8.
Discontinued Operations
On
February 1, 2008, we sold our outstanding premium finance loan portfolio. Under
the terms of the sale, the purchaser of the premium finance portfolio has agreed
that, during the five year period ending January 31, 2013 (subject to automatic
renewal for successive two year terms under certain circumstances), it will
purchase, assume and service all eligible premium finance contracts originated
by us in the states of New York and Pennsylvania. In connection with
such purchases, we will be entitled to receive a fee generally equal to a
percentage of the amount financed. As a result of the sale of the premium
finance portfolio on February 1, 2008, the operating results of the premium
financing operations for the six months and three months ended June 30, 2008 and
2007 have been presented as discontinued operations. Net assets and
liabilities to be disposed of or liquidated, at their book value, have been
separately classified in the accompanying balance sheets at June 30, 2008 and
December 31, 2007. Continuing operations of our premium financing operations
will only consist of placement fee revenue and any related
expenses.
Summarized
financial information of the premium financing segment as discontinued
operations for the six months and three months ended June 30, 2008 and 2007
follows:
|
|
Six
Months Ended
|
|
|
Three
Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium
finance revenue
|
|
$ |
225,322 |
|
|
$ |
1,641,868 |
|
|
$ |
- |
|
|
$ |
851,173 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
181,943 |
|
|
|
740,455 |
|
|
|
2,915 |
|
|
|
372,949 |
|
Provision
for finance receivable losses
|
|
|
89,316 |
|
|
|
275,610 |
|
|
|
- |
|
|
|
112,554 |
|
Depreciation
and amortization
|
|
|
46,556 |
|
|
|
50,938 |
|
|
|
- |
|
|
|
25,469 |
|
Interest
expense
|
|
|
45,181 |
|
|
|
332,980 |
|
|
|
- |
|
|
|
167,162 |
|
Total
operating expenses
|
|
|
362,996 |
|
|
|
1,399,983 |
|
|
|
2,915 |
|
|
|
678,134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(137,674 |
) |
|
|
241,885 |
|
|
|
(2,915 |
) |
|
|
173,039 |
|
Loss
on sale of premim financing portfolio
|
|
|
(245,875 |
) |
|
|
- |
|
|
|
(162,252 |
) |
|
|
- |
|
(Loss)
income before provision for income taxes
|
|
|
(383,549 |
) |
|
|
241,885 |
|
|
|
(165,167 |
) |
|
|
173,039 |
|
(Benefit
from) provision for income taxes
|
|
|
(172,597 |
) |
|
|
108,848 |
|
|
|
(74,325 |
) |
|
|
77,867 |
|
(Loss)
income from discontinued operations, net of income taxes
|
|
$ |
(210,952 |
) |
|
$ |
133,037 |
|
|
$ |
(90,842 |
) |
|
$ |
95,172 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
components of assets and liabilities of discontinued operations as of June 30,
2008 and December 31, 2007 are as follows:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Finance
contracts receivable, net
|
|
$ |
- |
|
|
$ |
12,498,809 |
|
Due
from purchaser of premium finance portfolio
|
|
|
35,986 |
|
|
|
- |
|
Other
current assets
|
|
|
25,650 |
|
|
|
31,680 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
69,000 |
|
Property
and equipment, net
|
|
|
- |
|
|
|
3,324 |
|
Other
assets
|
|
|
- |
|
|
|
48,410 |
|
Total
assets
|
|
$ |
61,636 |
|
|
$ |
12,651,223 |
|
|
|
|
|
|
|
|
|
|
Revolving
credit line
|
|
$ |
- |
|
|
$ |
9,488,437 |
|
Accounts
payable and accrued expenses
|
|
|
- |
|
|
|
139,480 |
|
Premiums
payable
|
|
|
- |
|
|
|
2,889,388 |
|
Total
liabilities
|
|
$ |
- |
|
|
$ |
12,517,305 |
|
|
|
|
|
|
|
|
|
|
Finance income, fees and
receivables (discontinued operations)
For our
premium finance operations, we used the interest method to recognize interest
income over the life of each loan in accordance with SFAS No. 91, "Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases."
Upon the
establishment of a premium finance contract, we recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was 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 26.1% and 26.4% per
annum for the six months ended June 30, 2008 and 2007,
respectively.
Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.
Allowance for finance
receivable losses (discontinued operations)
Customers
who purchase insurance policies are often unable to pay the premium in a lump
sum and, therefore, require extended payment terms. Premium financing involves
making a loan to the customer that is backed by the unearned portion of the
insurance premiums being financed. No credit checks were made prior to the
decision to extend credit to a customer. Losses on finance receivables included
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 were exhausted, the
remaining account balance, including unrealized interest, was written off. We
reviewed 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, 2008 and 2007, the provision for finance receivable losses was
approximately $89,000 and $276,000, respectively, and actual principal
write-offs for such period, net of actual and anticipated recoveries of previous
write-offs, were approximately $50,000 and $301,000, respectively.
Item
2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION.
Overview
We
operate 26 storefronts, including sixteen Barry Scott locations, five Atlantic
Insurance locations, and five Accurate Agency locations. We also have 40
franchised DCAP locations.
Our
insurance storefronts serve as insurance agents or brokers and place various
types of insurance on behalf of customers. We focus on automobile,
motorcycle, homeowner’s and small business insurance. Our customer base is
primarily individuals and small 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, in March 2007, the Board of Directors of Commercial
Mutual Insurance Company (“CMIC”) adopted a resolution to convert CMIC from an
advance premium insurance company to a stock property and casualty insurance
company. We hold surplus notes of CMIC in the aggregate principal
amount of $3,750,000. In the event the conversion occurs, we, at our
option, would be able to convert such notes into a controlling equity interest
in CMIC.
The
stores also offer automobile club services for roadside assistance and some of
our franchise locations offer income tax preparation services.
Payments
Inc., our wholly-owned subsidiary, is an insurance premium finance agency that
is licensed within the states of New York, Pennsylvania and New Jersey. Until
February 1, 2008, Payments Inc. offered premium financing to clients of DCAP,
Barry Scott, Atlantic Insurance and Accurate Agency offices, as well as
non-affiliated insurance agencies. On February 1, 2008, Payments Inc.
sold its outstanding premium finance loan portfolio. As a result of the sale,
its business of internally financing insurance contracts has been reclassified
as discontinued operations and prior periods have been restated. Effective
February 1, 2008, revenues from its premium financing business will consist of
placement fees based upon premium finance contracts purchased, assumed and
serviced by the purchaser of the loan portfolio.
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. However, 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. In addition, 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. For our continuing
premium finance operations, we earn placement fees upon the establishment of a
premium finance contract.
Franchise
fee revenue is recognized when substantially all of our contractual requirements
under the franchise agreement are completed. Franchisees also pay a
monthly franchise fee plus a monthly advertising fee. We are
obligated to provide marketing and training support to each
franchisee.
Automobile
club dues are recognized equally over the contract period.
Finance
income, fees and receivables (discontinued operations)
For our
premium finance operations, we used the interest method to recognize interest
income over the life of each loan in accordance with Statement of Financial
Accounting Standard (“SFAS”) No. 91, “Accounting for Nonrefundable Fees
and Costs Associated with Originating or Acquiring Loans and Initial Direct
Costs of Leases.”
Upon the
establishment of a premium finance contract, we recorded the gross loan payments
as a receivable with a corresponding reduction for deferred interest. The
deferred interest was 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 26.1% and
26.4% per annum for the six months ended June 30, 2008 and 2007,
respectively.
Upon
completion of collection efforts, after cancellation of the underlying insurance
policies, any uncollected earned interest or fees were charged off.
Allowance
for finance receivable losses (discontinued operations)
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 were made prior to the
decision to extend credit to a customer. Losses on finance receivables included
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 were exhausted, the
remaining account balance, including unrealized interest, was written off. We
reviewed 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, 2008 and 2007, the provision for finance receivable losses was
approximately $89,000 and $276,000, respectively, and actual principal
write-offs for such period, net of actual and anticipated recoveries of previous
write-offs, were approximately $50,000 and $301,000, respectively.
Goodwill
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,
2008.
Stock-based
compensation
Effective
January 1, 2006, our plans have been accounted for in accordance with the
recognition and measurement provisions of SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS
123(R)”), which replaced SFAS No. 123, “Accounting for Stock-Based
Compensation,” and supersede APB Opinion No. 25, “Accounting for Stock Issued to
Employees” (“APB 25”) and related interpretations. FAS 123(R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, we adhere to the guidance set forth within Securities and Exchange
Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 107, which provides the
Staff's views regarding the interaction between SFAS 123(R) and certain SEC
rules and regulations and provides interpretations with respect to the valuation
of share-based payments for public companies.
In
adopting SFAS 123(R), we applied the modified prospective approach to
transition. Under the modified prospective approach, the provisions of SFAS
123(R) are to be applied to new awards and to awards modified, repurchased, or
cancelled after the required effective date. Additionally, compensation cost for
the portion of awards for which the requisite service has not been rendered that
are outstanding as of the required effective date shall be recognized as the
requisite service is rendered on or after the required effective date. The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under SFAS 123.
Recent
Accounting Pronouncements
In March
2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 161,
“Disclosures about Derivative
Instruments and Hedging Activities—an amendment of FASB Statement No. 133”
(“SFAS 161”). SFAS 161 applies to all entities. SFAS 161
changes the disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced disclosures about (a) how
and why an entity uses derivative instruments, (b) how derivative instruments
and related hedged items are accounted for under SFAS No. 133 and its related
interpretations, and (c) how derivative instruments and related hedged items
affect an entity’s financial position, financial performance, and cash
flows. SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. SFAS 161 encourages, but does not require,
comparative disclosures for earlier periods at initial adoption. We do not
believe this pronouncement will have a material effect on our financial
statements.
Results
of Operations
Six Months Ended June 30,
2008 Compared to Six Months Ended June 30, 2007
On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been reclassified as
discontinued operations and prior periods have been restated. Separate
discussions follow for results of continuing operations and discontinued
operations.
Continuing
Operations
The
following table summarizes the changes in the significant components of the
results of continuing operations (in thousands) for the periods
indicated:
|
|
Six
months ended
|
|
|
June
30,
|
|
|
YTD
|
|
|
YTD
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
Commissions
and fee revenue
|
|
$ |
2,624 |
|
|
$ |
3,127 |
|
|
$ |
(503 |
) |
|
|
(16 |
)
% |
General
and administrtaive expenses
|
|
|
3,142 |
|
|
|
3,272 |
|
|
|
(130 |
) |
|
|
(4 |
)
% |
Interest
expense
|
|
|
152 |
|
|
|
250 |
|
|
|
(98 |
) |
|
|
(39 |
)
% |
(Benefit
from) provision for income taxes
|
|
|
(107 |
) |
|
|
74 |
|
|
|
(181 |
) |
|
|
(245 |
)
% |
(Loss)
income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
(237 |
) |
|
|
165 |
|
|
|
(402 |
) |
|
|
(244 |
)
% |
During
the six months ended June 30, 2008 (“2008”), revenues from continuing operations
were $2,624,000 as compared to $3,127,000 for the six months ended June 30, 2007
(“2007”). The 16% revenue decrease of $503,000 was primarily
attributable to a $612,000 reduction in commissions and fees earned due to the
sale of fewer insurance policies in 2008 than in 2007. Such reduction
in sales was generally caused by the continued heightened competition from the
voluntary insurance market which is offering lower premium rates to our main
customer, the non-standard insured. The decrease in commissions and
fees earned from the sale of insurance policies was offset by $219,000 of
premium finance placement fees earned in 2008, compared to none in 2007.
Effective February 1, 2008, we began earning placement fees in accordance with
the terms of the sale of our premium finance portfolio.
Our
general and administrative expenses in 2008 were $3,142,000, as compared to
$3,272,000 in 2007. The 4% net decrease of $130,000 was primarily attributable
to a reduction in fixed and variable compensation paid to employees due to a
reduction in policies sold at our stores.
Our
interest expense in 2008 was $152,000, as compared to $250,000 in 2007. The 39%
decrease of $98,000 was primarily due to: (i) a reduction in the principal
balance of our debt and (ii) our no longer allocating a portion of the interest
on our revolving credit line from our discontinued premium finance business to
continuing operations.
Our gain
on sale of book of business in 2008 was $-0-, as compared to $66,000 in 2007.
The $66,000 decrease in 2008 was due to a sale in 2007, compared to no such
sales in 2008.
During
2008, we recorded a benefit from income taxes of $107,000 compared to a
provision for income taxes of $74,000 in 2007. The decrease of $181,000 is due
to a $402,000 decrease in income from continuing operations in 2008 as compared
to 2007.
Our
continuing operations generated a net loss before income taxes of $237,000 in
2008 as compared to a net profit before income taxes of $165,000 in
2007. This decrease of $402,000 was primarily due to a 16% decrease
in revenues of $503,000 and the elimination of any sale of book of business in
2008, offset by a reduction in both employee head count and variable
compensation paid on commissions generated.
Discontinued
Operations
The
following table summarizes our changes in the results of discontinued operations
(in thousands) for the periods indicated:
|
|
Six
months ended
|
|
|
June
30,
|
|
|
|
YTD
|
|
|
YTD
|
|
|
Change
|
|
|
|
|
2008*
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
Premium
finance revenue
|
|
$ |
225 |
|
|
$ |
1,642 |
|
|
|
(1,417 |
) |
|
|
(86 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
182 |
|
|
|
740 |
|
|
|
(558 |
) |
|
|
(75 |
)
% |
Provision
for finance receivable losses
|
|
|
89 |
|
|
|
276 |
|
|
|
(187 |
) |
|
|
(68 |
)
% |
Depreciation
and amortization
|
|
|
47 |
|
|
|
51 |
|
|
|
(4 |
) |
|
|
(8 |
)
% |
Interest
expense
|
|
|
45 |
|
|
|
333 |
|
|
|
(288 |
) |
|
|
(86 |
)
% |
Total
Operating Expenses
|
|
|
363 |
|
|
|
1,400 |
|
|
|
(1,037 |
) |
|
|
(74 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(138 |
) |
|
|
242 |
|
|
|
(380 |
) |
|
|
(157 |
)
% |
Loss
on sale of premium financing portfolio
|
|
|
(245 |
) |
|
|
- |
|
|
|
(245 |
) |
|
|
-
|
% |
(Loss)
income before (benefit from) provision for income
taxes
|
|
|
(383 |
) |
|
|
242 |
|
|
|
(625 |
) |
|
|
(258 |
)
% |
(Benefit
from) provision for income taxes
|
|
|
(172 |
) |
|
|
109 |
|
|
|
(281 |
) |
|
|
(258 |
)
% |
(Loss)
income from discontinued operations
|
|
$ |
(211 |
) |
|
$ |
133 |
|
|
$ |
(344 |
) |
|
|
(259 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
* Our
premium finance portfolio was sold on February 1, 2008. Premium
finance revenue for 2008 only includes the period from January 1, 2008 through
January 31, 2008.
Our
premium finance revenue decreased $1,417,000 in 2008 as compared
2007. The 86% decrease is due to only including one month of revenue
in 2008 compared to six months in 2007.
Our
general and administrative expenses from discontinued operations decreased
$558,000 in 2008 as compared to 2007. The 75% decrease is due to only
including one month of operating expenses related to revenue in 2008 compared to
six months in 2007.
Our
provision for finance receivable losses for 2008 was $187,000 less than for
2007. The 68% decrease was due to the discontinuance of loan
originations offset by a provision for losses from loans originated in the prior
year.
Our
premium finance interest expense for 2008 was $288,000 less than for
2007. The 86% decrease was due to the payment in full of the
outstanding balance of our revolving credit line on February 1,
2008.
Loss on
sale of premium financing portfolio was $245,000 in 2008, compared to no such
loss in 2007. The 2008 loss was due to: (i) a $162,000 adjustment to the selling
price as a result of a change in the estimated collectible amount of the
portfolio, and (ii) the incurrence of $83,000 in fees related to the sale of our
premium finance portfolio.
Our
discontinued premium finance operations, on a stand-alone basis, generated a net
loss before income taxes of $383,000 in 2008 as compared to a net profit before
income taxes of $242,000 in 2007. The decrease in profit of $625,000
in 2008 was due to: (i) the cessation of revenues as of January 31, 2008, and
(ii) the loss on sale of portfolio, offset by the elimination and reductions in
operating expenses.
The
following table summarizes our change in net (loss) income (in thousands) for
the periods indicated.
|
|
Six
months ended
|
|
|
|
June
30,
|
|
|
|
YTD
|
|
|
YTD
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
(Loss)
income from continuing operations
|
|
$ |
(131 |
) |
|
$ |
91 |
|
|
$ |
(222 |
) |
|
|
(244 |
)
% |
(Loss)
income from discontinued operations, net of taxes
|
|
|
(211 |
) |
|
|
133 |
|
|
|
(344 |
) |
|
|
(259 |
)
% |
Net
(loss) income
|
|
$ |
(342 |
) |
|
$ |
224 |
|
|
$ |
(566 |
) |
|
|
(253 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net
loss for 2008 was $342,000 as compared to net income of $224,000 for
2007.
Three Months Ended June 30,
2008 Compared to Three Months Ended June 30, 2007
On
February 1, 2008, we sold our outstanding premium finance loan portfolio. As a
result of the sale, our premium financing operations have been reclassified as
discontinued operations and prior periods have been restated. Separate
discussions follow for results of continuing operations and discontinued
operations.
Continuing
Operations
The
following table summarizes the changes in the significant components of the
results of continuing operations (in thousands) for the periods
indicated:
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
|
Q2
|
|
|
Q2
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
Commissions
and fee revenue
|
|
$ |
1,307 |
|
|
$ |
1,514 |
|
|
$ |
(207 |
) |
|
|
(14 |
)
% |
General
and administrtaive expenses
|
|
|
1,481 |
|
|
|
1,577 |
|
|
|
(96 |
) |
|
|
(6 |
)
% |
Interest
expense
|
|
|
69 |
|
|
|
117 |
|
|
|
(48 |
) |
|
|
(41 |
)
% |
(Benefit
from) provision for income taxes
|
|
|
(17 |
) |
|
|
32 |
|
|
|
(49 |
) |
|
|
(153 |
)
% |
(Loss)
income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
before
income taxes
|
|
|
(38 |
) |
|
|
72 |
|
|
|
(110 |
) |
|
|
(153 |
)
% |
During
the three months ended June 30, 2008 (“Q2 2008”), revenues from continuing
operations were $1,307,000 as compared to $1,514,000 for the three months ended
June 30, 2007 (“Q2 2007”). The 14% revenue decrease of $207,000 was
primarily attributable to a $271,000 reduction in commissions and fees earned
due to the sale of fewer insurance policies in Q2 2008 than in Q2
2007. Such reduction in sales was generally caused by the continued
heightened competition from the voluntary insurance market which is offering
lower premium rates to our main customer, the non-standard
insured. The decrease in commissions and fees earned from the sale of
insurance policies was offset by $119,000 of premium finance placement fees
earned in Q2 2008, compared to none in Q2 2007. Effective February 1, 2008, we
began earning placement fees in accordance with the terms of the sale of our
premium finance portfolio.
Our
general and administrative expenses in Q2 2008 were $1,481,000, as compared to
$1,577,000 in Q2 2007. The 6% net decrease of $96,000 was primarily attributable
to a reduction in fixed and variable compensation paid to employees due to a
reduction in policies sold at our stores, fees paid to consultants, and a
reduction in our advertising expenses.
Our
interest expense in Q2 2008 was $69,000, as compared to $117,000 in Q2 2007. The
41% decrease of $48,000 was primarily due to: (i) a reduction in the principal
balance of our debt and (ii) our no longer allocating a portion of the interest
on our revolving credit line from our discontinued premium finance business to
continuing operations.
During Q2
2008, we recorded a benefit from income taxes of $17,000 compared to a provision
for income taxes of $32,000 in Q2 2007. The decrease of $49,000 is due to a
$110,000 decrease in income from continuing operations in Q2 2008 as compared to
Q2 2007.
Our
continuing operations generated a net loss before income taxes of $38,000 in Q2
2008 as compared to a net profit before income taxes of $72,000 in Q2
2007. This decrease of $110,000 was primarily due to a 14% decrease
in revenues of $207,000, offset by a reduction in both employee head count and
variable compensation paid on commissions generated, and a reduction in
consulting fees and advertising expenses.
Discontinued
Operations
The
following table summarizes our changes in the results of discontinued operations
(in thousands) for the periods indicated:
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
|
|
Q2
|
|
|
|
Q2
|
|
|
Change
|
|
|
|
|
2008*
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
Premium
finance revenue
|
|
$ |
- |
|
|
$ |
851 |
|
|
|
(851 |
) |
|
|
(100 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
3 |
|
|
|
372 |
|
|
|
(369 |
) |
|
|
(99 |
)
% |
Provision
for finance receivable losses
|
|
|
- |
|
|
|
113 |
|
|
|
(113 |
) |
|
|
(100 |
)
% |
Depreciation
and amortization
|
|
|
- |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
(100 |
)
% |
Interest
expense
|
|
|
- |
|
|
|
167 |
|
|
|
(167 |
) |
|
|
(100 |
)
% |
Total
Operating Expenses
|
|
|
3 |
|
|
|
678 |
|
|
|
(675 |
) |
|
|
(100 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(3 |
) |
|
|
173 |
|
|
|
(176 |
) |
|
|
(102 |
)
% |
Loss
on sale of premium financing portfolio
|
|
|
(162 |
) |
|
|
- |
|
|
|
(162 |
) |
|
|
-
|
% |
(Loss)
income before (benefit from) provision for income
taxes
|
|
|
(165 |
) |
|
|
173 |
|
|
|
(338 |
) |
|
|
(195 |
)
% |
(Benefit
from) provision for income taxes
|
|
|
(74 |
) |
|
|
78 |
|
|
|
(152 |
) |
|
|
(195 |
)
% |
(Loss)
income from discontinued operations
|
|
$ |
(91 |
) |
|
$ |
95 |
|
|
$ |
(186 |
) |
|
|
(196 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
* Our
premium finance portfolio was sold on February 1, 2008. Premium
finance revenue for 2008 only includes the period from January 1, 2008 through
January 31, 2008.
Our
premium finance revenue was $-0- in Q2 2008 compared $851,000 in Q2
2007. The decrease is due to the sale of the premium finance portfolio in
the first quarter of 2008, which as result, there was no revenue in Q2 2008,
compared to including three months of revenue in Q2 2007.
Our
operating expenses from discontinued operations was $3,000 in Q2 2008 compared
$678,000 in Q2 2007. The decrease is due to the sale of the premium finance
portfolio in the first quarter of 2008, which as result, there was no
significant operating expenses in Q2 2008, compared to including three months of
operating expenses in Q2 2007.
Loss on
sale of premium financing portfolio was $162,000 in Q2 2008, compared to no such
loss in Q2 2007. The 2008 loss was due to a $162,000 adjustment to the selling
price as a result of a change in the estimated collectible amount of the
portfolio.
Our
discontinued premium finance operations, on a stand-alone basis, generated a net
loss before income taxes of $165,000 in Q2 2008 as compared to a net profit
before income taxes of $173,000 in Q2 2007. The decrease in profit of
$338,000 in 2008 was due to: (i) the cessation of revenues as of January 31,
2008, and (ii) the loss on sale of portfolio, offset by the elimination and
reductions in operating expenses.
The
following table summarizes our change in net (loss) income (in thousands) for
the periods indicated.
|
|
Three
months ended
|
|
|
|
June
30,
|
|
|
|
|
Q2
|
|
|
|
Q2
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
% |
|
(Loss)
income from continuing operations
|
|
$ |
(21 |
) |
|
$ |
40 |
|
|
$ |
(61 |
) |
|
|
(153 |
)
% |
(Loss)
income from discontinued operations, net of taxes
|
|
|
(91 |
) |
|
|
95 |
|
|
|
(186 |
) |
|
|
(196 |
)
% |
Net
(loss) income
|
|
$ |
(112 |
) |
|
$ |
135 |
|
|
$ |
(247 |
) |
|
|
(183 |
)
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net
loss for Q2 2008 was $112,000 as compared to net income of $135,000 for Q2
2007.
Liquidity
and Capital Resources
As of
June 30, 2008, we had $226,206 in cash and cash equivalents and working capital
of $101,413. As of December 31, 2007, we had $1,030,822 in cash and cash
equivalents and a working capital deficit of $1,401,539.
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, and in August 2008, agreed to further
extend the maturity date to July 10, 2009 (or earlier under certain
circumstances). The $1,500,000 principal balance of these notes is
included in our June 30, 2008 balance sheet under “Long term
debt.” In addition, as discussed below, effective April 16, 2008, the
holder of our Series B preferred shares (which were mandatorily redeemable on
April 30, 2008) exchanged such shares for an equal number of preferred shares,
which are mandatorily redeemable on April 30, 2009. In August 2008, the
redemption date was further extended to July 31, 2009. The mandatorily
redeemable balance of $780,000 is included in our June 30, 2008 balance sheet as
a long term obligation. Further, as discussed below, term loan
payments in the aggregate principal amount of $334,286 are payable to
Manufacturers and Traders Trust Company (“M&T”) through December
2008. The principal balance of this obligation is included in our
June 30, 2008 balance sheet under “Current Liabilities.” We are
seeking to obtain a line of credit to fund our working capital obligations and
we plan to sell certain stores that are not operating profitably.
We
believe that, based on our present cash resources and assuming that we obtain
the line of credit sought and/or complete the store sales that are contemplated,
we will have sufficient cash on a short-term basis and over the next 12 months
to fund our working capital needs.
During
2008, cash and cash equivalents decreased by $805,000 primarily due to the
following:
·
|
Net
cash used in operating activities during 2008 was $1,058,000 due to the
following: (i) cash used in the operating activities of our
discontinued operations of $374,000 as a result of the liquidation of
substantially all of the related operating assets and liabilities on
February 1, 2008 and (ii) net loss adjusted for non-cash items was
$924,000. Non-cash items totaled $582,000, which include depreciation and
amortization, bad debt expense, accretion of discount on notes receivable,
amortization of warrants, stock-based payments, and deferred income
taxes.
|
·
|
Net
cash provided by investing activities during 2008 was $1,049,000 primarily
due to the $1,008,000 cash flow from finance contracts receivable included
in discontinued operations.
|
·
|
Net
cash used in financing activities during 2008 was $795,000 due to: (i) a
$562,000 decrease in our revolving credit line utilized in our
discontinued operations prior to the sale of our premium finance portfolio
on February 1, 2008, and (ii) a $233,000 reduction in other debt
obligations.
|
Our discontinued premium finance
operations were financed pursuant to a $20,000,000 revolving line of credit from
M&T entered into on July 28, 2006. The line of credit was
terminated and the $8,926,000 balance was paid in full on February 1, 2008 in
connection with the sale of our premium finance portfolio. The line of credit
also allowed 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 of $390,000, was payable to the extent of $130,000
on June 1, 2008 and $260,000 on June 30, 2008. In June 2008, the
maturity date of the M&T term loan was extended to December 31, 2008.
Principal payments of $55,174 are due on the first day of each month and one
final payment on the maturity date. The first principal payment was paid on June
30, 2008, reducing the balance of the term loan to $334,286. Interest is payable
monthly.
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. In August 2008,
the maturity date of our $1,500,000 subordinated note obligation has been
extended from September 30, 2008 to July 10, 2009 (or earlier if certain
conditions are met). In exchange for this extension, the holders will receive an
aggregate incentive payment equal to $10,000 times the number of months (or
partial months) the debt is outstanding after September 30, 2008 through the
maturity date. If a prepayment of principal reduces the debt below $1,500,000,
the incentive payment for all subsequent months will be reduced in proportion to
any such reduction to the debt. The aggregate incentive payment is due upon full
repayment of the debt.
Effective
April 16, 2008, the holder of our Series B preferred shares exchanged such
shares for an equal number of preferred shares, which provide for dividends at
the rate of 10% per annum (as compared to 5% per annum for the Series B
preferred shares) and are mandatorily redeemable on April 30, 2009. In August
2008, the redemption date was further extended to July 31, 2009.
We have
no current commitments for capital expenditures. However, we may,
from time to time, consider acquisitions of complementary businesses, products
or technologies.
Commercial
Mutual Insurance Company
On
January 31, 2006, we purchased $3,750,000 of surplus notes issued by Commercial
Mutual Insurance Company (“CMIC”) for a price of $3,075,141, of which $1,303,434
was paid by delivery of a six month promissory note which provided for interest
at the rate of 7.5% per annum. The promissory note was paid in full
on July 28, 2006. Accrued but unpaid interest on the surplus notes
totaled $1,794,688 at the time of the purchase. As of June 30, 2008, the balance
of the surplus notes, including accrued interest was $5,773,000. 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 CMIC and require the approval of
the Insurance Department of the State of New York.
In March
2007, CMIC’s Board of Directors adopted a resolution to convert CMIC from an
advance premium cooperative insurance company to a stock property and casualty
insurance company. CMIC has advised us that it has obtained
permission from the Superintendent of Insurance of the State of New York (the
“Superintendent”) to proceed with the conversion process (subject to certain
conditions as discussed below).
The
conversion by CMIC to a stock property and casualty insurance company is subject
to a number of conditions, including the approval of the plan of conversion,
which was filed with the Superintendent on April 25, 2008, by both the
Superintendent and CMIC’s policyholders. As part of the approval
process, the Superintendent had an appraisal performed with respect to the fair
market value of CMIC as of December 31, 2006. In addition, the
Insurance Department conducted a five year examination of CMIC as of December
31, 2006. We, as a holder of the CMIC 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 CMIC would be
converted. Based upon the amount payable on the surplus notes and the
statutory surplus of CMIC, we believe that, following any conversion by CMIC
into a stock corporation, we could hold a controlling equity interest in
CMIC. It is anticipated that the conversion will occur prior to
December 31, 2008. No assurances can be given that the conversion
will occur or as to the terms of the conversion.
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. Quantitative and
Qualitative Disclosures about Market Risk
As a
smaller reporting company, the registrant is not required to provide a response
to Item 3.
Item
4. Controls and Procedures
Evaluation
of Disclosure 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.
Changes
in Internal Control over Financial Reporting
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,
except as described below.
As
previously reported in our Annual Report on Form 10-KSB for the year ended
December 31, 2007, we determined that, as of that date, there were material
weaknesses in our internal control over financial reporting relating to (1) the
financial reporting of a subsidiary, and (2) information technology applications
and infrastructure.
Item (1)
above was remediated during the first quarter of fiscal year 2008 as a result of
the sale of this subsidiary’s assets in February 2008. The material weaknesses
in our internal control over financial reporting related to item (2) continues
to persist through the current fiscal quarter. Accordingly, we are in the
process of developing and implementing a plan to address the material weakness
related to information technology applications and infrastructure. We have hired
a consulting firm to advise us in connection with remediation of this existing
deficiency.
Item
1. Legal
Proceedings
None
Item 1A. Risk
Factors
As a smaller reporting company,
the registrant is not required to provide a response to Item
1A.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
(a) During the second quarter of 2008, we issued an aggregate of 13,364
common shares to our non-employee directors as director fees for such
quarter. 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) each director represented
that he was an “accredited investor” and he acquired the shares for his 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.
Item
3. Defaults Upon
Senior Securities
None.
Item 4. Submission
of Matters to a Vote of Security Holders
There
were no matters submitted to a vote of security holders during the quarterly
period covered by this report.
Item
5. Other Information
None.
Item
6. Exhibits
|
2
|
Amended
and Restated Purchase and Sale Agreement, dated as of February 1, 2008, by
and among Premium Financing Specialists, Inc., Payments Inc. and DCAP
Group, Inc.1
|
|
|
|
|
3(a)
|
Restated
Certificate of Incorporation2
|
|
|
|
|
3(b)
|
Certificate
of Designation of Series A Preferred Stock3
|
|
|
|
|
3(c)
|
Certificate
of Designation of Series B Preferred Stock4
|
|
|
|
|
3(d)
|
Certificate
of Designation of Series C Preferred Stock5
|
|
|
|
|
3(e)
|
|
|
|
|
|
31(a)
|
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
|
|
|
|
|
31(b)
|
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
|
|
|
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
|
1 Denotes document filed as
an exhibit to our Current Report on Form 8-K for an event dated February 1, 2008
and incorporated herein by reference.
2 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.
3 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.
4 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.
5 Denotes document filed as
an exhibit to our Quarterly Report on Form 10Q-SB for the period ended March 31,
2008 and incorporated herein by reference.
6 Denotes
document filed as an exhibit to our Current Report on Form 8-K for an event
dated December 26, 2007 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 14, 2008
|
By:
|
/s/ Barry
B. Goldstein |
|
|
|
Barry
B.
Goldstein |
|
|
|
President |
|
|
|
|
|
|
|
|
|
|
By: |
/s/Victor
Brodsky |
|
|
|
Victor
Brodsky |
|
|
|
Chief
Accounting Officer |
|
30