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, 2004
------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File Number: 0-1665
DCAP GROUP, INC.
----------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 36-2476480
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(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
1158 Broadway, Hewlett, NY 11557
--------------------------------
(Address of Principal Executive Offices)
(516) 374-7600
--------------
(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
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: 2,512,424 shares as of October
31, 2004.
Transitional Small Business Disclosure Format (check one):
Yes No X
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INDEX
DCAP GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheet - September 30, 2004 (Unaudited)
Condensed Consolidated Statements of Income - Nine months ended
September 30, 2004 and 2003 (Unaudited)
Condensed Consolidated Statements of Income - Three Months ended
September 30, 2004 and 2003 (Unaudited)
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 2004 and 2003 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Nine months
ended September 30, 2004 and 2003 (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
2
Explanatory Note
----------------
All references in this Quarterly Report to numbers of common shares and per
share information give retroactive effect to the one-for-five reverse split of
our common shares effected as of August 26, 2004.
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, 2003 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.
3
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
--------------------
DCAP GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheet (Unaudited)
--------------------------------------------------------------------------------
September 30, 2004
--------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 2,247,163
Accounts receivable, net of allowance for
doubtful accounts of $62,000 1,973,081
Finance contracts receivable $25,980,085
Less: Deferred Interest (1,841,522)
Less: Allowance for doubtful accounts (169,804) 23,968,759
-----------
Prepaid expenses and other current assets 234,515
--------------
Total Current Assets 28,423,518
Property and Equipment, net 420,967
Goodwill 1,171,551
Other Intangibles, net 285,698
Deposits and Other Assets 319,027
-------------
Total Assets $30,620,761
============
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving credit line $13,512,193
Accounts payable and accrued expenses 907,859
Premiums payable 6,419,638
Current portion of long-term debt 125,000
Income taxes payable 657,532
Other current liabilities 365,039
-------------
Total Current Liabilities 21,987,261
-------------
Long-Term Debt 3,661,500
-------------
Other Liabilities 32,003
-------------
Mandatorily Redeemable Preferred Stock 904,000
-------------
Commitments
Stockholders' Equity:
Common Stock, $.01 par value; 10,000,000
shares authorized; 3,255,347 shares issued 32,553
Preferred Stock, $.01 par value; 1,000,000
shares authorized; 0 shares issued and outstanding -
Capital in excess of par 10,712,533
Deficit (5,780,434)
-------------
4,964,652
Treasury Stock, at cost, 742,923 shares (928,655)
-------------
Total Stockholders' Equity 4,035,997
-------------
Total Liabilities and Stockholders' Equity $30,620,761
============
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See notes to condensed consolidated financial statements.
4
DCAP GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
--------------------------------------------------------------------------------
Nine months ended September 30, 2004 2003
--------------------------------------------------------------------------------
Revenues:
Commissions and fees $ 5,326,539 $ 4,600,853
Premium finance revenue 6,049,173 1,074,406
--------------------------
11,375,712 5,675,259
--------------------------
Operating Expenses:
General and administrative expenses 8,345,040 4,675,907
Depreciation and amortization 313,423 165,189
Premium finance interest expense 932,146 92,651
--------------------------
Total Operating Expenses 9,590,609 4,933,747
--------------------------
Operating Income 1,785,103 741,512
----------------------------
Other (Expense) Income:
Interest income 7,212 7,597
Interest expense (24,965) (44,962)
Interest expense -
mandatorily redeemable preferred stock (33,900) (18,833)
Gain on sale of stores - 89,700
Gain on sale of book of business - 88,962
----------------------------
(51,653) 122,464
----------------------------
Income Before Provision for (Benefit of) Income Taxes 1,733,450 863,976
Provision for (Benefit of) Income Taxes 637,578 (182,922)
----------------------------
Income from Continuing Operations 1,095,872 1,046,898
Discontinued Operations:
Loss from discontinued operations - (46,096)
----------------------------
Net Income $ 1,095,872 $1,000,802
============================
Net Income Per Common Share:
Basic:
Income from continuing operations $ 0.44 $ 0.43
Loss from discontinued operations - (0.02)
----------------------------
Net income $ 0.44 $ 0.41
============================
Diluted:
Income from continuing operations $ 0.35 $ 0.40
Loss from discontinued operations - (0.02)
----------------------------
Net income $ 0.35 $ 0.38
============================
Weighted Average Number of Shares Outstanding:
Basic 2,491,333 2,470,680
============================
Diluted 3,244,947 2,681,088
============================
--------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
5
DCAP GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Income (Unaudited)
----------------------------------------------------------------------------------------------
Three months ended September 30, 2004 2003
----------------------------------------------------------------------------------------------
Revenues:
Commissions and fees $ 1,853,700 $ 1,585,191
Premium finance revenue 2,094,087 377,134
-----------------------------
3,947,787 1,962,325
-----------------------------
Operating Expenses:
General and administrative expenses 2,955,019 1,732,745
Depreciation and amortization 102,957 90,271
Premium finance interest expense 337,434 92,651
-----------------------------
Total Operating Expenses 3,395,410 1,915,667
-----------------------------
Operating Income 552,377 46,658
-----------------------------
Other (Expense) Income:
Interest income 1,771 2,794
Interest expense (6,846) (11,168)
Interest expense -
mandatorily redeemable preferred stock (11,300) (11,041)
Gain on sale of book of business - 88,962
-----------------------------
(16,375) 69,547
-----------------------------
Income Before Provision for (Benefit of) Income Taxes 536,002 116,205
Provision for (Benefit of) Income Taxes 161,191 (188,586)
-----------------------------
Net Income $ 374,811 $ 304,791
=============================
Net Income Per Common Share:
Basic $ 0.15 $ 0.12
=============================
Diluted $ 0.12 $ 0.11
=============================
Weighted Average Number of Shares Outstanding:
Basic 2,512,497 2,470,680
=============================
Diluted 3,245,876 2,811,636
=============================
--------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
6
DCAP GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
-------------------------------------------------------------------------------------------------
Nine months ended September 30, 2004 2003
-------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 1,095,872 $ 1,000,802
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 313,423 165,189
Bad debt expense - 42,098
Amortization of warrants 44,100 -
Gain on sale of stores - (89,700)
Gain on sale of book of business - (88,962)
Deferred income tax benefit - (200,000)
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (176,721) (478,848)
Prepaid expenses and other current assets (123,606) (222,475)
Deposits and other assets (114,474) (82,745)
Increase (decrease) in liabilities:
Premiums payable (110,581) 5,830,101
Accounts payable and accrued expenses (419,670) 91,107
Income taxes payable 657,532 -
Other current liabilities 152,849 (25,296)
-------------------------------
Net Cash Provided by Operating Activities 1,318,724 5,941,271
-------------------------------
Cash Flows from Investing Activities:
Increase in finance contracts receivable - net (4,884,598) (11,819,646)
Decrease in notes and other receivables - net 12,493 19,441
Business acquisition - (39,039)
Purchase of property and equipment (129,605) (74,535)
Proceeds from disposition of discontinued subsidiary - 500,000
Proceeds on sale of book of business - 112,925
Proceeds from sale of stores - 141,383
-------------------------------
Net Cash Used in Investing Activities (5,001,710) (11,159,471)
-------------------------------
Cash Flows from Financing Activities:
Principal payments on long-term debt (158,263) (368,965)
Proceeds from long-term debt - 3,500,000
Proceeds from revolving credit line 51,895,399 3,387,479
Payments on revolving credit line (47,351,288) (770,018)
Proceeds from exercise of warrants 194,997 -
-------------------------------
Net Cash Provided by Financing Activities 4,580,845 5,748,496
------------------------------
Net Increase in Cash and Cash Equivalents 897,859 530,296
Cash and Cash Equivalents, beginning of period 1,349,304 607,403
-------------------------------
Cash and Cash Equivalents, end of period $2,247,163 $1,137,699
===============================
--------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
7
DCAP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003 (UNAUDITED)
1. The Condensed Consolidated Balance Sheet as of September 30, 2004, the
Condensed Consolidated Statements of Income for the three and nine months
ended September 30, 2004 and 2003 and the Condensed Consolidated Statements
of Cash Flows for the nine months ended September 30, 2004 and 2003 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, 2004, results of operations for the
three and nine months ended September 30, 2004 and 2003 and cash flows for
the nine months ended September 30, 2004 and 2003.
This report should be read in conjunction with our Annual Report on Form
10-KSB for the year ended December 31, 2003.
The results of operations and cash flows for the nine months ended
September 30, 2004 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 (except for contingent commissions that are receivable
annually, which we recognize on a ratable basis) and on automobile club
dues equally over the contract period. Franchise fee revenue is recognized
when substantially all of our contractual requirements under the franchise
agreement are completed. Refunds of commissions on the cancellation of
insurance policies are reflected at the time of cancellation.
Prior to July 14, 2003, premium financing fee revenue was earned based upon
the origination of premium finance contracts sold by agreement to third
parties. The contract fee gave consideration to an estimate as to the
collectability of the loan amount. Periodically, actual results were
compared to estimates previously recorded, and adjusted accordingly.
On July 14, 2003, we changed our business model with respect to our premium
finance operations from selling finance contracts to third parties to
internally financing those contracts. To accomplish this, we obtained a
credit facility and commenced recording interest and fee-based revenue over
the life of each loan (generally 9 to 10 months) and expenses of operating
a finance company, such as servicing, bad debts and interest expense.
Thus, rather than recording a one-time fee per contract (as we did prior to
July 14, 2003), we are now recording income and expense over the life of
each contract, as well as receivables and payables relating to the
operations of a premium finance company. 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."
8
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. 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 $47,043 and $40,500 in such costs
was incurred during the nine months ended September 30, 2004 and 2003,
respectively.
d. Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for the nine months ended September 30, 2003 to conform with the
classifications used for the nine months ended September 30, 2004.
3. Business Segments:
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.
In December 2002, we disposed of our Hotel segment as part of a settlement
agreement. Accordingly, the segment information shown in the following
table excludes the activity of this segment for the nine months ended
September 30, 2004 and 2003.
Summarized financial information concerning our reportable segments is
shown in the following tables:
Nine Months Ended Premium
September 30, 2004 Insurance Finance Other(1) Total
----------------------- ---------- ---------- --------- -----------
Revenues from external
customers $5,326,539 $6,049,173 $ - $11,375,712
Interest income 7,212 - - 7,212
Interest expense 57,682 932,146 1,183 991,011
Depreciation and
amortization 128,458 161,934 23,031 313,423
Segment profit (loss)
before income taxes 1,284,412 1,379,568 (930,530) 1,733,450
Segment profit (loss) 770,647 827,741 (502,516) 1,095,872
Segment assets 3,915,060 25,680,697 1,025,004 30,620,761
------------
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
9
Nine Months Ended Premium
September 30, 2003 Insurance Finance Other(1) Total
------------------------ --------- ---------- -------- -----
Revenues from external
customers $4,600,853 $1,074,406 $ - $5,675,259
Interest income 1,223 - 6,374 7,597
Interest expense 63,795 92,651 - 156,446
Depreciation and
amortization 111,848 46,341 - 165,189
Segment profit (loss)
before income taxes 795,501 604,361 (535,886) 863,976
Segment profit (loss) 795,501 604,361 (352,964) 1,046,898
Segment assets 3,046,295 12,598,948 1,200,361 16,845,604
----------
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
4. Stock Options
-------------
We have elected the disclosure only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FASB 123") in accounting for our employee stock options. Accordingly, no
compensation expense has been recognized. Had we recorded compensation
expense for the stock options based on the fair value at the grant date for
awards in the nine and three months ended September 30, 2004 and 2003
consistent with the provisions of SFAS 123, our net income and net income
per share would have been adjusted as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
--------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------- ------------ ----------
Net income, as reported $1,095,872 $1,000,802 $374,811 $304,791
Deduct: Total stock-based employee
compensation expense determined
under fair value based method, net
of related tax effects (50,000) (59,000) (17,000) (23,000)
--------- --------- ------- -------
Pro forma net income $1,045,872 $941,802 $357,811 $281,791
========= ========= ======= =======
Net income per share:
Basic - as reported $0.44 $0.41 $0.15 $0.12
---- ---- ---- ----
Basic - pro forma $0.42 $0.38 $0.14 $0.11
---- ---- ---- ----
Diluted - as reported $0.35 $0.38 $0.12 $0.11
---- ---- ---- ----
Diluted - pro forma $0.33 $0.36 $0.11 $0.10
---- ---- ---- ----
10
5. Sale of Stores and Book of Business
-----------------------------------
During the nine months ended September 30, 2003, we sold two of our retail
offices (part of our Insurance segment) and the book of business relating
to one store for cash consideration aggregating approximately $254,000 and
a note receivable of approximately $97,000. These sales resulted in a gain
of approximately $179,000. The assets included accounts receivable of
approximately $97,000, goodwill with a carrying amount of $57,000, and
fixed assets with a carrying amount of approximately $10,000. In addition,
concurrently with the sale of the two retail stores, the purchasers entered
into franchise agreements with us.
6. Income Taxes
------------
Our tax benefit for the three and nine months ended September 30, 2003
reflects the anticipated utilization of estimated net operating loss
carryforwards that had previously been fully reserved and the reversal of
approximately 50% of the valuation allowance relating to the net operating
loss carryforward not subject to Internal Revenue Code Section 382. Our tax
provision for the three and nine months ended September 30, 2004 differs
from statutory rates as it results from an underaccrual of the 2003 tax
benefit.
7. Net Income Per Share
--------------------
Basic net income per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares
outstanding. Diluted earnings per share reflect, in periods in which they
have a dilutive effect, the impact of common shares issuable upon exercise
of stock options and conversion of mandatorily redeemable preferred stock.
The reconciliation is as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
2003 2004 2003 2004
--------- --------- --------- ---------
Weighted Average Number
of Shares Outstanding 2,491,333 2,470,680 2,512,497 2,470,680
Effect of Dilutive Securities,
Common Stock Equivalents 753,614 210,408 733,379 340,956
--------- --------- --------- ---------
Weighted Average Number of
Shares Outstanding, used for
computing diluted earnings
per share 3,244,947 2,681,088 3,245,876 2,811,636
========= ========= ========= ==========
11
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,
2004 2003 2004 2003
----------- ----------- --------- ---------
Net Income $1,095,872 $1,000,802 $374,811 $304,791
Interest Expense on Dilutive
Convertible Preferred Stock 33,900 18,833 11,300 11,041
---------- ---------- -------- --------
Net Income Available to Common
Shareholders for Diluted Earnings
Per Share $1,129,772 $1,019,635 $386,111 $315,832
========== ========== ======== ========
8. Exercise of Warrants
--------------------
During the nine months ended September 30, 2004, warrants were exercised
for the purchase of 22,727 common shares at an exercise price of $5.50 per
share and 19,090 common shares at an exercise price of $3.65 per share.
9. Reverse Stock Split
-------------------
On August 26, 2004, we effected a one-for-five reverse split of our common
shares. The $0.01 par value per share was not changed as a result of the
reverse split and $130,218 was transferred from common stock to capital in
excess of par value. Total shares outstanding decreased from 12,562,487 to
2,512,424 as a result of the reverse split. All references to numbers of
common shares and per share information give retroactive effect to the
one-for-five reverse split.
In connection with the reverse split, the number of authorized common
shares was reduced from 40,000,000 to 10,000,000.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
----------------------------------------------------------
Overview
We operate 25 storefronts, including 19 Barry Scott locations acquired
through our August 2002 acquisition of Barry Scott Companies, Inc., and five
Atlantic Insurance locations acquired through our May 2003 acquisition of
substantially all the assets of AIA Acquisition Corp. We also have 42 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 and homeowner's insurance and our customer base is primarily
individuals rather than businesses.
The stores receive commissions from insurance companies for their services.
We receive fees from the franchised locations in connection with their use of
the DCAP name. Neither we nor the stores currently serve as an insurance company
and therefore do not assume underwriting risks. The stores also offer automobile
club services for roadside assistance and income tax preparation services.
Payments Inc., our wholly-owned subsidiary, is an insurance premium finance
agency that offers premium financing to clients of DCAP, Barry Scott and
Atlantic Insurance offices, as well as non-affiliated insurance agencies. We
currently operate within the states of New York, Pennsylvania and New Jersey.
Critical Accounting Policies
Our consolidated financial statements include accounts of DCAP Group, Inc.
and all majority-owned and controlled subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements and related notes. In preparing these financial statements, our
management has utilized information available including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by our management in
formulating its estimates inherent in these financial statements might not
materialize. 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, except for contingent commissions that are receivable
annually, for which we recognize the commission revenue ratably. Refunds of
commissions on the cancellation of insurance policies are reflected at the time
of cancellation.
13
Franchise fee revenue 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
Finance income consists of interest, service fees and delinquency fees.
Finance income, other than delinquency fees, is recognized using the interest
method or similar methods that produce a level yield over the life of each loan
(generally nine to ten months). Delinquency fees are earned when collected.
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. The majority of these shortfalls result
in the write-off of such interest. 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.
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, 2004.
Stock-based compensation
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, to account for stock-based employee
compensation plans and report pro forma disclosures in our Form 10-QSB filings
by estimating the fair value of options issued and the related expense in
accordance with SFAS No. 123. Under this method, compensation cost is recognized
for awards of common shares or stock options to our directors, officers and
employees only if the quoted market price of the stock at the grant date (or
other measurement date, if later) is greater than the amount the grantee must
pay to acquire the stock.
14
Results of Operations
Our operating income for the nine months ended September 30, 2004 was
$1,785,103 as compared to $741,512 for the nine months ended September 30, 2003.
During the nine months ended September 30, 2004, revenues from our
insurance-related operations were $5,326,539 as compared to $4,600,853 for the
nine months ended September 30, 2003. The increase was generally due to the
revenues of our Atlantic Insurance stores (whose assets were acquired effective
May 1, 2003) as well as an increase in contingent commissions during the 2004
period.
Premium finance revenues increased $4,974,767 during the nine months ended
September 30, 2004 as compared to the nine months ended September 30, 2003, as
indicated by the following table:
Nine Months Ended
September 30,
2004 2003
------------------------
Revenue from sale of receivables $ - $ 683,497
Interest and late fee revenue 6,049,173 390,909
---------- ----------
Total $6,049,173 $1,074,406
========== ==========
During the period from January 1, 2003 until July 13, 2003, we recognized
premium finance revenue from the sale of premium finance receivables to a third
party and recorded a one-time fee per contract. On July 14, 2003, we obtained an
$18,000,000 two-year line of credit from Manufacturers and Traders Trust Co. to
finance our premium finance operations. Concurrently, we obtained $3,500,000 in
funding from a private placement of subordinated debt and warrants to support
our premium finance operations. We then began utilizing these credit facilities
and commenced recording interest and fee-based revenue over the life of each
loan and the expenses of operating a finance company, such as servicing, bad
debts and interest expense. Thus, rather than recording a one-time fee per
contact, we are recording income and expense over the life of each contract.
Effective November 2003, we began providing premium finance services to our
Barry Scott locations (following the expiration of a requirement that the
locations use another provider), and in March 2004 we began providing premium
finance services to our Atlantic Insurance offices.
Our general and administrative expenses for the nine months ended September
30, 2004 were $3,669,133 more than for the nine months ended September 30, 2003.
This increase was primarily due to the expenses of our Atlantic Insurance stores
(whose assets were acquired effective May 1, 2003) and the expenses of operating
a finance company, as discussed above, which we commenced on July 14, 2003.
Our depreciation and amortization expense for the nine months ended
September 30, 2004 was $148,234 more than for the nine months ended September
30, 2003. This increase was primarily the result of our recording amortization
of costs associated with obtaining the financing
15
discussed above.
During the nine months ended September 30, 2004, we incurred premium
finance interest expense of $932,146 as compared to $92,651 during the nine
months ended September 30, 2003. This increase was the result of the change in
our premium finance business in July 2003 as discussed above.
In May 2003, we issued redeemable preferred shares in connection with the
acquisition of the assets of AIA Acquisition Corp. and incurred interest expense
of $33,900 during the nine months ended September 30, 2004 as compared to
$18,833 during the nine months ended September 30, 2003.
During the nine months ended September 30, 2003, we sold two of our stores
and the book of business relating to one store, resulting in a gain of $178,662.
No such sales occurred during the nine months ended September 30, 2004.
During the nine months ended September 30, 2004, our provision for income
taxes was $637,578 as opposed to a tax benefit of $182,922 for the nine months
ended September 30, 2003. This was primarily due to the reversal of the
valuation allowance on our net operating loss carryforwards for the nine months
ended September 30, 2003. Our tax provision for the nine months ended September
30, 2004 differs from statutory rates as it results from an underaccrual of the
2003 tax benefit.
Our insurance-related operations, on a stand-alone basis, generated a net
profit before income taxes of $1,284,412 during the nine months ended September
30, 2004 as compared to a net profit before income taxes of $795,501 during the
nine months ended September 30, 2003. This increase was primarily the result of
the inclusion of AIA's operations and an increase in contingent commission
revenue during the 2004 period. Our premium finance operations, on a stand-alone
basis, generated a net profit before income taxes of $1,379,568 during the nine
months ended September 30, 2004 as compared to a net profit before income taxes
of $604,361 during the nine months ended September 30, 2003. The increase was
primarily due to increased profits resulting from the change in our business
model as discussed above. Loss before income taxes from corporate-related items
not allocable to reportable segments was $930,530 during the nine months ended
September 30, 2004 as compared to $535,886 during the nine months ended
September 30, 2003. This increase was primarily due to the gain on sale of
stores and book of business during the nine months ended September 30, 2003
while no sale of stores or book of business occurred during the nine months
ended September 30, 2004 as well as increased salary expense and the purchase of
directors and officers liability insurance during the nine months ended
September 30, 2004.
In January 2003, we discontinued the operations of the International
Airport Hotel in San Juan, Puerto Rico. During the nine months ended September
30, 2003, this discontinued operation generated a net loss of $46,096. There
were no such operations during the nine months ended September 30, 2004.
An action was recently brought by the New York State Attorney General
against Marsh & McLennan Companies, the nation's leading insurance brokerage
firm, alleging, among other things, that it had improperly steered clients to
insurers with whom it had lucrative contingent commission
16
arrangements. As a result of the ongoing investigation of this matter by the
Attorney General's office and others, we anticipate that there may be an
industry-wide change in the method by which insurance brokers are compensated.
We do not believe that any such change would have a material adverse effect on
our results of operations.
Liquidity and Capital Resources
As of September 30, 2004, we had $2,247,163 in cash and cash equivalents
and working capital of $6,436,257. As of December 31, 2003, we had $1,349,304 in
cash and cash equivalents and working capital of $5,168,694.
During the nine months ended September 30, 2004, our cash and cash
equivalents increased by $897,859. This was due to the following:
o Net cash provided by operating activities was $1,318,724 primarily due
our net income for the period of $1,095,872, plus an increase in taxes
payable of $657,532 and deprecation and amortization expenses of
$313,423, offset by a decrease in accounts payable and accrued
expenses of $419,670.
o We used $5,001,710 in investing activities primarily due to an
increase in our net finance contracts receivable of $4,884,598.
o Net cash provided by financing activities was $4,580,845 primarily due
to proceeds of $51,895,399 from our revolving credit line from
Manufacturers and Traders Trust Co. for premium finance purposes,
offset by payments of $47,351,288 on the revolving line.
Liquidity at September 30, 2004 was sufficient, in the opinion of
management, to meet our cash requirements for the 12 month period ending
September 30, 2005.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonably
likely to have a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Item 3. CONTROLS AND PROCEDURES
-----------------------
Our Chief Executive Officer and Chief Financial Officer conducted an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
September 30, 2004 in alerting him in a timely manner to material information
required to be included in our SEC reports. In addition, no change in our
internal control over financial reporting occurred during the fiscal quarter
ended September 30, 2004 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
-----------------------------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS
--------
3(a) Restated Certificate of Incorporation, as amended
3(b) Certificate of Amendment of the Restated Certificate of
Incorporation, filed August 25, 2004
3(c) By-laws, as amended(1)
10 Employment Agreement, dated September 24, 2004, by and between
DCAP Group, Inc. and Jack Willis
31 Rule 13a-14(a)/15d-14(a) Certification as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification of the Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
--------
1 Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB
for the period ended June 30, 2004 and incorporated herein by reference.
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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: November 9, 2004 By: /s/ Barry Goldstein
-------------------------------------
Barry Goldstein
President, Chairman of the Board,
Chief Executive Officer, Chief
Financial Officer and Treasurer
(Principal Executive, Financial and
Accounting Officer)
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