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, 2003
------------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
-------------------- ------------------------
Commission File Number: 0-1665
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DCAP GROUP, INC.
----------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 36-2476480
-------- -----------
(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)
------------------------------------------------
(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: 12,353,402 shares as of
October 31, 2003.
Transitional Small Business Disclosure Format (check one):
Yes No X
------ -------
INDEX
DCAP GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
------- ---------------------
Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheet - September 30, 2003 (Unaudited)
Condensed Consolidated Statements of Income - Nine months ended
September 30, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Income - Three months ended
September 30, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows - Nine months ended
September 30, 2003 and 2002 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Nine months
ended September 30, 2003 and 2002 (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. Changes in 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 and Reports on Form 8-K
SIGNATURES
2
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 following:
o our ability to obtain the necessary level of financing to expand our
premium finance operations
o increases in interest rates which would adversely affect our premium
finance margins
o the decline in the number of insurance companies offering insurance
products in our markets
o the volatility of insurance premium pricing
o government regulation
o competition from larger, better financed and more established
companies
o the possibility of tort reform and a resultant decrease in the demand
for insurance
o the dependence on our executive management
o our ability to raise additional capital which may be required.
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.
Explanatory Note
----------------
Throughout this Quarterly Report, the words "DCAP Group," "we," "our," and
"us" refer to DCAP Group, Inc. and the operations of DCAP Group, Inc. as a
whole. References to "DCAP Insurance" and the "DCAP Companies" in this Quarterly
Report mean our wholly-owned subsidiary, Dealers Choice Automotive Planning,
Inc., and affiliated companies, and the operations of our insurance-related
subsidiaries.
3
PART I. FINANCIAL INFORMATION
---------------------
Item 1. FINANCIAL STATEMENTS
--------------------
DCAP GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
September 30, 2003
------------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 1,137,699
Accounts receivable, net of allowance for doubtful
accounts of $58,190 1,174,360
Finance contracts receivable, net of deferred interest
of $1,226,706 and allowance for doubtful accounts
of $85,495 11,819,646
Prepaid expenses and other current assets 315,044
Deferred tax asset 200,000
-------------
Total current assets 14,646,749
-------------
PROPERTY AND EQUIPMENT, net 367,706
-------------
OTHER ASSETS:
Goodwill 1,104,551
Other intangibles, net 369,519
Deposits and other assets 357,079
-------------
Total other assets 1,831,149
-------------
$16,845,604
=============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 776,901
Premiums payable 5,830,101
Current portion of long-term debt 125,000
Current portion of capital lease obligations 47,187
Revolving loan 2,617,461
Deferred revenue 45,259
Debentures payable 154,200
-------------
Total current liabilities 9,596,109
-------------
LONG-TERM DEBT 3,860,000
-------------
CAPITAL LEASE OBLIGATIONS 8,047
-------------
DEFERRED REVENUE 21,321
-------------
MANDATORILY REDEEMABLE PREFERRED STOCK 904,000
-------------
STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
40,000,000 shares; issued 16,068,018 160,680
Preferred Stock, $.01 par value; authorized 1,000,000
shares; 0 shares issued and outstanding -
Capital in excess of par 10,389,409
Deficit (7,165,307)
------------
3,384,782
Treasury Stock, at cost, 3,714,616 (928,655)
------------
2,456,127
------------
$16,845,604
============
See notes to condensed consolidated financial statements.
4
DCAP GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Nine months ended
September 30,
------------------------------
2003 2002
------------ -------------
Revenues:
Commissions and fees $ 4,600,853 $ 1,276,675
Premium finance revenue 1,074,406 855,668
------------ -------------
Total revenues 5,675,259 2,132,343
------------ -------------
Operating Expenses:
Selling, general and administrative 4,675,907 1,690,345
Depreciation and amortization 165,189 95,803
------------ -------------
Total operating expenses 4,841,096 1,786,148
------------ -------------
Operating Income 834,163 346,195
Other (Expense) Income:
Interest income 7,597 1,822
Interest expense (137,613) (44,193)
Interest expense -
mandatorily redeemable preferred stock (18,833) -
Gain on sale of stores 89,700 -
Gain on sale of book of business 88,962 -
------------ -------------
29,813 (42,371)
------------ -------------
Income before income taxes
and minority interest 863,976 303,824
(Benefit) provision for income taxes (182,922) 8,283
------------ -------------
Income before minority interest 1,046,898 295,541
Minority interest - 1,936
------------ -------------
Income from continuing operations 1,046,898 293,605
Discontinued operations:
(Loss) income from discontinued operations (46,096) 49,438
------------ -------------
Net income $ 1,000,802 $ 343,043
============ =============
Net income per common share:
Basic:
Income from continuing operations $ 0.08 $ 0.03
(Loss) income from discontinued operations (0.00) 0.00
------------ -------------
Net income $ 0.08 $ 0.03
============ =============
Diluted:
Income from continuing operations $ 0.07 $ 0.03
(Loss) income from discontinued operations (0.00) 0.00
------------ -------------
Net income $ 0.07 $ 0.03
============ =============
Weighted average number of shares outstanding:
Basic 12,353,402 11,474,281
============ =============
Diluted 13,405,441 11,656,367
============ =============
See notes to condensed consolidated financial statements.
5
DCAP GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three months ended
September 30,
-------------------------------
2003 2002
------------ -------------
Revenues:
Commissions and fees $ 1,585,191 $ 577,440
Premium finance revenue 377,134 428,572
------------ -------------
Total revenues 1,962,325 1,006,012
------------ -------------
Operating Expenses:
Selling, general and administrative 1,732,745 702,057
Depreciation and amortization 90,271 36,063
------------ -------------
Total operating expenses 1,823,016 738,120
------------ -------------
Operating Income 139,309 267,892
Other (Expense) Income:
Interest income 2,794 624
Interest expense (103,819) (15,293)
Interest expense -
mandatorily redeemable preferred stock (11,041) -
Gain on sale of book of business 88,962 -
------------ -------------
(23,104) (14,669)
------------ -------------
Income before income taxes and minority interest 116,205 253,223
(Benefit) provision for income taxes (188,586) 7,860
------------ -------------
Income from continuing operations 304,791 245,363
Discontinued operations:
Income from discontinued operations - 10,381
------------ -------------
Net income $ 304,791 $ 255,744
============ =============
Net income per common share:
Basic:
Income from continuing operations $ 0.02 $ 0.02
Income from discontinued operations 0.00 0.00
------------ -------------
Net income $ 0.02 $ 0.02
============ =============
Diluted:
Income from continuing operations $ 0.02 $ 0.02
Income from discontinued operations 0.00 0.00
------------ -------------
Net income $ 0.02 $ 0.02
============ =============
Weighted average number of shares outstanding:
Basic 12,353,402 11,712,098
============ =============
Diluted 14,058,179 12,105,812
============ =============
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,
------------------------------
2003 2002
-------------- -------------
Cash flows from operating activities:
Net income $ 1,000,802 $ 343,043
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 165,189 107,416
Provision for bad debts 42,098 8,819
Gain on sale of stores (89,700) -
Gain on sale of book of business (88,962) -
Deferred income tax benefit (200,000) -
Minority interest - 1,936
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Finance contracts receivable (11,819,646) -
Accounts receivable (478,848) (67,351)
Prepaid expenses and other current assets (222,475) 7,696
Deposits and other assets (82,745) (5,434)
Increase (decrease) in liabilities:
Premiums payable 5,830,101 -
Accounts payable and accrued expenses 91,107 (80,989)
Deferred revenue (25,296) (23,131)
------------ ------------
Net cash (used in) provided by operating activities (5,878,375) 292,005
------------ ------------
Cash flows from investing activities:
Decrease in notes receivable - net 19,441 4,667
Acquisition costs on purchase of AIA stores (39,039) -
Proceeds from disposition of discontinued subsidiary 500,000 -
Proceeds on sale of DCAP stores 141,383 -
Proceeds on sale of book of business 112,925 -
Purchase of property and equipment (74,535) (10,023)
Acquisition of Barry Scott Companies - (325,000)
Acquisition of minority interest - (40,000)
Proceeds from sale of property and equipment - 36,610
------------ ------------
Net cash provided by (used in) investing activities 660,175 (333,746)
------------ ------------
Cash flows from financing activities:
Principal payment of long-term debt and
capital lease obligations (368,965) (84,943)
Proceeds from long-term debt 3,500,000 -
Proceeds from revolving loan 3,387,479 -
Payments on revolving loan (770,018) -
Proceeds from private placement - 500,000
Decrease in due to officer - (33,333)
------------ ------------
Net cash provided by financing activities 5,748,496 381,724
------------ ------------
Net increase in cash and cash equivalents 530,296 339,983
Cash and cash equivalents, beginning of period 607,403 220,774
------------ ------------
Cash and cash equivalents, end of period $1,137,699 $ 560,757
============ ============
See notes to condensed consolidated financial statements.
7
DCAP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002 (UNAUDITED)
1. The Condensed Consolidated Balance Sheet as of September 30, 2003, the
Condensed Consolidated Statements of Operations for the three and nine
months ended September 30, 2003 and 2002 and the Condensed Consolidated
Statements of Cash Flows for the nine months ended September 30, 2003 and
2002 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, 2003, results of operations for the
three and nine months ended September 30, 2003 and 2002 and cash flows for
the nine months ended September 30, 2003 and 2002. This report should be
read in conjunction with our Annual Report on Form 10-KSB for the year
ended December 31, 2002.
The results of operations and cash flows for the nine months ended
September 30, 2003 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 those commissions payable 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 10 or 11 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
contact, 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
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 $40,500 and -0- in such costs was
incurred during the nine months ended September 30, 2003 and 2002,
respectively.
d. Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for the nine months ended September 30, 2002 to conform with the
classifications used for the nine months ended September 30, 2003.
3. Acquisition of AIA Acquisition Corp.
------------------------------------
On May 28, 2003, we acquired, effective May 1, 2003, substantially all of
the assets of AIA Acquisition Corp. ("AIA"), an insurance brokerage firm
with six offices located in Eastern Pennsylvania for a base purchase price
of $904,000. The base purchase price was payable with 904 shares of our
Series A Preferred Stock. The Series A Preferred Stock carries a 5%
dividend, is convertible into our Common Stock at a conversion price of
$.50 per share and is redeemable on April 30, 2007 (or sooner under certain
circumstances). Additional cash consideration based upon the EBITDA of the
combined operations of AIA and our wholly-owned subsidiary, Barry Scott
Companies, Inc., during the five year period ending April 30, 2008 may be
payable. The additional consideration cannot exceed an aggregate of
$335,000. The AIA insurance agencies derive substantially all of their
income from commissions and fees associated with the sale of automobile
insurance. The acquisition allows for the expansion of our geographical
footprint outside New York State and allows for us to capitalize on
operational and administrative efficiencies.
On May 28, 2003, we entered into a two year employment contract with a
former employee of AIA.
The goodwill amount recorded at May 1, 2003 is comprised of the following:
(i) the excess of the purchase price over the tangible net assets and
identified intangibles acquired; and (ii) the estimated direct transaction
costs associated with the acquisition.
Our condensed consolidated statements of operations include the revenues
and expenses of AIA from May 1, 2003.
The following pro forma results were developed assuming the acquisition of
AIA had occurred on January 1, 2002:
Nine months ended
September 30,
--------------------------
2003 2002
---- ----
Revenues $6,088,303 $3,110,159
Income from
continuing operations 1,058,119 364,962
Income from continuing
operations per share 0.09 0.03
The above unaudited pro forma condensed financial information is presented
for illustrative
9
purposes only and is not necessarily indicative of the condensed
consolidated results of operations that actually would have been realized
had we and AIA been a combined company during the specified periods.
4. 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, 2003 and 2002.
Summarized financial information concerning our reportable segments is
shown in the following tables:
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 118,848 46,341 - 165,189
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.
Nine Months Ended Premium
September 30, 2002 Insurance Finance Other(1) Total
---------------------- ---------- -------- -------- ----------
Revenues from external
customers $1,276,675 $855,668 - $2,132,343
Interest income 1,534 - 288 1,822
Interest expense 44,193 - - 44,193
Depreciation and
amortization 95,803 - - 95,803
Segment (loss) profit (29,814) 669,741 (346,322) 293,605
Segment assets 2,000,784 250,464 366,029 2,617,277
----------
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
10
5. Stock Options
-------------
We have elected the disclosure only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("SFAS 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 months ended September 30, 2003 and 2002 consistent with
the provisions of SFAS 123, our net income and net income per share would
have been adjusted as follows:
Nine Months Ended
September 30,
--------------------------
2003 2002
---- ----
Net income, as reported $1,000,802 $343,043
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effects 59,000 352,000
---------- --------
Pro forma net income (loss) $ 941,802 $ (8,957)
========== ========
Net income (loss) per share:
Basic -as reported $ 0.08 $ 0.03
---------- --------
Basic -pro forma $ 0.08 $ (0.00)
---------- --------
Diluted- as reported $ 0.07 $ 0.03
---------- --------
Diluted- pro forma $ 0.07 $ (0.00)
---------- --------
6. 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 $178,000. 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.
7. Income Taxes
------------
Our tax benefit for the three and nine months ended September 30, 2003
reflects the anticipated utilization of net operating loss carryforwards
that had previously been fully reserved. We also reversed approximately 50%
of the valuation allowance relating to the net operating loss carryforward
not subject to Internal Revenue Code Section 382.
8. Credit Facilities:
------------------
In July, 2003, in connection with our premium finance operations, we
obtained an $18,000,000 revolving line of credit from Manufacturers and
Traders Trust Co. ("M&T") that is due in July, 2005. Interest on this line
is payable at the rate of prime plus 1.5%. Concurrently, we obtained a
$3,500,000 secured subordinated loan, that is repayable in January, 2006
and carries interest at the rate of 12-5/8% per annum. In connection with
the
11
$3,500,000 debt financing, we issued warrants for the purchase of 525,000
shares of our Common Stock at an exercise price of $1.25 per share. The
warrants expire on January 10, 2006. The fair value of the warrants has
been capitalized as loan origination costs, and is being charged to
operations over the life of the loan.
The loan agreement with M&T required Barry Goldstein, our Chairman and CEO,
to personally guaranty the repayment of $2,500,000 of the loans made by
M&T. In consideration of this guaranty, we agreed to pay to Mr. Goldstein
$50,000 per annum while the guaranty is outstanding.
12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
----------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003 AND 2002
Results of Operations
Our net income for the nine months ended September 30, 2003 was $1,000,802
as compared to $343,043 for the nine months ended September 30, 2002.
During the nine months ended September 30, 2003, revenues from our
insurance-related operations were $4,600,853 as compared to $1,276,675 for the
nine months ended September 30, 2002. The increase in revenues was generally due
to revenues from the Barry Scott Companies, Inc., which we acquired on August
30, 2002, and AIA Acquisition Corp. whose assets we acquired effective May 1,
2003.
Premium finance revenues increased $218,738 during the nine months ended
September 30, 2003 as compared to the nine months ended September 30, 2002 as
indicated by the following table:
2003 2002
---- ----
Revenue from sale of receivables $ 683,497 $855,668
Interest and late fee revenue 390,909 0
---------- --------
Total $1,074,406 $855,668
========== ========
This increase was primarily the result of higher average premiums being
financed during the first two quarters of 2003. 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 an $18,000,000 two-year line of credit from
Manufacturers and Traders Trust Company ("M&T") 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. On July 14, 2003, we began utilizing these credit facilities and
commenced recording interest and fee-based revenue over the life of each loan
(generally 10 or 11 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. This resulted in a
reduction in premium finance revenue in the third quarter of 2003 as compared to
the third quarter of 2002 and the second quarter of 2003 and partially offset
the increases from the initial two quarters of 2003. It will take approximately
four months of operations under the new method to realize the same income as the
previous method.
Our selling, general and administrative expenses for the nine months ended
September 30, 2003 were $2,985,562 more than for the nine months ended September
30, 2002. This increase was primarily due to the expenses of the Barry Scott
Companies acquired on August 30, 2002 and AIA Acquisition Corp. whose assets
were acquired effective May 1, 2003.
Our depreciation and amortization expense and our interest expense for the
nine months ended September 30, 2003 were $69,386 and $93,420 more,
respectively, than for the nine months ended September 30, 2002. The increases
were primarily the result of our recording amortization of costs associated with
obtaining the financing discussed above as well as the interest expense incurred
thereon.
13
During the nine months ended September 30, 2003, we issued redeemable
Preferred Stock in connection with the acquisition of the assets of AIA
Acquisition Corp. and incurred interest expense of $18,833. No Preferred Stock
was outstanding during the nine months ended September 30, 2002.
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, 2002.
Our tax benefit for the nine months ended September 30, 2003 was $182,922
as opposed to a tax provision of $8,283 for the nine months ended September 30,
2002. The difference represents the reversal of approximately 50% of the
valuation allowance relating to certain net operating loss carryforwards
previously reserved.
Our insurance-related operations, on a stand-alone basis, generated a net
profit of $795,501 during the nine months ended September 30, 2003 as compared
to a loss of $29,814 during the nine months ended September 30, 2002. Our
premium finance operations, on a stand-alone basis, generated a net profit of
$604,361 during the nine months ended September 30, 2003 as compared to a net
profit of $669,741 during the nine months ended September 30, 2002. Losses from
corporate-related items not allocable to reportable segments were $352,964
during the nine months ended September 30, 2003 as compared to $346,322 during
the nine months ended September 30, 2002.
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 as
compared to a net profit of $49,438 during the nine months ended September 30,
2002.
Liquidity and Capital Resources
As of September 30, 2003, we had $1,137,699 in cash and cash equivalents
and working capital of $5,050,640. As of December 31, 2002, we had $607,403 in
cash and cash equivalents and working capital of $904,232.
During the nine months ended September 30, 2003, our cash and cash
equivalents increased by $530,296. This was due to the following:
o We received loan proceeds of $6,887,479, and made payments due on
these obligations and capital lease payments aggregating
$1,138,983, resulting in a net increase of $5,748,496 from our
financing activities.
o We disposed of our Hotel segment for $500,000, as well as certain
other assets, resulting in an increase in cash from investing
activities of $660,175.
o We used net cash of $5,878,375 in our operating activities. This
was primarily due to an increase in our finance contracts
receivable of $11,819,646, offset by an increase in premiums
payable of $5,830,101 and our net income for the period of
$1,000,802.
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, 2003 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, 2003 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.
14
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
None
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
On July 10, 2003, we borrowed an aggregate of $3,500,000 from lenders
(collectively, the "Lenders") in a private offering of secured subordinated
debt. In connection with the borrowing, we issued warrants to the Lenders for
the purchase of an aggregate of 525,000 shares of our Common Stock
(collectively, the "Warrants"). The Warrants are exercisable through January 10,
2006 at an exercise price of $1.25 per share.
The above offering of Warrants 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 of the Lenders represented that it was an
"accredited investor"; (ii) each represented that it acquired the Warrants for
its own account; (iii) the certificate representing the Warrants bears a
restrictive legend permitting transfer only upon the registration of the
Warrants or pursuant to an exemption from such registration requirements; and
(iv) we did not offer or sell the Warrants 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
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
3(a) Certificate of Incorporation, as amended1
3(b) By-laws, as amended1
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 September 30, 2002 and incorporated herein by reference.
15
(b) Reports on Form 8-K
-------------------
Four Current Reports on Form 8-K were filed by us during the quarter
ended September 30, 2003 as follows:
(i) Date of Report: July 7, 2003
Items reported: 5 and 7
(ii) Date of Report: July 14, 2003
Items reported: 5 and 7
(iii) Date of Report: May 28, 2003 (Amendment)
Item reported: 7
(iv) Date of Report: August 7, 2003
Items reported: 7 and 12
16
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 12, 2003 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)
17