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
March 31,
2008
|
|
[ ]
|
Transition
report under Section 13 or 15(d) of the Exchange Act
|
|
|
For
the transition period
from to
|
|
|
Commission
File Number:
0-1665
|
DCAP GROUP,
INC.
(Exact
Name of Small Business Issuer as Specified in its Charter)
Delaware
(State
or Other Jurisdiction of
Incorporation
or Organization)
|
36-2476480
(I.R.S.
Employer
Identification
No.)
|
1158 Broadway, Hewlett, NY
11557
(Address
of Principal Executive Offices)
(516)
374-7600
(Issuer’s
Telephone Number, Including Area Code)
________________________________________________
(Former
Name, Former Address and Former Fiscal Year, if Changed
Since
Last Report)
Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes_
X
__ No____
Indicate
by check mark whether the registrant is a shell company (as defined by Rule
12b-2 of the Exchange Act). Yes
____ No
X
APPLICABLE
ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY
PROCEEDINGS DURING THE
PRECEDING
FIVE YEARS
Check
whether the registrant filed all documents and reports required to be filed by
Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities
under a plan confirmed by a
court. Yes No
APPLICABLE
ONLY TO CORPORATE ISSUERS
State the
number of shares outstanding of each of the issuer's classes of common equity,
as of the latest practicable date: 2,977,108 shares as of April 28,
2008.
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 Sheets – March 31, 2008 (Unaudited) and December 31,
2007
|
|
|
|
Condensed
Consolidated Statements of Operations - Three months ended March 31, 2008
and 2007 (Unaudited)
|
|
|
|
Condensed
Consolidated Statements of Cash Flows - Three months ended March 31, 2008
and 2007 (Unaudited)
|
|
|
|
Notes
to Condensed Consolidated Financial Statements - Three months ended March
31, 2008 and 2007 (Unaudited)
|
|
|
Item
2.
|
Management's
Discussion and Analysis or Plan of Operation
|
Item
3A(T).
|
Controls
and Procedures
|
|
|
PART
II
.
|
OTHER
INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
Item
3.
|
Defaults
Upon Senior Securities
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
Item
5.
|
Other
Information
|
Item
6.
|
Exhibits
|
|
|
SIGNATURES
|
Forward-Looking
Statements
This
Quarterly Report contains forward-looking statements as that term is defined in
the federal securities laws. The events described in forward-looking
statements contained in this Quarterly Report may not
occur. Generally these statements relate to business plans or
strategies, projected or anticipated benefits or other consequences of our plans
or strategies, projected or anticipated benefits from acquisitions to be made by
us, or projections involving anticipated revenues, earnings or other aspects of
our operating results. The words "may," "will," "expect," "believe,"
"anticipate," "project," "plan," "intend," \"estimate," and "continue," and their
opposites and similar expressions are intended to identify forward-looking
statements. We caution you that these statements are not guarantees
of future performance or events and are subject to a number of uncertainties,
risks and other influences, many of which are beyond our control, that may
influence the accuracy of the statements and the projections upon which the
statements are based. Factors which may affect our results include,
but are not limited to, the risks and uncertainties discussed in Item 6 of our
Annual Report on Form 10-KSB for the year ended December 31, 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
|
|
|
|
|
|
|
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
Assets
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
313,139
|
|
|
$
|
1,030,822
|
|
Accounts
receivable, net of allowance for doubtful accounts of
|
|
|
|
|
|
|
|
|
$50,000
at March 31, 2008 and December 31, 2007
|
|
|
796,323
|
|
|
|
801,718
|
|
Prepaid
income taxes
|
|
|
84,056
|
|
|
|
76,723
|
|
Prepaid
expenses and other current assets
|
|
|
103,331
|
|
|
|
218,881
|
|
Assets
from discontinued operations
|
|
|
253,685
|
|
|
|
12,651,223
|
|
Total
current assets
|
|
|
1,550,534
|
|
|
|
14,779,367
|
|
Property
and equipment, net
|
|
|
418,669
|
|
|
|
464,824
|
|
Goodwill
|
|
|
2,601,257
|
|
|
|
2,601,257
|
|
Other
intangibles, net
|
|
|
132,099
|
|
|
|
150,910
|
|
Notes
receivable
|
|
|
5,477,915
|
|
|
|
5,170,804
|
|
Deposits
and other assets
|
|
|
68,137
|
|
|
|
78,164
|
|
Total
assets
|
|
$
|
10,248,611
|
|
|
$
|
23,245,326
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and Stockholders' Equity
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
747,783
|
|
|
$
|
630,412
|
|
Current
portion of long-term debt
|
|
|
1,976,751
|
|
|
|
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
|
|
|
2,878,734
|
|
|
|
16,180,906
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
473,681
|
|
|
|
499,065
|
|
Deferred
income taxes
|
|
|
151,000
|
|
|
|
408,000
|
|
Mandatorily
redeemable preferred stock
|
|
|
780,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Commitments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
stock, $.01 par value; authorized 10,000,000 shares;
issued
|
|
|
|
|
|
|
|
|
3,758,531
at March 31, 2008 and 3,750,447 shares at December 31,
2007
|
|
|
37,586
|
|
|
|
37,505
|
|
Preferred
stock, $.01 par value; authorized
|
|
|
|
|
|
|
|
|
1,000,000
shares; 0 shares issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Capital
in excess of par
|
|
|
11,888,290
|
|
|
|
11,850,872
|
|
Deficit
|
|
|
(4,774,900
|
)
|
|
|
(4,545,242
|
)
|
|
|
|
7,150,976
|
|
|
|
7,343,135
|
|
Treasury
stock, at cost, 781,423 shares at March 31, 2008 and December 31,
2007
|
|
|
(1,185,780
|
)
|
|
|
(1,185,780
|
)
|
Total
stockholders' equity
|
|
|
5,965,196
|
|
|
|
6,157,355
|
|
Total
liabilities and stockholders' equity
|
|
$
|
10,248,611
|
|
|
$
|
23,245,326
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited)
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Commissions
and fee revenue
|
|
$
|
1,316,691
|
|
|
$
|
1,613,239
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
1,660,911
|
|
|
|
1,695,315
|
|
Depreciation
and amortization
|
|
|
71,782
|
|
|
|
70,989
|
|
Total
operating expenses
|
|
|
1,732,693
|
|
|
|
1,766,304
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(416,002
|
)
|
|
|
(153,065
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,186
|
|
|
|
1,353
|
|
Interest
income - notes receivable
|
|
|
307,111
|
|
|
|
324,298
|
|
Interest
expense
|
|
|
(82,722
|
)
|
|
|
(132,705
|
)
|
Interest
expense - mandatorily redeemable preferred stock
|
|
|
(9,750
|
)
|
|
|
(9,750
|
)
|
Gain
on sale of book of business
|
|
|
-
|
|
|
|
62,467
|
|
Total
other income
|
|
|
216,825
|
|
|
|
245,663
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations before (benefit from) provision for
income taxes
|
|
|
(199,177
|
)
|
|
|
92,598
|
|
(Benefit
from) provision for income taxes
|
|
|
(89,629
|
)
|
|
|
41,669
|
|
(Loss)
income from continuing operations
|
|
|
(109,548
|
)
|
|
|
50,929
|
|
(Loss)
income from discontinued operations, net of income taxes
|
|
|
(120,110
|
)
|
|
|
37,865
|
|
Net
(loss) income
|
|
$
|
(229,658
|
)
|
|
$
|
88,794
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Per Common Share:
|
|
|
|
|
|
|
|
|
Basic
and Diluted:
|
|
|
|
|
|
|
|
|
(Loss)
income from continuing operations
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
(Loss)
income from discontinued operations
|
|
$
|
(0.04
|
)
|
|
$
|
0.01
|
|
(Loss)
income per common share
|
|
$
|
(0.08
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares Outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
2,969,024
|
|
|
|
2,941,491
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
2,969,024
|
|
|
|
3,283,525
|
|
|
|
|
|
|
|
|
|
|
See
notes to condensed consolidated financial statements.
DCAP
GROUP, INC. AND
|
|
SUBSIDIARIES
|
|
|
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited)
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Cash
Flows from Operating Activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(229,658
|
)
|
|
$
|
88,794
|
|
Adjustments
to reconcile net (loss) income to net cash
|
|
|
|
|
|
|
|
|
(used
in) provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
71,782
|
|
|
|
70,990
|
|
Accretion
of discount on notes receivable
|
|
|
(246,955
|
)
|
|
|
(246,951
|
)
|
Amortization
of warrants
|
|
|
5,910
|
|
|
|
19,305
|
|
Stock-based
payments
|
|
|
37,499
|
|
|
|
5,000
|
|
Gain
on sale of book of business
|
|
|
-
|
|
|
|
(62,467
|
)
|
Deferred
income taxes
|
|
|
(257,000
|
)
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in assets:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
5,395
|
|
|
|
324,072
|
|
Prepaid
expenses and other current assets
|
|
|
(37,278
|
)
|
|
|
(95,870
|
)
|
Deposits
and other assets
|
|
|
10,027
|
|
|
|
2,172
|
|
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
117,371
|
|
|
|
(136,562
|
)
|
Income
taxes payable
|
|
|
(7,333
|
)
|
|
|
73,109
|
|
Other
current liabilities
|
|
|
-
|
|
|
|
68,149
|
|
Net
cash (used in) provided by operating activities of continuing
operations
|
|
|
(530,240
|
)
|
|
|
109,741
|
|
Operating
activities of discontinued operations
|
|
|
(578,296
|
)
|
|
|
511,738
|
|
Net
Cash (Used in) Provided by Operating Activities
|
|
|
(1,108,536
|
)
|
|
|
621,479
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities:
|
|
|
|
|
|
|
|
|
Decrease
in notes and other receivables - net
|
|
|
104,992
|
|
|
|
35,663
|
|
Proceeds
from sale of book of business
|
|
|
-
|
|
|
|
63,000
|
|
Purchase
of property and equipment
|
|
|
(6,816
|
)
|
|
|
(51,825
|
)
|
Net
cash provided by investing activities of continuing
operations
|
|
|
98,176
|
|
|
|
46,838
|
|
Investing
activities of discontinued operations
|
|
|
1,008,386
|
|
|
|
321
|
|
Net
Cash Provided by Investing Activities
|
|
|
1,106,562
|
|
|
|
47,159
|
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities:
|
|
|
|
|
|
|
|
|
Principal
payments on long-term debt
|
|
|
(153,532
|
)
|
|
|
(130,000
|
)
|
Proceeds
from exercise of options and warrants
|
|
|
-
|
|
|
|
99,000
|
|
Net
cash used in financing activities of continuing operations
|
|
|
(153,532
|
)
|
|
|
(31,000
|
)
|
Financing
activities of discontinued operations
|
|
|
(562,177
|
)
|
|
|
(786,707
|
)
|
Net
Cash Used in Financing Activities
|
|
|
(715,709
|
)
|
|
|
(817,707
|
)
|
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(717,683
|
)
|
|
|
(149,069
|
)
|
Cash
and Cash Equivalents, beginning of period
|
|
|
1,030,822
|
|
|
|
1,196,412
|
|
Cash
and Cash Equivalents, end of period
|
|
$
|
313,139
|
|
|
$
|
1,047,343
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-Cash Investing and Financing Activities:
|
|
|
|
|
|
|
|
|
Liabilities
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
THREE
MONTHS ENDED MARCH 31, 2008 AND 2007
1.
Basis of Presentation
The
Condensed Consolidated Balance Sheet as of March 31, 2008, the Condensed
Consolidated Statements of Operations for the three months ended March 31, 2008
and 2007 and the Condensed Consolidated Statements of Cash Flows for the three
months ended March 31, 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 March 31, 2008,
results of operations for the three months ended March 31, 2008 and 2007 and
cash flows for the three months ended March 31, 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 three months ended March 31, 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 three months ended March 31, 2008 and
2007, approximately $-0- and $50,000, 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 $6,000 and $43,000 in such capitalized costs were
incurred during the three months ended March 31, 2008 and 2007,
respectively.
Reclassifications
Certain
reclassifications have been made to the consolidated financial statements for
the three months ended March 31, 2007 to conform to the classifications used for
the three months ended March 31, 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 (which
order has been stayed pending appeal). 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 three months ended March
31, 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 three months ended March 31,
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 during the
fiscal year ending 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 three month periods ended March 31, 2008 and 2007 include
share-based compensation expense totaling approximately $24,000 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 three months ended March 31,
2008 or 2007.
The
following table represents our stock options granted, exercised, and forfeited
during the first quarter 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
|
|
|
8,050
|
|
|
$
|
2.58
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at March 31, 2008
|
|
|
260,574
|
|
|
$
|
2.53
|
|
|
|
3.88
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at March 31, 2008
|
|
|
107,881
|
|
|
$
|
2.87
|
|
|
|
3.30
|
|
|
$
|
-
|
|
The
aggregate intrinsic value of options outstanding and options exercisable at
March 31, 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 $1.67 closing price of our common
shares on March 31, 2008. We received cash proceeds from options
exercised in the three months ended March 31, 2008 and 2007 of approximately $0
and $99,000, respectively.
As of
March 31, 2008, the fair value of unamortized compensation cost related to
unvested stock option awards was approximately $121,000. Unamortized
compensation cost as of March 31, 2008 is expected to be recognized over a
remaining weighted-average vesting period of 2.45 years.
5.
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 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 three months ended March 31, 2007, the inclusion
of 202,300 of options and warrants in the computation of diluted earnings per
share would have been anti-dilutive. During the three months ended
March 31, 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 670,074 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 for the three months ended March 31, 2008 and 2007 is as
follows:
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
2,969,024
|
|
|
|
2,941,491
|
|
Effect
of dilutive securities, common share equivalents
|
|
|
-
|
|
|
|
342,034
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding,
|
|
|
|
|
|
|
|
|
used
for computing diluted earnings per share
|
|
|
2,969,024
|
|
|
|
3,283,525
|
|
Net
(loss) income from continuing operations available to common shareholders for
the computation of diluted earnings (loss) per share is computed as
follows:
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations
|
|
$
|
(109,548
|
)
|
|
$
|
50,929
|
|
Interest
expense on dilutive convertible preferred stock
|
|
|
-
|
|
|
|
9,750
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income from continuing operations available
|
|
|
|
|
|
|
|
|
to
common shareholders for diluted earnings (loss) per share
|
|
$
|
(109,548
|
)
|
|
$
|
60,679
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders for the computation of diluted
earnings per share is computed as follows:
Three
Months Ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(229,658
|
)
|
|
$
|
88,794
|
|
Interest
expense on dilutive convertible preferred stock
|
|
|
-
|
|
|
|
9,750
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income available to common shareholders for
|
|
|
|
|
|
|
|
|
diluted
earnings (loss) per share
|
|
$
|
(229,658
|
)
|
|
$
|
98,544
|
|
6.
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 Series C preferred
shares. The terms of the Series C preferred shares 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 the Series C preferred shares provide for dividends at the
rate of 10% per annum (as compared to 5% per annum for the Series B preferred
shares). The current aggregate redemption amount for the Series C preferred
shares is $780,000, plus accumulated and unpaid dividends. The Series
C 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.
7.
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 three months ended March 31, 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 March 31, 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 three months ended March 31, 2008 and 2007
follows:
Three
months ended March 31,
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Premium
finance revenue
|
|
$
|
225,322
|
|
|
$
|
790,695
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
179,028
|
|
|
|
367,506
|
|
Provision
for finance receivable losses
|
|
|
89,316
|
|
|
|
163,056
|
|
Depreciation
and amortization
|
|
|
46,556
|
|
|
|
25,469
|
|
Interest
expense
|
|
|
45,181
|
|
|
|
165,818
|
|
Total
operating expenses
|
|
|
360,081
|
|
|
|
721,849
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(134,759
|
)
|
|
|
68,846
|
|
Loss
on sale of premim financing portfolio
|
|
|
83,623
|
|
|
|
-
|
|
(Loss)
income before provision for income taxes
|
|
|
(218,382
|
)
|
|
|
68,846
|
|
(Benefit
from) provision for income taxes
|
|
|
(98,272
|
)
|
|
|
30,981
|
|
(Loss)
income from discontinued operations, net of income taxes
|
|
$
|
(120,110
|
)
|
|
$
|
37,865
|
|
The
components of assets and liabilities of discontinued operations as of March 31,
2008 and December 31, 2007 are as follows:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Finance
contracts receivable, net
|
|
$
|
-
|
|
|
$
|
12,498,809
|
|
Due
from purchaser of premium finance portfolio
|
|
|
253,685
|
|
|
|
-
|
|
Other
current assets
|
|
|
-
|
|
|
|
31,680
|
|
Deferred
income taxes
|
|
|
-
|
|
|
|
69,000
|
|
Property
and equipment, net
|
|
|
-
|
|
|
|
3,324
|
|
Other
assets
|
|
|
-
|
|
|
|
48,410
|
|
Total
assets
|
|
$
|
253,685
|
|
|
$
|
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 26.5% per
annum for the three months ended March 31, 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 three months ended March 31, 2008 and 2007, the
provision for finance receivable losses was approximately $89,000 and $163,000,
respectively, and actual principal write-offs for such period, net of actual and
anticipated recoveries of previous write-offs, were approximately $50,000 and
$170,000, respectively.
Item
2.
MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
.
Overview
We
operate 26 storefronts, including 16 Barry Scott locations, five Atlantic
Insurance locations, and five Accurate Agency locations. We also have 41
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;
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
26.5% per annum for the three months ended March 31, 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 three
months ended March 31, 2008 and 2007, the provision for finance receivable
losses was approximately $89,000 and $163,000, respectively, and actual
principal write-offs for such period, net of actual and anticipated recoveries
of previous write-offs, were approximately $50,000 and $170,000,
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 March 31,
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
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 for the periods indicated:
|
|
Three
months ended
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Commissions
and fee revenue
|
|
$
|
1,317,000
|
|
|
$
|
1,613,000
|
|
|
$
|
(296,000
|
)
|
|
|
(18
|
)
%
|
General
and administrtaive expenses
|
|
|
1,661,000
|
|
|
|
1,695,000
|
|
|
|
(34,000
|
)
|
|
|
(2
|
)
%
|
Interest
expense
|
|
|
83,000
|
|
|
|
133,000
|
|
|
|
(50,000
|
)
|
|
|
(38
|
)
%
|
(Benefit
from) provision for income taxes
|
|
|
(90,000
|
)
|
|
|
42,000
|
|
|
|
(132,000
|
)
|
|
|
(314
|
)
%
|
(Loss)
income from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes
|
|
|
(199,000
|
)
|
|
|
93,000
|
|
|
|
(292,000
|
)
|
|
|
(314
|
)
%
|
During
the three months ended March 31, 2008 (“2008”), revenues from continuing
operations were $1,317,000 as compared to $1,613,000 for the three months ended
March 31, 2007 (“2007”). The 18% revenue decrease of $296,000 was
primarily attributable 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 was offset by $99,000 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 $1,661,000, as compared to
$1,695,000 in 2007. The 2% net decrease of $34,000 was primarily attributable to
a reduction in fixed and variable compensation paid to employees due to a
reduction in policies sold at our stores, offset by an increase in advertising
expenses.
Our
interest expense in 2008 was $83,000, as compared to $133,000 in 2007. The 38%
decrease of $50,000 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 $62,000 in 2007.
The $62,000 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 $90,000 compared to a provision
for income taxes of $42,000 in 2007. The decrease of $132,000 is due to a
$292,000 decrease in income from continuing operations in 2008 as compared to
2007.
Our continuing
operations generated a net loss before income taxes of $199,000 in 2008 as
compared to a net profit before income taxes of $93,000 in
2007. This decrease of $292,000 was primarily due to an 18% decrease
in revenues of $296,000 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
for the periods indicated:
|
|
Three
months ended
|
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
|
2008*
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
Premium
finance revenue
|
|
$
|
225,000
|
|
|
$
|
791,000
|
|
|
|
(566,000
|
)
|
|
|
(72
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
|
179,000
|
|
|
|
368,000
|
|
|
|
(189,000
|
)
|
|
|
(51
|
)
%
|
Provision
for finance receivable losses
|
|
|
89,000
|
|
|
|
163,000
|
|
|
|
(74,000
|
)
|
|
|
(45
|
)
%
|
Depreciation
and amortization
|
|
|
47,000
|
|
|
|
25,000
|
|
|
|
22,000
|
|
|
|
88
|
%
|
Interest
expense
|
|
|
45,000
|
|
|
|
166,000
|
|
|
|
(121,000
|
)
|
|
|
(73
|
)
%
|
Total
Operating Expenses
|
|
|
360,000
|
|
|
|
722,000
|
|
|
|
(362,000
|
)
|
|
|
(50
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(135,000
|
)
|
|
|
69,000
|
|
|
|
(204,000
|
)
|
|
|
(296
|
)
%
|
Loss
on sale of premium financing portfolio
|
|
|
83,000
|
|
|
|
-
|
|
|
|
83,000
|
|
|
|
-
|
%
|
(Loss)
income before (benefit from) provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
for
income taxes
|
|
|
(218,000
|
)
|
|
|
69,000
|
|
|
|
(287,000
|
)
|
|
|
(416
|
)
%
|
(Benefit
from) provision for income taxes
|
|
|
(98,000
|
)
|
|
|
31,000
|
|
|
|
(129,000
|
)
|
|
|
(416
|
)
%
|
(Loss)
income from discontinued operations
|
|
$
|
(120,000
|
)
|
|
$
|
38,000
|
|
|
$
|
(158,000
|
)
|
|
|
(416
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
___________________
* 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 $566,000 in 2008 as compared
2007. The 72% decrease is due to only including one month of revenue
in 2008 compared to three months in 2007.
Our
general and administrative expenses from discontinued operations decreased
$189,000 in 2008 as compared 2007. The 51% decrease
is due to only including one month of operating expenses related to revenue
in 2008 compared to three months in 2007.
Our
provision for finance receivable losses for 2008 was $74,000 less than for
2007. The 45% 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 $121,000 less than for
2007. The 73% 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 $83,000 in 2008, compared to no
such costs in 2007. The 2008 loss was due to 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 $218,000 in 2008 as compared to a net profit
before income taxes of $69,000 in 2007. The decrease in
profit of $287,000 in 2008 was due to the cessation of revenues as of January
31, 2008, offset by the elimination and reductions in operating
expenses.
The
following table summarizes our change in net (loss) income for the periods
indicated.
|
|
Three
months ended
|
|
|
March
31,
|
|
|
|
|
|
|
|
|
Change
|
|
|
|
|
|
|
2008
|
|
|
2007
|
|
|
$
|
|
|
|
%
|
|
(Loss)
income from continuing operations
|
|
$
|
(110,000
|
)
|
|
$
|
51,000
|
|
|
$
|
(161,000
|
)
|
|
|
(316
|
)
%
|
(Loss)
income from discontinued operations, net of taxes
|
|
|
(120,000
|
)
|
|
|
38,000
|
|
|
|
(158,000
|
)
|
|
|
(416
|
)
%
|
Net
(loss) income
|
|
$
|
(230,000
|
)
|
|
$
|
89,000
|
|
|
$
|
(319,000
|
)
|
|
|
(358
|
)
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Our net
loss for 2008 was $230,000 as compared to net income of $89,000 for
2007.
Liquidity
and Capital Resources
As of
March 31, 2008, we had $313,139 in cash and cash equivalents and a working
capital deficit of $1,328,200. 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. The $1,500,000 principal
balance of these notes is included in our March 31, 2008 balance sheet under
“Current Liabilities.” 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 Series C preferred shares, which are mandatorily redeemable on April
30, 2009. The mandatorily redeemable balance of $780,000 is included
in our March 31, 2008 balance sheet under “Non-
Current Liabilities.” Further, as
discussed below, term loan payments in the aggregate principal amount of
$390,000 are payable to Manufacturers and Traders Trust Company (“M&T”)
during June 2008. The principal balance of this obligation is
included in our March 31, 2008 balance sheet under “Current
Liabilities.” We plan to seek to either extend the maturity dates of
these subordinated debt and term loan obligations, and/or refinance the
obligations. We also 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 our efforts
with regard to the subordinated debt and term loan obligations, as discussed
above, are successful,
that we
obtain the line of credit sought and/or complete the store sales that are
contemplated, and that the CMIC conversion discussed below occurs by the end of
2008,
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 $718,000 primarily due to the
following:
·
|
Net
cash used in operating activities during 2008 was $1,109,000 due to the
following: (i) cash used in the operating activities of our
discontinued operations of $578,000 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
$619,000. Non-cash items totaled $389,000, which include depreciation and
amortization, 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 $1,107,000 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 $716,000 primarily due
to 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.
|
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 is payable to the extent of $130,000 on
June 1, 2008 and $260,000 on June 30, 2008. 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.
Effective
April 16, 2008, the holder of our Series B preferred shares exchanged such
shares for an equal number of Series C preferred shares. The Series C preferred
shares provide for dividends at the rate of 10% per annum (as compared to 5% per
annum for the Series B preferred shares). The Series C preferred
shares are mandatorily redeemable on April 30, 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 March 31, 2008, the
balance of the surplus notes, including accrued interest was $5,478,000. 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 during the
fiscal year ending 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
3A(T).
CONTROLS AND
PROCEDURES
We
maintain disclosure controls and procedures (as defined in Exchange Act Rule
13a-15(e)) that are designed to assure that information required to be disclosed
in our Exchange Act reports is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms, and that such information is accumulated and communicated to
management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required
disclosures.
As
required by Exchange Act Rule 13a-15(b), as of the end of the period covered by
this Quarterly Report, under the supervision and with the participation of our
principal executive officer and principal financial officer, we evaluated the
effectiveness of our disclosure controls and procedures. Based on
this evaluation, our principal executive officer and principal financial officer
concluded that our disclosure controls and procedures were effective as of that
date.
There was
no change in our internal control over financial reporting during our most
recently completed fiscal quarter that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting,
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.
PART
II.
OTHER
INFORMATION
|
|
|
Item
1.
|
LEGAL
PROCEEDINGS
|
|
|
|
None
|
|
|
Item
2.
|
UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS
|
|
|
(a) During
the first quarter of 2008, we issued an aggregate of 8,084 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.
(b) Not
applicable
(c) 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
|
|
|
|
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 Incorporation
2
|
_______________
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(b)
|
Certificate
of Designation of Series A Preferred Stock
3
|
|
|
|
|
3(c)
|
Certificate
of Designation of Series B Preferred Stock
4
|
|
|
|
|
3(d)
|
Certificate
of Designation of Series C Preferred Stock
|
|
|
|
|
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
|
_______________
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 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.
|
Company Name
|
|
|
|
|
|
Dated:
May 15, 2008
|
By:
|
/s/ Barry
B. Goldstein
|
|
|
|
Barry B.
Goldstein
|
|
|
|
President
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Victor
Brodsky
|
|
|
|
Victor
Brodsky
|
|
|
|
Chief
Accounting Officer
|
|
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