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, 2003
--------------
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from to
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Commission File Number: 0-1665
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DCAP GROUP, INC.
----------------
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 36-2476480
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(State or Other Jurisdiction of (I.R.S Employer
Incorporation or Organization) Identification No.)
1158 Broadway, Hewlett, NY 11557
--------------------------------
(Address of Principal Executive Offices)
(516) 374-7600
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(Issuer's Telephone Number, Including Area Code)
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(Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report)
APPLICABLE ONLY TO ISSUERS INVOLVED IN
BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes No
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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 April
-----------------------------
30, 2003.
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Transitional Small Business Disclosure Format (check one):
Yes No X
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INDEX
DCAP GROUP, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
--------------------
Condensed Consolidated Balance Sheet - March 31, 2003 (Unaudited)
Condensed Consolidated Statements of Operations - Three months ended
March 31, 2003 and 2002 (Unaudited)
Condensed Consolidated Statements of Cash Flows - Three months ended
March 31, 2003 and 2002 (Unaudited)
Notes to Condensed Consolidated Financial Statements - Three months
ended March 31, 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
CERTIFICATION
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:
- our ability to obtain the necessary level of financing to maintain and
grow our premium finance operation
- the decline in the number of insurance companies offering insurance
products in our markets
- the volatility of insurance premium pricing
- government regulation
- competition from larger, better financed and more established
companies
- the possibility of tort reform and a resultant decrease in the demand
for insurance
- the dependence on our executive management
- 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 Annual
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)
March 31, 2003
--------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $1,206,394
Accounts receivable, net of allowance for doubtful
accounts of $43,000 763,475
Notes receivable 54,571
Prepaid expenses and other current assets 146,312
----------
Total current assets $2,170,752
----------
PROPERTY AND EQUIPMENT, net 212,128
----------
OTHER ASSETS:
Goodwill 569,382
Other intangibles, net 268,513
Deposits and other assets 26,929
Note receivable 55,309
----------
Total other assets 920,133
----------
$3,303,013
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 576,859
Current portion of long-term debt 13,986
Current portion of capital lease obligations 47,847
Deferred revenue 66,417
Debentures payable 154,200
----------
Total current liabilities 859,309
----------
LONG-TERM DEBT 691,662
----------
CAPITAL LEASE OBLIGATIONS 31,013
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DEFERRED REVENUE 24,591
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STOCKHOLDERS' EQUITY:
Common Stock, $.01 par value; authorized
25,000,000 shares; issued 16,068,018 shares 160,680
Preferred Stock, $.01 par value; authorized 1,000,000
shares; 0 shares issued and outstanding -
Capital in excess of par 10,242,409
Deficit (7,777,996)
----------
2,625,093
Treasury Stock, at cost, 3,714,616 (928,655)
----------
1,696,438
----------
$3,303,013
==========
See notes to condensed consolidated financial statements.
4
DCAP GROUP INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three months ended
March 31,
--------------------------------
2003 2002
-------------- ----------------
Revenues:
Commissions and fees $ 1,461,415 $ 363,364
Premium finance revenue 347,477 170,826
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Total revenues 1,808,892 534,190
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Operating Expenses:
Selling, general and administrative 1,407,299 487,049
Depreciation and amortization 36,317 30,279
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Total operating expenses 1,443,616 517,328
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Operating Income: 365,276 16,862
Other (Expense) Income:
Interest income 1,348 608
Interest expense (17,260) (16,670)
Gain on sale of stores 89,700 -
------------ -----------
73,788 (16,062)
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Income before income taxes
and minority interest 439,064 800
Provision for income taxes 4,855 675
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Income before minority interest 434,209 125
Minority interest - (1,817)
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Income from continuing operations 434,209 1,942
Discontinued operations:
(Loss) income from discontinued operations (46,096) 26,388
------------ -----------
Net income $ 388,113 $ 28,330
============ ===========
Net income per common share:
Basic and diluted:
Income from continuing operations $ 0.03 $ 0.00
(Loss) income from discontinued operations (0.00) 0.00
------------ -----------
Net income $ 0.03 $ 0.00
============ ===========
Weighted average number of shares outstanding:
Basic 12,353,402 11,353,402
========== ==========
Diluted 12,923,929 11,353,402
========== ==========
See notes to condensed consolidated financial statements.
5
DCAP GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three months ended
March 31,
-----------------------
2003 2002
--------- ---------
Cash flows from operating activities:
Net income $ 388,113 $ 28,330
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Depreciation and amortization 36,317 34,138
Provision for bad debts 5,886 867
Gain on sale of stores (89,700) -
Minority interest - (1,817)
Changes in operating assets and liabilities:
Decrease (increase) in assets:
Accounts receivable (186,155) 41,382
Prepaid expenses and other current assets 30,923 11,710
Deposits and other assets (3,979) -
Decrease in liabilities:
Accounts payable and accrued expenses (197,020) (69,923)
Deferred revenue (868) (22,294)
--------- --------
Net cash (used in) provided by operating activities (16,483) 22,393
--------- --------
Cash flows from investing activities:
Decrease (increase) in notes and other receivables - net 21,649 (495)
Proceeds from disposition of discontinued subsidiary 500,000 -
Proceeds from sale of DCAP stores 141,383 -
Purchase of property and equipment (10,952) (9,332)
--------- --------
Net cash provided by (used in) investing activities 652,080 (9,827)
--------- --------
Cash flows from financing activities:
Principal payment of long-term debt and
capital lease obligations (36,606) (26,555)
Increase in due to officer - 33,333
---------- --------
Net cash (used in) provided by financing activities (36,606) 6,778
---------- --------
Net increase in cash and
cash equivalents 598,991 19,344
Cash and cash equivalents,
beginning of period 607,403 220,774
---------- --------
Cash and cash equivalents,
end of period $1,206,394 $240,118
========== ========
See notes to condensed consolidated financial statements.
6
DCAP GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED MARCH 31, 2003 AND 2002 (UNAUDITED)
1. The Condensed Consolidated Balance Sheet as of March 31, 2003, the
Condensed Consolidated Statements of Operations for the three months ended
March 31, 2003 and 2002 and the Condensed Consolidated Statements of Cash
Flows for the three months ended March 31, 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 March
31, 2003, results of operations for the three months ended March 31, 2003
and 2002 and cash flows for the three months ended March 31, 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 three months ended March
31, 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.
Premium financing fee revenue is earned based upon the origination of
premium finance contracts sold by agreement to third parties. The contract
fee gives consideration to an estimate as to the collectability of the loan
amount. Periodically, actual results are compared to estimates previously
recorded, and adjusted accordingly.
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 $9,800 and -0- in such costs was
incurred during the three months ended March 31, 2003 and 2002,
respectively.
d. Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for the three months ended March 31, 2002 to conform with the
classifications used for the three
7
months ended March 31, 2003.
3. Business Segments:
------------------
We currently have two reportable business segments: Insurance and Premium
Finance. The Insurance segment sells retail auto, motorcycle, boat, life,
business, and homeowner's insurance and franchises. In addition, this
segment offers tax preparation services and automobile club services for
roadside emergencies. Insurance revenues are derived from activities within
the United States, and all long-lived assets are located within the United
States. The Premium Finance segment offers property and casualty
policyholders loans to finance the policy premiums. Such loans are sold to
a third party upon origination.
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 three months ended
March 31, 2003 and 2002.
Summarized financial information concerning our reportable segments is
shown in the following tables:
Period Ended Premium
March 31, 2003 Insurance Finance Other(1) Total
--------------------- ---------- -------- ---------- ----------
Revenues from external
customers $1,461,415 $347,477 $ - $1,808,892
Interest income 841 - 507 1,348
Interest expense 17,260 - - 17,260
Depreciation and
amortization 35,927 390 - 36,317
Segment profit (loss) 362,421 267,075 (195,287) 434,209
Segment assets 2,161,844 194,864 1,006,305 3,303,013
------------
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
Period Ended Premium
March 31, 2002 Insurance Finance Other(1) Total
--------------------- --------- ------- --------- ----------
Revenues from external
customers $363,364 $170,826 $ - $ 534,190
Interest income - - 608 608
Interest expense 16,670 - - 16,670
Depreciation and
amortization 30,279 - - 30,279
Segment profit (loss) (19,466) 123,225 (101,817) 1,942
Segment assets 782,203 69,899 320,934 1,173,036
----------
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
8
4. Stock Options
-------------
We have elected the disclosure only provisions of Statement of Financial
Accounting Standard No. 123, "Accounting for Stock-Based Compensation"
("FASB 123") in accounting for our employee stock options. Accordingly, no
compensation expense has been recognized. Had we recorded compensation
expense for the stock options based on the fair value at the grant date for
awards in the three months ended March 31, 2003 and 2002 consistent with
the provisions of SFAS 123, our net income and net income per share would
have been adjusted as follows:
Three Months Ended
March 31,
----------------------
2003 2002
-------- -------
Net income, as reported $388,113 $28,330
Deduct: Total stock-based employee
compensation expense determined under
fair value based method, net of related tax
effects (15,000) (24,000)
---------- -------
Pro forma net income $373,113 $ 4,330
======= =======
Net income per share:
Basic and Diluted-as reported $ 0.03 $ 0.00
-------- -------
Basic and Diluted-pro forma $ 0.03 $ 0.00
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6. Sale of Stores
--------------
During the three months ended March 31, 2003, we sold two of our retail
offices (part of our Insurance segment) for cash consideration aggregating
$141,383 and a note receivable of approximately $97,000. The sale of the
two offices resulted in a gain of $89,700. The assets of these stores
included accounts receivable of approximately $85,000, goodwill with a
carrying amount of $50,000, and fixed assets with a carrying amount of
approximately $10,000. In addition, concurrently with the sale, the
purchasers entered into franchise agreements with us.
7. Income Taxes
------------
Our tax provision for the three months ended March 31, 2003 reflects the
anticipated utilization of net operating loss carryforwards that had
previously been fully reserved. As a result we recognized a tax benefit
during the three months ended March 31, 2003.
9
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
---------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 2003 AND 2002
Results of Operations
Our income from continuing operations for the three months ended March 31,
2003 was $434,209 as compared to $1,942 for the three months ended March 31,
2002.
During the three months ended March 31, 2003, revenues from our insurance
related operations were $1,461,415 as compared to $363,364 for the three months
ended March 31, 2002. The increase in revenues was generally due to revenues
from the Barry Scott operation, which we acquired on August 30, 2002.
Premium finance revenues increased $176,651 during the three months ended
March 31, 2003 as compared to the three months ended March 31, 2002. This
increase was the result of higher average premiums being financed and an
expansion of our premium finance marketing efforts to non-DCAP insurance
agencies. In March 2003, we were informed that the premium finance agency that
currently purchases our premium finance receivables would no longer do so after
July 30, 2003. We are seeking an alternative financing arrangement. On April 22,
2003, we tendered a good faith deposit to a commercial bank based on a
non-binding letter of intent from such bank providing for the establishment of a
revolving line of credit. There can be no assurance that a commitment letter
will be received from such bank. Failure to receive such commitment will require
the bank to refund a majority of the good faith deposit.
Our selling general and administrative expenses for the three months ended
March 31, 2003 were $920,250 more than for the three months ended March 31,
2002. This increase was primarily due to the expenses of the Barry Scott
operation which was acquired on August 30, 2002.
During the three months ended March 31, 2003, we sold two of our stores,
resulting in a gain of $89,700. No such sales occurred during the three months
ended March 31, 2002.
Our insurance-related operations on a stand-alone basis, generated a net
profit of $362,421 during the three months ended March 31, 2003 as compared to a
loss of $19,466 during the three months ended March 31, 2002. Our premium
finance operations, on a stand-alone basis, generated a net profit of $267,075
during the three months ended March 31, 2003, as compared to a net profit of
$123,225 during the three months ended March 31, 2002. Losses from
corporate-related items not allocable to reportable segments were $195,287
during the three months ended March 31, 2003 as compared to $101,817 during the
three months ended March 31, 2002.
In January 2003, we ceased operation of the International Airport Hotel in
San Juan, Puerto Rico. As such, the operating results of the hotel are being
presented as discontinued operations. During the three months ended March 31,
2003, this discontinued operation generated a net loss of $46,096 as compared to
a net profit of $26,388 during the three months ended March 31, 2002.
Liquidity and Capital Resources
As of March 31, 2003, we had $1,206,394 in cash and cash equivalents and
working capital of $1,311,443. As of December 31, 2002, we had $607,403 in cash
and cash equivalents and
10
working capital of $904,232.
Cash and cash equivalents increased between December 31, 2002 and March 31,
2003 primarily due to net cash of $652,080 from investing activities for the
three months ended March 31, 2003 based on proceeds of $500,000 from the
disposition of our Hotel segment and $141,383 from the sale of stores, offset by
(i) net cash of $16,483 used in operating activities based primarily on our net
income of $388,113, offset by a net increase in current assets of $159,211, a
decrease in current liabilities of $197,888, and the gain on the sale of stores
of $89,700, and (ii) net cash of $36,606 used in financing activities for
principal payments of long-term debt and capital lease obligations.
We have no current commitments for capital expenditures.
Item 3. CONTROLS AND PROCEDURES
-----------------------
Within 90 days prior to the filing date of this report, 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 are effective in alerting him in a timely manner to
material information required to be included in our SEC reports. In addition,
our Chief Executive Officer and Chief Financial Officer reviewed our internal
controls, and there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of our last evaluation.
11
PART II. OTHER INFORMATION
-----------------
Item 1. LEGAL PROCEEDINGS
-----------------
In January, 2003, our subsidiary, Aard-Vark Agency, Ltd., commenced an
action in the Supreme Court of the State of New York, Queens County, against
Barnett Prager, Anita Prager and All About Security, Inc. for breach of
employment agreement and misappropriation of trade secrets and confidential
information, among other claims. In May 2003, the defendants asserted
counterclaims seeking $2,000,000 in compensatory damages, plus punitive damages,
based upon the October 1998 sale by the defendants of the stock of Aard-Vark to
Barry Scott Acquisition Corp. (which we acquired in August 2002). We believe
that the counterclaims are wholly meritless in that, among other defenses, they
are brought against the improper party and are barred by previous judicial
decisions on the matter. In any event, pursuant to our August 2002 acquisition
agreement with regard to Barry Scott, Progressive Agency Holdings Corp., the
seller of Barry Scott to us, has agreed to defend and indemnify us with regard
to this matter.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
-----------------------------------------
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None
Item 5. OTHER INFORMATION
-----------------
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
--------
3(a) Certificate of Incorporation, as amended(1)
3(b) By-laws, as amended(1)
99 Certificate of Chief Executive Officer and Chief Financial
Officer Pursuant to 18 U.S.C . Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
---------------------
(1) Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB
for the period ended September 30, 2002 and incorporated herein by reference.
12
(b) Reports on Form 8-K
-------------------
Two Current Reports on Form 8-K were filed by us during the
quarter ended March 31, 2003 as follows:
(i) Date of Report: January 29, 2003
Item reported: 2
(ii) Date of Report: March 14, 2003
Item reported: 5
13
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: May 20, 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)
Certification
-------------
I, Barry Goldstein, Chief Executive Officer and Chief Financial Officer of
DCAP Group, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-QSB of DCAP Group, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our evaluation
as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
15
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 20, 2003
/s/ Barry Goldstein
---------------------------
Barry Goldstein
Chief Executive Officer and
Chief Financial Officer
16