SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
(x) ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 2003
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( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from to
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Commission file number 0-1665
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DCAP GROUP, INC.
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(Name of small business issuer 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, New York 11557
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number (516) 374-7600
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
none
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Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.01 par value
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(Title of class)
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 .
-- --
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.( )
State issuer's revenues for its most recent fiscal year: $8,685,751
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $8,166,976 as of February 29, 2004.
(ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Check whether the issuer has filed all documents and reports 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 REGISTRANTS)
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
February 29, 2004.
DOCUMENTS INCORPORATED BY REFERENCE
None
Transitional Small Business Disclosure Format: Yes No X
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INDEX
Page No.
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Forward-Looking Statements................................................................................1
PART I
Item 1. Description of Business......................................................................2
Item 2. Description of Property.....................................................................10
Item 3. Legal Proceedings...........................................................................10
Item 4. Submission of Matters to a Vote of Security Holders.........................................11
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................................12
Item 6. Management's Discussion and Analysis or Plan of Operation...................................13
Item 7. Financial Statements........................................................................22
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................22
Item 8A. Controls and Procedures.....................................................................22
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........................................23
Item 10. Executive Compensation......................................................................25
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................................27
Item 12. Certain Relationships and Related Transactions..............................................30
PART IV
Item 13. Exhibits, List and Reports on Form 8-K......................................................32
Item 14. Principal Accountant Fees and Services......................................................35
Signatures
PART I
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Forward-Looking Statements
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This Annual 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 Annual 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 this Annual Report 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.
1
ITEM 1. DESCRIPTION OF BUSINESS
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(a) Business Development
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General
We operate two lines of business:
o franchising, ownership and operation of storefront insurance agencies
under the DCAP, Barry Scott and Atlantic Insurance brand names
o premium financing of insurance policies for our DCAP, Barry Scott and
Atlantic Insurance clients as well as clients of non-affiliated
entities
Our business strategy anticipates the utilization and expansion of our
distribution network and delivery of insurance-related services through this
network. Pursuant to this strategy, we have
o granted franchises for the use of the DCAP trade name
o sold our interest in a number of storefronts but retained them as DCAP
franchises
o as discussed below, purchased Barry Scott Companies, Inc., which has
19 store locations, and the assets of AIA Acquisition Corp., which has
five store locations that operate under the Atlantic Insurance brand
name
o changed our business model with respect to our premium finance
operations from selling finance contracts to third parties to
internally financing those contracts
Developments During 2003
The following material events occurred during 2003:
o Effective May 1, 2003, we acquired substantially all of the assets of
AIA Acquisition Corp., an insurance brokerage firm with five offices
located in eastern Pennsylvania that operate under the Atlantic
Insurance brand. The acquisition allows for the expansion of our
geographical footprint outside New York State and allows for us to
capitalize on operational and administrative efficiencies. See Item 13
of this Annual Report.
o In July 2003, in connection with the change in our premium finance
operations business model, as discussed above, we obtained an
$18,000,000 revolving line of credit from Manufacturers and Traders
Trust Co. that is due in July 2005. Interest on this loan is payable
at the rate of prime plus 1.5%. Concurrently, we obtained a $3,500,000
secured subordinated loan, that is repayable in January 2006 and
carries interest at the rate of 12-5/8% per annum. In connection with
the $3,500,000 debt
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financing, we issued warrants for the purchase of 525,000 common shares at
an exercise price of $1.25 per share. The warrants expire on January 10,
2006.
Developments During 2002
The following material events occurred during 2002:
o On August 30, 2002, we purchased Barry Scott Companies, Inc. from a
subsidiary of the insurance carrier, The Progressive Corporation.
Through the acquisition, we added 20 new locations, 18 of which are
located north of Westchester County, New York and outside the DCAP
footprint. In 2003, one of the acquired stores was damaged by fire and
not reopened.
The purchase price was $850,000, of which $325,000 was paid at
closing. The balance of the purchase price is payable as follows: (i)
$125,000 on August 30, 2004, (ii) $125,000 on August 30, 2005, and
(iii) $275,000 on August 30, 2006 (of which $40,000 was prepaid in
2003). As security for the payment of the installments and other
obligations under the acquisition agreement, a security interest was
granted to Progressive in the shares of stock acquired and in the
assets of Barry Scott and its subsidiaries.
o In August 2002, we raised gross proceeds of $500,000 through a private
placement of our common shares.
o During 2002, we determined that our operation of the former
International Airport Hotel in San Juan, Puerto Rico was a non-core
business and that we should settle the ongoing litigation with the
Ports Authority of Puerto Rico, the owner of the hotel, concerning the
term of the lease granted to our wholly-owned subsidiary, IAH, Inc.
Accordingly, in December 2002, IAH reached a verbal understanding with
the Ports Authority and, on January 29, 2003, IAH finalized a
settlement agreement with the Ports Authority. Pursuant to the
agreement, in consideration for IAH's agreement to release all rights
with respect to the lease and to vacate the premises, in January 2003,
the Ports Authority paid to IAH the sum of $500,000.
Developments During 2001
The following material events occurred during 2001:
o Barry B. Goldstein was elected our President, Chairman of the Board
and Chief Executive Officer. See Item 9 of this Annual Report.
o We entered into agreements with Kevin Lang, Abraham Weinzimer and
Morton L. Certilman, each then one of our executive officers, to sell
them a total of eight of our DCAP stores for an aggregate cash
consideration of $767,000.
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o We repurchased an aggregate of 3,714,616 common shares from Messrs.
Lang and Weinzimer in consideration of the cancellation of
indebtedness owed to us by them in the aggregate amount of $928,654.
o We terminated our employment agreements with Messrs. Lang, Weinzimer
and Certilman, as well as with Jay M. Haft who was then our Vice
Chairman; our wholly-owned subsidiary, DCAP Management Corp., which
operates our franchise business, entered into a six month employment
agreement with Mr. Lang pursuant to which he served as its President;
and each of Messrs. Lang, Weinzimer, Certilman and Haft resigned his
position as an officer of DCAP Group. Each of Messrs. Lang and
Weinzimer also resigned his position as a director of DCAP Group.
(b) Business of Issuer
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General
Our storefront locations serve as insurance agents or brokers and place
various types of insurance on behalf of customers. We focus on automobile,
motorcycle and homeowners insurance and our customer base is primarily
individuals rather than businesses.
There are 69 store locations owned or franchised by us of which 63 are
located in New York State. In the New York metropolitan area, there are 44 DCAP
franchises, one joint venture DCAP store and one Barry Scott location. There are
also 18 Barry Scott locations outside the New York metropolitan area, primarily
in central New York State and five Atlantic Insurance locations in eastern
Pennsylvania. All of the Barry Scott and Atlantic Insurance locations are
wholly-owned by us.
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 serve as an insurance company and
therefore do not assume underwriting risks.
Through our wholly-owned subsidiary, Payments Inc., we provide insurance
premium financing services to our DCAP, Barry Scott and Atlantic Insurance
locations as well as non-affiliated insurance agencies. Payments Inc. is
licensed by the New York State Department of Banking as an insurance premium
finance agency and has been granted permission to conduct business in
Pennsylvania and New Jersey.
We also offer automobile club services for roadside emergencies. Income tax
preparation services are also offered in connection with the operation of the
DCAP stores.
We were incorporated in 1961 and changed our name from EXTECH Corporation
to DCAP Group, Inc. in 1999.
4
Our executive offices are located at 1158 Broadway, Hewlett, New York
11557; our telephone number is (516) 374-7600 and our fax number is (516)
295-7216.
Insurance Agencies
Insurance Brokerage
Our storefront agencies deal primarily with the insurance needs of
individuals. In the states in which we operate, all automobile owners must
secure liability insurance coverage. We provide various choices to the insured
depending on market conditions.
In New York and New Jersey, insurance carriers have suffered from a
continued lack of profitability. Many carriers have withdrawn and others have
either suspended their operations or cut back severely. Thus, we are limited in
many cases and can only offer "assigned risk" coverage provided by each state's
automobile insurance plan.
During the fiscal year ended December 31, 2003, approximately 90% of our
insurance revenues were derived from commissions and other fees received in
connection with the selling of automobile and other property and casualty
insurance policies.
In addition to automobile insurance, we offer:
o property and casualty insurance for motorcycles, boats and
livery/taxis
o life insurance
o business insurance
o homeowner's insurance
o excess coverage
We have obtained the right to receive calls placed to "1-800-INSURANCE" in
the states of New York, New Jersey and Pennsylvania (except for one area code in
Pennsylvania) as a way to increase our insurance brokerage business.
Franchises
An important part of our strategy has been to increase our name
recognition. We decided that granting others DCAP franchises is an important
step in achieving this goal.
Franchises currently pay us an initial franchise fee of $25,000 to offer
insurance products under the DCAP name. Additional fees are payable if the
franchisee desires to obtain training and software in connection with income tax
preparation services. Franchisees are obligated to also pay us monthly fees
during the term of the franchise agreement, generally commencing after a twelve
month period from the date on which the storefront opens for business. Monthly
fees payable by franchisees constituted approximately 7% of our insurance
revenues during the year ended December 31, 2003.
5
Automobile Club
As a complement to our automobile insurance operations, we offer automobile
club services for roadside emergencies. We offer memberships for such services,
and we make arrangements with towing dispatch companies to fulfill service call
requirements.
During fiscal 2003, fees received in connection with automobile club
services constituted approximately 3% of our insurance revenues.
Income Tax Return Preparation
A number of our franchise locations provide income tax return preparation
services. The tax return preparation service allows us to offer an additional
service to the walk-in customers who comprise the bulk of our customer base, as
well as to existing customers. We have also obtained the right to receive calls
placed to "1-800-INCOME TAX" as a way to increase our tax preparation business.
During fiscal 2003, fees received in connection with income tax return
preparation were nominal.
Structure and Operations
As stated above, we currently have 69 offices, of which 44 are franchises,
24 are wholly-owned, and one is a joint venture. Our franchises and joint
venture office consist of both "conversion" and "startup" operations. In a
conversion operation, an existing insurance brokerage with an established
business becomes a DCAP office. In a startup operation, an entrepreneur begins
operations as a DCAP office. Our wholly-owned and joint venture offices are
managed by our employees; each franchise is managed by or under the supervision
of the franchisee.
In order to promote consistency and efficiency, and as a service to our
franchises, we offer training to office managers. Our training program covers:
o marketing, sales and underwriting
o office and logistics
o computer information
o our proprietary database software, DCAP Management System
We provide the administrative services and functions of a "central office"
to our wholly-owned and joint venture offices. The services provided to these
storefront offices are:
o sales training
o bookkeeping and accounting
o processing services
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Franchises operate without the assistance of our "central office" services.
We also provide support services to stores such as:
o assistance with regard to the hiring of employees
o assistance with regard to the writing of local advertising
o advice regarding potential carriers for certain customers
We also manage the cooperative advertising program in which all of our
offices participate.
In addition to the above services, we provide to all of our offices a
direct business relationship with nationally-known and local insurance carriers
that may otherwise be beyond the reach of small, privately-owned retail
insurance operations.
Premium Financing
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. Our wholly-owned subsidiary,
Payments Inc., is licensed by the New York State Banking Department as a premium
finance agency and has been granted permission to conduct business in
Pennsylvania and New Jersey.
In a typical premium finance arrangement, we lend the amount of the premium
(minus the customer's down payment) to the customer and pay it to the insurance
company on behalf of the customer. The customer makes periodic payments to us
over the term of the finance agreement (generally nine to ten months). We strive
to design our payment plans so that the balance of the principal of the loan is
at all times less than the amount of the unearned portion of the insurance
premiums being financed, which backs the loan. We also seek to mitigate risk by
acting on a timely basis to request cancellation of the policy if the
policyholder defaults on his or her obligation to repay the premium finance
loan.
If the policy is cancelled before its term expires, the policyholder has a
right to receive a return of the unearned premium. Under our premium finance
agreement, the policyholder assigns this right to us to secure his or her
obligations under the loan. If the policyholder fails to make a payment, we have
the right to request that the insurance company cancel the policy and pay to us
the amount of any unearned premium on the policy. If the amount of unearned
premium exceeds the balance due on the loan plus any interest and applicable
fees owed by the policyholder to us, then we return the excess amount to the
policyholder in accordance with applicable law.
The regulatory framework under which our premium finance procedures are
established is generally set forth in the premium finance statutes of the states
in which we operate. Among other
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restrictions, the interest rate we may charge our customers for financing their
premiums is limited by these state statutes. See "Government Regulation."
Reference is made to Items 1(a) and 6 of this Annual Report for a
discussion of the line of credit and subordinated debt that we utilize in
connection with our premium finance operations.
Strategy
In order to achieve our goal of utilizing and expanding our distribution
network and delivering insurance-related services through this network, we
currently have the following four-pronged business strategy:
o promote franchise sales by providing proprietary products and services
that may not be available elsewhere
o acquire storefront agencies in the Northeast in order to expand our
geographical footprint
o increase the size of our premium finance business, both within and
outside the DCAP storefronts, including the introduction of our
business in other states
o seek to expand our operations by acquiring businesses or other assets
which we believe will complement or enhance our business
In seeking to promote franchise sales, we pursue increased name recognition
through the establishment of additional DCAP storefront sites (both conversion
and start-up types) and increased marketing activities. In addition, our
cooperative advertising program will continue to use the aggregated buying power
of the DCAP, Barry Scott and Atlantic Insurance offices to advertise in various
editions of telephone directories and in other media.
We utilize toll-free telephone numbers to increase business. Telephone
calls received are routed to the DCAP, Barry Scott or Atlantic Insurance office
nearest the call (based on the zip code of the caller) for handling. We are
promoting "1-800-INSURANCE" in our current markets and intend to utilize such
numbers in the future as our market expands.
During 2004, we will continue to seek to acquire additional locations in
order to further capitalize on existing proprietary services, relationships with
carriers and the increased premium finance activity.
As indicated above, one of our strategies involves the growth of our
premium finance business. As the number of insurance companies participating
voluntarily in the non-standard automobile market has significantly decreased,
there has been an offsetting increase in the size of the involuntary market.
Thus, there are many more automobile policies written through the "assigned
risk" New York Automobile Insurance Plan than in the recent past. This plan
provides for limited finance options, and the insurance premiums have increased
dramatically in recent years. Thus,
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unless the insured can pay the premium in full at the time of the application
for insurance, or can provide a large down payment and be capable of paying the
balance over a short period of time, there is a need for premium financing. We
offer the insured a reduced downpayment, and the ability to spread the balance
over a ten-month period. We are licensed to provide premium finance services in
New York, New Jersey and Pennsylvania.
Our final strategy involves the expansion of our operations into
complementary areas. We continually explore such opportunities as a means to
enhance our business.
Competition
We compete with numerous insurance agents and brokers in our market. The
amount of capital required to commence operations is generally small and the
only material barrier to entry is the ability to obtain the required licenses
and appointments as a broker or agent for insurance carriers. Since the great
majority of the automobile policies issued in our market emanate from the
"assigned risk" New York State Automobile Insurance Plan which provides for
fixed premiums for a given geographical area, there is little price competition
between us and other agents and brokers. As the number of voluntary carriers has
declined, the differentiation between us and our competition has narrowed.
In recent years, extensive competition has come from direct sales entities,
such as GEICO Insurance, who have concentrated their advertising efforts on
television and radio. In addition, the Internet sales effort of some of our
competitors has shown promise; however, the market share attributable to the
Internet is not currently significant. Further, recent legislation that allows
banks to offer insurance to their customers has taken market share from the
storefront insurance operators.
Our premium finance operation competes with many other companies that have
been in business longer than we have, and have long term relationships with
their insurance agency clients.
Government Regulation
Our premium finance subsidiary, Payments Inc., is regulated by governmental
agencies in states in which it conducts business. The regulations, which
generally are designed to protect the interests of policyholders who elect to
finance their insurance premiums, vary by jurisdiction, but usually, among other
matters, involve:
o regulating the interest rates, fees and service charges we may charge
our customers
o imposing minimum capital requirements for our premium finance
subsidiary or requiring surety bonds in addition to or as an
alternative to such capital requirements
o governing the form and content of our financing agreements
o prescribing minimum notice and cure periods before we may cancel a
customer's policy for non-payment under the terms of the financing
agreement
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o prescribing timing and notice procedures for collecting unearned
premium from the insurance company, applying the unearned premium to
our customer's premium finance account, and, if applicable, returning
any refund due to our customer
o requiring our premium finance company to qualify for and obtain a
license and to renew the license each year
o conducting periodic financial and market conduct examinations and
investigations of our premium finance company and its operations
o requiring prior notice to the regulating agency of any change of
control of our premium finance company
Employees
We employ approximately 72 persons. We believe that our relationship with
our employees is good.
ITEM 2. DESCRIPTION OF PROPERTY
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Our principal executive offices are located at 1158 Broadway, Hewlett, New
York, our central processing offices are located at 1762 Central Avenue, Albany,
New York and the administrative offices of Payments Inc. are located at 1154
Broadway, Hewlett, New York.
Our 19 Barry Scott offices are located in upstate New York (with the
exception of one located in the New York metropolitan area). Our five Atlantic
Insurance offices are located in eastern Pennsylvania. We also have one joint
venture DCAP store that is located in Greenbrook, New Jersey.
Our 25 wholly-owned or joint venture storefront locations and our executive
and other offices are operated pursuant to lease agreements that expire from
time to time through 2011. The current yearly aggregate base rental for the
offices is approximately $309,000.
ITEM 3. LEGAL PROCEEDINGS
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As described in Item 1(a) of this Annual Report, in August 2002, we
acquired Barry Scott Companies, Inc. from a subsidiary of The Progressive
Corporation. In 1998, Barry Scott Companies, Inc. had acquired all of the
outstanding stock of Aard-Vark Agency, Ltd. Accordingly, we acquired Aard-Vark
as part of our acquisition of Barry Scott Companies, Inc. On January 21, 2003,
Aard-Vark commenced an action against Barnett Prager, Anita Prager and All About
Security, Inc. in Supreme Court of the State of New York, Queens County.
Aard-Vark alleges claims based on breach of an employment agreement. In
response, on April 28, 2003, the defendants served counterclaims against
Aard-Vark in which they allege breach of contract, breach of implied covenant of
good faith and fair dealing, misrepresentation and breach of fiduciary duty. The
defendants seek
10
damages of up to $2,000,000 for each of several claims against Aard-Vark.
Pursuant to the terms of the agreement whereby we acquired Barry Scott
Companies, Inc., Progressive agreed to indemnify and defend us from any claims
or liabilities arising in connection with the transaction by which Aard-Vark was
acquired by Barry Scott Companies, Inc. Progressive has assigned counsel to
defend the counterclaims against Aard-Vark.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Our Annual Meeting of Stockholders was held on October 30, 2003. The
following is a description of the matters voted upon at the meeting and a
listing of the votes cast for, against or withheld, as well as the number of
abstentions and broker non-votes as to each matter, including a separate
tabulation with respect to each nominee for director.
1. Election of Board of Directors.
Number of Shares
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For Withheld
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Barry B. Goldstein 8,530,156 6,321
Morton L. Certilman 8,530,571 5,906
Jay M. Haft 8,530,671 5,806
Robert Wallach 8,530,131 6,346
2. Approval of a proposal to authorize our Board of Directors to effect a
reverse split (between 1 for 3 and 1 for 10) if determined necessary in its sole
discretion.
For 7,684,429
Against 198,679
Abstain 653,369
Broker Non-Vote -
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PART II
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ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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(a) Market Information
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Our common shares are quoted on the OTC Bulletin Board under the symbol
"DCAP."
Set forth below are the high and low bid prices for our common shares for
the periods indicated, as reported on the Bulletin Board. The prices set forth
are prices between broker-dealers and do not include retail mark-ups or
mark-downs or any commissions to the broker-dealer. The prices may not
necessarily reflect actual transactions.
High Low
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2003 Calendar Year
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First Quarter $ .51 $.25
Second Quarter .65 .32
Third Quarter 1.21 .53
Fourth Quarter 1.02 .81
2002 Calendar Year
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First Quarter $ .28 $.22
Second Quarter .30 .23
Third Quarter .43 .28
Fourth Quarter .52 .25
(b) Holders
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As of March 4, 2004, there were approximately 1,586 record holders of our
common shares.
(c) Dividends
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Holders of our common shares are entitled to dividends when, as and if
declared by our Board of Directors out of funds legally available. There are
also outstanding 904 Series A preferred shares. These shares are entitled to
cumulative aggregate dividends, effective as of May 1, 2003, of $45,200 per
annum (5% of their liquidation preference of $904,000). No dividends may be paid
on our common shares unless an equivalent pro rata payment is made to the
holders of the Series A preferred shares on the accumulated and unpaid dividends
payable to such holders at such time.
We have not declared or paid any dividends in the past and do not currently
anticipate declaring or paying any dividends in the foreseeable future. We
intend to retain earnings, if any, to
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finance the development and expansion of our business. Future dividend policy
will be subject to the discretion of our Board of Directors and will be
contingent upon future earnings, if any, our financial condition, capital
requirements, general business conditions, and other factors. Therefore, we can
give no assurance that any dividends of any kind will ever be paid to holders of
our common shares.
(d) Recent Sales of Unregistered Securities
---------------------------------------
Not applicable.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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Overview
We operate 25 storefronts, including 19 Barry Scott locations acquired
through our August 2002 acquisition of Barry Scott Companies, Inc., and five
Atlantic Insurance locations acquired through our May 2003 acquisition of
substantially all the assets of AIA Acquisition Corp. We also have 44 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 serve as an insurance company and
therefore do not assume underwriting risks. The stores also offer automobile
club services for roadside assistance and income tax preparation services.
Payments Inc., our wholly-owned subsidiary, is an insurance premium finance
agency that offers premium financing to clients of DCAP, Barry Scott and
Atlantic Insurance offices, as well as non-affiliated insurance agencies. We
currently operate within the states of New York, Pennsylvania and New Jersey.
Critical Accounting Policies
Our consolidated financial statements include accounts of DCAP Group, Inc.
and all majority-owned and controlled subsidiaries. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States requires our management to make estimates and assumptions in
certain circumstances that affect amounts reported in our consolidated financial
statements and related notes. In preparing these financial statements, our
management has utilized information available including our past history,
industry standards and the current economic environment, among other factors, in
forming its estimates and judgments of certain amounts included in the
consolidated financial statements, giving due consideration to materiality. It
is possible that the ultimate outcome as anticipated by our management in
formulating its estimates inherent in these financial statements might not
materialize. However, application of the critical
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accounting policies below involves the exercise of judgment and use of
assumptions as to future uncertainties and, as a result, actual results could
differ from these estimates. In addition, other companies may utilize different
estimates, which may impact comparability of our results of operations to those
of companies in similar businesses.
Commission and fee income
We recognize commission revenue from insurance policies at the beginning of
the contract period, except for commissions that are receivable annually, for
which we recognize the commission revenue ratably. Refunds of commissions on the
cancellation of insurance policies are reflected at the time of cancellation.
Franchise fee revenue is recognized when substantially all of our
contractual requirements under the franchise agreement are completed.
Fees for income tax preparation are recognized when the services are
completed. Automobile club dues are recognized equally over the contract period.
Finance income, fees and receivables
Finance income consists of interest, service fees and delinquency fees.
Finance income, other than delinquency fees, is recognized using the interest
method or similar methods that produce a level yield over the life of each loan
(generally nine to ten months). Delinquency fees are earned when collected. Upon
cancellation of the underlying insurance policies, any uncollected earned
interest or fees are charged off.
Allowance for finance receivable losses
Losses on finance receivables include an estimate of future credit losses
on premium finance accounts. Credit losses on premium finance accounts occur
when the unearned premiums received from the insurer upon cancellation of a
financed policy are inadequate to pay the balance of the premium finance
account. The majority of these shortfalls result in the write-off of unrealized
interest. We review historical trends of such losses relative to finance
receivable balances to develop estimates of future losses. However, actual
write-offs may differ materially from the write-off estimates that we used.
Goodwill and intangible assets
The carrying value of goodwill was initially reviewed for impairment as of
January 1, 2002, and is reviewed annually or whenever events or changes in
circumstances indicate that the carrying amount might not be recoverable. If the
fair value of the operations to which goodwill relates is less than the carrying
amount of those operations, including unamortized goodwill, the carrying amount
of goodwill is reduced accordingly with a charge to expense. Based on our most
recent analysis, we believe that no impairment of goodwill exists at December
31, 2003.
14
Stock-based compensation
We apply the intrinsic value-based method of accounting prescribed by
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations, to account for stock-based employee
compensation plans and report pro forma disclosures in our Form 10-KSB filings
by estimating the fair value of options issued and the related expense in
accordance with SFAS No. 123. Under this method, compensation cost is recognized
for awards of common shares or stock options to our directors, officers and
employees only if the quoted market price of the stock at the grant date (or
other measurement date, if later) is greater than the amount the grantee must
pay to acquire the stock.
Results of Operations
Our net income from continuing operations for the year ended December 31,
2003 was $1,335,899 as compared to $698,475 for the year ended December 31,
2002.
During the year ended December 31, 2003, revenues from our
insurance-related operations were $6,354,920 as compared to $2,473,921 for the
year ended December 31, 2002. The increase in revenues was generally due to
revenues from the operation of the Barry Scott stores, which were acquired on
August 30, 2002, and the Atlantic Insurance stores, which were acquired
effective May 1, 2003.
Premium finance revenues increased $1,021,023 during the year ended
December 31, 2003 as compared to the year ended December 31, 2002 as indicated
by the following table:
2003 2002
---- ----
Revenue from sale of receivables $ 626,552 $1,309,808
Interest and late fee revenue 1,704,279 0
--------- ---------
$ 2,330,831 $1,309,808
During 2002 and the initial two quarters of 2003, we recognized premium
finance revenue from the sale of the premium finance receivables to a third
party and recorded a one-time fee per contract. On July 14, 2003, we obtained an
$18,000,000 two-year line of credit from Manufacturers and Traders Trust Co. to
finance our premium finance operations. Concurrently, we obtained $3,500,000 in
funding from a private placement of subordinated debt and warrants to support
our premium finance operations. We then began utilizing these credit facilities
and commenced recording interest and fee based revenue over the life of each
loan and expenses of operating a finance company, such as servicing, bad debts
and interest expense. Thus rather than recording a one time fee per contract, we
are recording income and expense over the life of each contract.
Effective November 2003, we began providing premium finance services to our
Barry Scott locations (following the expiration of a requirement that the
locations use another provider), and
15
effective March 2004, we will begin providing premium finance services to our
Atlantic Insurance offices. These new sources of premium finance revenue should
have a positive effect on our premium finance operations in 2004.
Our general and administrative expenses for the year ended December 31,
2003 were $3,936,950 more than for the year ended December 31, 2002. This
increase was primarily due to the expenses of the Barry Scott stores acquired on
August 30, 2002 and the Atlantic Insurance stores acquired effective May 1,
2003.
Our depreciation and amortization expense for the year ended December 31,
2003 was $146,904 more than for the year ended December 31, 2002. This increase
was primarily the result of our recording amortization of costs associated with
obtaining the financing discussed above.
As a result of the change in our premium finance business model in July
2003 as discussed above, we incurred premium finance interest expense in 2003
while none was incurred in 2002.
During the year ended December 31, 2003, we issued redeemable preferred
shares in connection with the acquisition of the assets of AIA Acquisition Corp.
and incurred interest expense of $30,133. No preferred shares were outstanding
during the year ended December 31, 2002.
During the year ended December 31, 2003, we sold two of our stores and the
book of business relating to one store, resulting in a gain of $178,662. No such
sales occurred during the year ended December 31, 2002.
Our insurance-related operations, on a stand-alone basis, generated a net
profit of $1,298,868 during the year ended December 31, 2003 as compared to a
net profit of $125,108 during the year ended December 31, 2002. The increased
net profit was due to the operation of the Barry Scott and Atlantic Insurance
stores. Our premium finance operations, on a stand-alone basis, generated a net
profit of $839,311 during the year ended December 31, 2003 as compared to a net
profit of $1,035,789 during the year ended December 31, 2002. The decreased net
profit was the result of the change in business model discussed above and
resulting longer period to recognize revenue. The net loss from
corporate-related items not allocable to reportable segments was $802,280 during
the year ended December 31, 2003 as compared to $462,422 during the year ended
December 31, 2002 primarily due to increased executive compensation and
professional fees.
In January 2003, our subsidiary, IAH, Inc., discontinued the operations of
the International Airport Hotel in San Juan, Puerto Rico. During the year ended
December 31, 2003, this discontinued operation generated a net loss of $46,096
as compared to a net profit of $34,612 during the year ended December 31, 2002.
In December 2002, IAH reached a verbal understanding with the Ports Authority of
Puerto Rico, the owner of the hotel, pursuant to which IAH agreed to release all
rights with respect to the hotel and vacate the premises. In consideration for
IAH's agreement, in January 2003, the Ports Authority paid to IAH $500,000. The
gain of $312,920 on the disposition of this discontinued subsidiary for the year
ended December 31, 2002 is comprised of the $500,000
16
payment received, offset by assets written off, accrued close down expenses and
a fee paid to one of our directors for his services in obtaining the settlement
agreement.
Liquidity and Capital Resources
As of December 31, 2003, we had $1,349,304 in cash and cash equivalents and
working capital of $5,168,694. As of December 31, 2002, we had $607,403 in cash
and cash equivalents and working capital of $904,232.
Cash and cash equivalents increased by $741,901 between December 31, 2002
and December 31, 2003 primarily due to the following:
o Net cash provided by operating activities during the year ended
December 31, 2003 was $7,077,764 primarily due to the following: (i)
our net income for the year of $1,289,803, plus an increase in
premiums payable of $6,530,219 (based upon the change in our premium
finance business model as discussed above), plus an increase in
accounts payable and accrued expenses of $530,298, offset by (ii) an
increase in accounts receivable of $1,095,662.
o We used $18,534,164 in investing activities during the fiscal year
ended December 31, 2003 primarily due to the following: (i) an
increase in our net finance contracts receivable of $19,084,161 (based
upon the change in our premium finance business model as discussed
above), offset by (ii) proceeds of $500,000 from the disposition of
our interest in the International Airport Hotel in San Juan, Puerto
Rico.
o Net cash provided by financing activities during the year ended
December 31, 2003 was $12,198,301 primarily due to the following: (i)
proceeds of $17,769,118 from our revolving loan from Manufacturers and
Traders Trust Co. for premium finance purposes, plus proceeds of
$3,500,000 from long-term debt that was obtained concurrently to
support our premium finance operations, offset by (ii) payments of
$8,801,036 on the revolving loan.
Our premium finance operations are financed pursuant to an $18,000,000
revolving line of credit from Manufacturers and Traders Trust Co. The line of
credit bears interest at the rate of prime plus 1.5%, matures on July 31, 2005
and is secured by substantially all of our assets. We can borrow against the
line to the extent of 80% of eligible premium finance receivables. As of
December 31, 2003, $8,968,082 was outstanding under the loan.
Concurrently with the obtaining of the line of credit, we obtained a
$3,500,000 secured subordinated loan to support our premium finance operations.
The loan is repayable in January 2006 and carries interest at the rate of
12-5/8% per annum.
We have no current commitments for capital expenditures. However, we may,
from time to time, consider acquisitions of complementary businesses, products
or technologies.
17
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that have or are reasonable
likely to have a current or future effect on our financial conditions, changes
in financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is material to investors.
Factors That May Affect Future Results and Financial Condition
Based upon the following factors, as well as other factors affecting our
operating results and financial condition, past financial performance should not
be considered to be a reliable indicator of future performance, and investors
should not use historical trends to anticipate results or trends in future
periods. In addition, such factors, among others, may affect the accuracy of
certain forward-looking statements contained in this Annual Report.
Because our core product is personal automobile insurance, our business may
be adversely affected by negative developments in the conditions in this
industry.
Approximately 66% of our revenues for 2003 were commissions and fees from
the sale of personal automobile and other property and casualty insurance
policies. As a result of our concentration in this line of business, negative
developments in the economic, competitive or regulatory conditions affecting the
personal automobile insurance industry could have a material adverse effect on
our results of operations and financial condition.
Because substantially all of our insurance-related operations are located
in New York and Pennsylvania, our business may be adversely affected by
conditions in these states.
Substantially all of our insurance-related operations are located in the
states of New York and Pennsylvania. Our revenues and profitability are affected
by the prevailing regulatory, economic, demographic, competitive and other
conditions in these states. Changes in any of these conditions could make it
more costly or difficult for us to conduct our business. Adverse regulatory
developments in New York or Pennsylvania, which could include fundamental
changes to the design or implementation of the automobile insurance regulatory
framework, could have a material adverse effect on our results of operations and
financial condition.
Our business is highly competitive, which may make it difficult for us to
market our core products effectively and profitably.
The personal automobile insurance business is highly competitive. We
compete with numerous other insurance agents and brokers in our market. The
amount of capital required to commence operations as a broker or agent is
generally small and the only material barrier to entry is the ability to obtain
the required licenses and appointments as a broker or agent for insurance
carriers. We also compete with insurers, such as GEICO Insurance, that sell
insurance policies directly to their customers.
18
Some of our competitors, including those who provide premium finance
services, have substantially greater financial and other resources than we have,
and they may offer a broader range of products or offer competing products or
services at lower prices. Our results of operations and financial condition
could be materially and adversely affected by a loss of business to competitors
offering similar insurance products or services at lower prices or having other
competitive advantages.
Our inability to refinance our current line of credit or obtain additional
required financing would have an adverse effect on our premium finance revenue.
The working capital needs of our premium finance subsidiary, Payments Inc.,
are substantially dependent on its line of credit agreement with Manufacturers
and Traders Trust Co. that expires in July 2005. That agreement includes
covenants requiring us to pass specified financial tests and to refrain from
certain kinds of actions. In addition, the $3,500,000 of subordinated debt that
supports our premium finance operations is due in January 2006. In the event we
fail to meet our covenants or are unable to extend, refinance, replace or
increase our bank line of credit and subordinated debt on economically feasible
terms, our income and the marketability of our premium finance services would be
adversely affected.
If we lose key personnel or are unable to recruit qualified personnel, our
ability to implement our business strategies could be delayed or hindered.
Our future success will depend, in part, upon the efforts of Barry
Goldstein, our Chief Executive Officer. The loss of Mr. Goldstein or other key
personnel could prevent us from fully implementing our business strategies and
could materially and adversely affect our business, financial condition and
results of operations. In addition, an event of default under our line of credit
agreement will be triggered if Mr. Goldstein is no longer serving as our chief
executive and chief operating officer. We have an employment agreement with Mr.
Goldstein that expires on April 1, 2005. As we continue to grow, we will need to
recruit and retain additional qualified management personnel, but we may not be
able to do so. Our ability to recruit and retain such personnel will depend upon
a number of factors, such as our results of operations and prospects and the
level of competition then prevailing in the market for qualified personnel.
The volatility of premium pricing and commission rates could adversely
affect our operations.
We currently derive most of our insurance-related revenues from commissions
paid by insurance companies. The commission is usually a percentage of the
premium paid by an insured. Insurance premiums are not determined by us.
Historically, property and casualty premiums have been cyclical in nature and
have displayed a high degree of volatility based on economic and competitive
conditions. In times of expanded underwriting capacity of insurance companies,
premium rates have decreased causing a reduction in the commissions payable to
us. In addition, in many cases, insurance companies may seek to reduce their
expenses by reducing the commission rates payable to insurance agents. We cannot
predict the timing or extent of future changes in
19
commission rates or premiums and therefore cannot predict the effect, if any,
that such changes would have on our operations.
We are subject to regulation that may restrict our ability to earn profits.
Our premium finance subsidiary is subject to regulation and supervision by
the financial institution departments in the states where it offers to finance
premiums. Certain regulatory restrictions, including restrictions on the maximum
permissible rates of interest for premium financing, and prior approval
requirements may affect its ability to operate.
The operations of our storefronts depend on their continued good standing
under the licenses and approvals pursuant to which they operate. Licensing laws
and regulations vary from jurisdiction to jurisdiction. Such laws and
regulations are subject to amendment or interpretation by regulatory
authorities, and generally such authorities are vested with broad discretion as
to the granting, suspending, renewing and revoking of licenses and approvals.
In addition, there are currently 44 DCAP franchises. The offering of
franchises is regulated by both the federal government and some states,
including New York.
As a holding company, we are dependent on the results of operations of our
operating subsidiaries and the regulatory and contractual capacity of our
premium finance subsidiary to pay dividends to us.
We are a holding company and a legal entity separate and distinct from our
operating subsidiaries. As a holding company without significant operations of
our own, the principal sources of our funds are dividends and other payments
from our operating subsidiaries. Dividends from our premium finance subsidiary
are limited by the minimum capital requirements in applicable state regulations
and by covenants in our loan agreement with Manufacturers and Traders Trust Co.
Consequently, our ability to repay debts, pay expenses and pay cash dividends to
our shareholders may be limited.
Our premium finance subsidiary is subject to capital requirements, and our
failure to meet these standards could subject us to regulatory actions.
Our premium finance subsidiary is subject to minimum capital requirements
imposed under the laws of the states in which it conducts business. Failure to
meet applicable minimum statutory capital requirements could subject our premium
finance subsidiary to further examination or corrective action imposed by state
regulators, including limitations on our engaging in finance activities, state
supervision or even liquidation.
A decline in the number of insurance companies offering insurance products
in our markets would adversely affect our business.
Based upon economic conditions and loss history, insurance companies enter
and leave our
20
market. A reduction in the number of available insurance products that we can
offer to our customers would adversely affect our business.
We may have difficulties in managing our expansion into new geographic
markets, and we may not be successful in identifying agency acquisition
candidates or integrating their operations.
Our future growth plans include expanding into new states by acquiring the
business and assets of local agencies. Our future growth will face risks,
including risks associated with obtaining necessary licenses for our premium
finance operations and our ability to identify agency acquisition candidates or,
if acquired, to integrate their operations. In addition, we may acquire
businesses in states in which market and other conditions may not be favorable
to us.
Our inability to identify and acquire agency acquisition candidates could
hinder our growth by slowing down our ability to expand into new states. If we
do acquire additional agencies, we could suffer increased costs, disruption of
our business and distraction of our management if we are unable to integrate the
acquired agencies into our operations smoothly. Our geographic expansion will
also continue to place significant demands on our management, operations,
systems, accounting, internal controls and financial resources. Any failure by
us to manage our growth and to respond to changes in our business could have a
material adverse effect on our business, financial condition and results of
operations.
We may seek to expand through acquisitions of complementary businesses or
other assets which involve additional risks that may adversely affect us.
We continually seek to expand our operations by acquiring businesses or
other assets which we believe will complement or enhance our business. We may
also acquire or make investments in complementary businesses, products, services
or technologies. In the event we effect any such acquisition, we may not be able
to successfully integrate any acquired business, asset, product, service or
technology in our operations without substantial costs, delays or other problems
or otherwise successfully expand our operations. In addition, efforts expended
in connection with such acquisitions may divert our management's attention from
other business concerns. We also may have to borrow money to pay for future
acquisitions and we may not be able to do so at all or on terms favorable to us.
Additional borrowings and liabilities may have a materially adverse effect on
our liquidity and capital resources.
We are materially dependent upon the operations of our third party premium
finance servicing agent.
The administration, servicing and collection of our premium finance
receivables is handled by a third party. Our premium finance business is
materially dependent upon the operations of such company in a professional
manner, including the timely cancellation of insurance policies based upon the
failure of the customer to pay a premium finance receivable installment.
21
We rely on our information technology and telecommunication systems, and
the failure of these systems could materially and adversely affect our business.
Our business is highly dependent upon the successful and uninterrupted
functioning of our information technology and telecommunications systems as well
as those of our premium financing servicing agent. We rely on these systems to
support our operations, as well as to process new and renewal business, provide
customer service, make claims payments, support premium financing activities,
and facilitate collections and cancellations. The failure of these systems could
interrupt our operations and result in a material adverse effect on our
business.
The enactment of tort reform could adversely affect our business.
Legislation concerning tort reform is from time to time considered in the
United States Congress and in several states. Among the provisions considered
for inclusion in such legislation are limitations on damage awards, including
punitive damages, and various restrictions applicable to class action lawsuits.
Enactment of these or similar provisions by Congress or by states in which we
sell insurance could result in a reduction in the demand for liability insurance
policies or a decrease in the limits of such policies, thereby reducing our
commission revenues. We cannot predict whether any such legislation will be
enacted or, if enacted, the form such legislation will take, nor can we predict
the effect, if any, such legislation would have on our business or results of
operations.
ITEM 7. FINANCIAL STATEMENTS
------- --------------------
The financial statements required by this Item 7 are included in this
Annual Report on Form 10-KSB following Item 14 hereof.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
-------- ----------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in accountants due to disagreements on accounting and
financial disclosure during the twenty-four month period ended December 31,
2003.
ITEM 8A. CONTROLS AND PROCEDURES
-------- -----------------------
Our Chief Executive Officer and Chief Financial Officer conducted an
evaluation of the effectiveness of our disclosure controls and procedures. Based
on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of
December 31, 2003 in alerting him in a timely manner to material information
required to be included in our SEC reports. In addition, no change in our
internal control over financial reporting occurred during the fourth quarter of
the fiscal year ended December 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
22
PART III
--------
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
------- ------------------------------------------------------------------------
WITH SECTION 16(a) OF THE EXCHANGE ACT
--------------------------------------
Executive Officers and Directors
The following table sets forth the positions and offices presently held by
each of our current directors and executive officers and their ages:
---------------------------------------- ------------ --------------------------------------------------------------
Name Age Positions and Offices Held
---------------------------------------- ------------ --------------------------------------------------------------
Barry B. Goldstein 50 President, Chairman of the Board, Chief Executive Officer,
Chief Financial Officer, Treasurer and Director
---------------------------------------- ------------ --------------------------------------------------------------
Morton L. Certilman 72 Secretary and Director
---------------------------------------- ------------ --------------------------------------------------------------
Jay M. Haft 68 Director
---------------------------------------- ------------ --------------------------------------------------------------
Robert Wallach 51 Director
---------------------------------------- ------------ --------------------------------------------------------------
Barry B. Goldstein
Mr. Goldstein was elected our President, Chief Executive Officer, Chief
Financial Officer, Chairman of the Board, and a director in March 2001 and our
Treasurer in May 2001. Since April 1997, he has served as President of AIA
Acquisition Corp., which operated insurance agencies in Pennsylvania and which
sold substantially all of its assets to us in May 2003. Since 1982, he has
served as President of Stone Equities, a consulting firm. Mr. Goldstein received
his B.A. and M.B.A. from State University of New York at Buffalo, and has been a
certified public accountant since 1979.
Morton L. Certilman
Mr. Certilman served as our Chairman of the Board from February 1999 until
March 2001. From October 1989 to February 1999, he served as our President. He
was elected our Secretary in May 2001 and has served as one of our directors
since 1989. Mr. Certilman has been engaged in the practice of law since 1956 and
is affiliated with the law firm of Certilman Balin Adler & Hyman, LLP. Mr.
Certilman is Chairman of the Long Island Regional Planning Board, the Nassau
County Coliseum Privatization Commission, and the Northrop/Grumman Master
Planning Council. He served as a director of the Long Island Association and the
New Long Island Partnership for a period of ten years and currently serves as a
director of the Long Island Sports Commission. Mr. Certilman has lectured
extensively before bar associations, builders' institutes, title companies, real
estate institutes, banking and law school seminars, The Practicing Law
Institute, The Institute of Real
23
Estate Management and at annual conventions of such organizations as the
National Association of Home Builders, the Community Associations Institute and
the National Association of Corporate Real Estate Executives. He was a member of
the faculty of the American Law Institute/American Bar Association, as well as
the Institute on Condominium and Cluster Developments of the University of Miami
Law Center. Mr. Certilman has written various articles in the condominium field,
and is the author of the New York State Bar Association Condominium Cassette and
the Condominium portion of the State Bar Association book on "Real Property
Titles." Mr. Certilman received an LL.B. degree, cum laude, from Brooklyn Law
School.
Jay M. Haft
Mr. Haft served as our Vice Chairman of the Board from February 1999 until
March 2001. From October 1989 to February 1999, he served as our Chairman of the
Board. He has served as one of our directors since 1989. Mr. Haft has been
engaged in the practice of law since 1959 and since 1994 has served as counsel
to Parker Duryee Rosoff & Haft (and since December 2001, its successor, Reed
Smith). From 1989 to 1994, he was a senior corporate partner of that firm. Mr.
Haft is a strategic and financial consultant for growth stage companies. He is
active in international corporate finance and mergers and acquisitions. Mr. Haft
also represents emerging growth companies. He has actively participated in
strategic planning and fund raising for many high-tech companies, leading edge
medical technology companies and marketing companies. He is a director of many
public and private corporations, including Encore Medical Corporation and DUSA
Pharmaceuticals, Inc., whose securities are traded on the Nasdaq Stock Market,
and also serves on the Board of the United States-Russian Business Counsel. Mr.
Haft is a past member of the Florida Commission for Government Accountability to
the People, a past national trustee and Treasurer of the Miami City Ballet, and
a past Board member of the Concert Association of Florida. He is also a trustee
of Florida International University Foundation and serves on the advisory board
of the Wolfsonian Museum and Florida International University Law School. Mr.
Haft received B.A. and LL.B. degrees from Yale University.
Robert M. Wallach
Mr. Wallach has served since 1993 as President, Chairman and Chief
Executive Officer of The Robert Plan Corporation, a servicer and underwriter of
private passenger and commercial automobile insurance. He has served as one of
our directors since 1999.
There are no family relationships among any of our executive officers and
directors.
Each director will hold office until the next annual meeting of
stockholders and until his successor is elected and qualified or until his
earlier resignation or removal. Each executive officer will hold office until
the initial meeting of the Board of Directors following the next annual meeting
of stockholders and until his successor is elected and qualified or until his
earlier resignation or removal.
24
Audit Committee Financial Expert
Our Board of Directors has determined that the Audit Committee of the Board
does not have an "audit committee financial expert," as that is defined in Item
401(e)(2) of Regulation S-B. We are currently seeking to obtain the services of
an individual who would serve on our Board and Audit Committee and who would be
an "audit committee financial expert."
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Exchange Act requires that reports of beneficial
ownership of common shares and changes in such ownership be filed with the
Securities and Exchange Commission by Section 16 "reporting persons," including
directors, certain officers, holders of more than 10% of the outstanding common
shares and certain trusts of which reporting persons are trustees. We are
required to disclose in this Annual Report each reporting person whom we know to
have failed to file any required reports under Section 16 on a timely basis
during the fiscal year ended December 31, 2003. To our knowledge, based solely
on a review of written representations that no reports were required, during the
fiscal year ended December 31, 2003, our officers, directors and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them, except that, on two occasions, Mr. Goldstein filed a Form 4 one day late
(which forms reported one late transaction each).
Code of Ethics for Senior Financial Officers
Our Board of Directors has adopted a Code of Ethics for our principal
executive officer, principal financial officer, principal accounting officer or
controller, or persons performing similar functions. A copy of the Code of
Ethics is filed as an exhibit to this Annual Report. We intend to satisfy the
disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or a
waiver from, or Code of Ethics by posting such information on our website,
www.dcapinsurance.com.
ITEM 10. EXECUTIVE COMPENSATION
-------- ----------------------
Summary Compensation Table
The following table sets forth certain information concerning the
compensation for the fiscal years ended December 31, 2003, 2002 and 2001 for
Barry B. Goldstein, our Chief Executive Officer:
Long-Term Compensation
Name and Annual Compensation Awards All Other
Principal Position Year Salary Bonus Shares Underlying Options Compensation
------------------ ---- ------ ----- ------------------------- ------------
Barry B. Goldstein 2003 $300,000 $50,000(1) - -
Chief Executive Officer 2002 200,000 20,000 1,000,000 -
2001 200,000(2) - 1,000,000 -
----------
(1) Paid in March 2003 for services rendered during 2002.
(2) Includes amounts earned as a consultant prior to his employment.
25
Option Tables
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2003
Number of Common Percentage of Total
Shares Underlying Options Granted To
Name Options Granted Employees in Fiscal Year Exercise Price Expiration Date
---- --------------- ------------------------ -------------- ---------------
Barry B. Goldstein - - - -
AGGREGATED OPTION EXERCISES IN FISCAL YEAR
ENDED DECEMBER 31, 2003 AND FISCAL YEAR-END OPTION VALUES
Number of Shares Underlying Value of Unexercised
Number of Unexercised Options at In-the-Money Options
Shares Acquired Value December 31, 2003 at December 31, 2003
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
Barry B. Goldstein - - 1,600,000/400,000 $1,070,000/$280,000
Long-Term Incentive Plan Awards
No awards were made to Mr. Goldstein during the fiscal year ended December
31, 2003 under any long-term incentive plan.
Compensation of Directors
Effective January 1, 2004, our non-employee directors are entitled to
receive compensation for their services as directors as follows:
o $15,000 per annum
o additional $5,000 per annum for committee chair
o $500 per Board meeting attended ($250 if telephonic)
o $250 per committee meeting attended ($125 if telephonic)
In addition, in 2003, we paid Mr. Certilman $50,000 in consideration of his
services in obtaining the $500,000 settlement amount for our Puerto Rico hotel
lease, as discussed in "Developments During 2002" in Item 1(a) of this Annual
Report. In addition, during 2003, Mr. Certilman was paid a fee of $50,000 from
us for consulting services.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Mr. Goldstein is employed as our President, Chairman of the Board and Chief
Executive Officer pursuant to an employment agreement that expires on April 1,
2005. Mr. Goldstein is entitled to receive a salary of $300,000 per annum plus
such additional compensation as may be determined by the Board of Directors.
26
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-------- ----------------------------------------------------------------------
RELATED STOCKHOLDER MATTERS
---------------------------
Security Ownership
The following table sets forth certain information as of February 29, 2004
regarding the beneficial ownership of our common shares by (i) each person who
we believe to be the beneficial owner of more than 5% of our outstanding common
shares, (ii) each present director, (iii) each person listed in the Summary
Compensation Table under "Executive Compensation," and (iv) all of our present
executive officers and directors as a group.
Name and Address Number of Shares Approximate
of Beneficial Owner Beneficially Owned Percent of Class
------------------- ------------------ ----------------
Barry B. Goldstein 1,902,000(1)(2) 13.4%
1158 Broadway
Hewlett, New York
AIA Acquisition Corp. 1,808,000(3) 12.8%
6787 Market Street
Upper Darby, Pennsylvania
Eagle Insurance Company 1,486,893(4) 12.0%
c/o The Robert Plan
Corporation
999 Stewart Avenue
Bethpage, New York
Robert M. Wallach 1,486,893(5) 12.0%
c/o The Robert Plan Corporation
999 Stewart Avenue
Bethpage, New York
Jack Seibald 1,238,750(6) 9.9%
1336 Boxwood Drive West
Hewlett Harbor, New York
Morton L. Certilman 1,056,005(1)(7) 8.5%
The Financial Center at
Mitchel Field
90 Merrick Avenue
East Meadow, New York
27
Name and Address Number of Shares Approximate
of Beneficial Owner Beneficially Owned Percent of Class
------------------- ------------------ ----------------
Jay M. Haft 911,393(1)(8) 7.3%
69 Beaver Dam Road
Salisbury, CT 06068
Abraham Weinzimer 783,924(1) 6.3%
418 South Broadway
Hicksville, New York
Kevin Lang 651,460(1) 5.3%
3789 Merrick Road
Seaford, New York
All executive officers
and directors as a group 5,356,291(1)(2)(7) 37.2%
(4 persons) (8)(9)
----------
(1) Based upon Schedule 13D filed under the Securities Exchange Act of 1934, as
amended.
(2) Represents (i) 1,800,000 shares issuable upon the exercise of options that
are exercisable currently or within 60 days, (ii) 42,500 shares held by Mr.
Goldstein's children, and (iii) 59,500 shares held in a retirement trust
for the benefit of Mr. Goldstein. Mr. Goldstein disclaims beneficial
ownership of the shares held by his children and retirement trust. Excludes
shares owned by AIA Acquisition Corp. of which Mr. Goldstein is President
and members of his family are principal stockholders.
(3) Based upon Schedule 13G filed under the Securities Exchange Act of 1934, as
amended. Represents shares issuable upon the conversion of preferred shares
that are currently convertible.
(4) Eagle is a wholly-owned subsidiary of The Robert Plan Corporation.
(5) Represents shares owned by Eagle, of which Mr. Wallach, one of our
directors, is a Vice President. Eagle is a wholly-owned subsidiary of The
Robert Plan Corporation, of which Mr. Wallach is President, Chairman and
Chief Executive Officer.
(6) Based upon Schedule 13G filed under the Securities Exchange Act of 1934, as
amended. Represents (i) 565,000 shares owned jointly by Mr. Seibald and his
wife, Stephanie Seibald; (ii) 500,000 shares owned by SDS Partners I, Ltd.,
a limited partnership ("SDS"); (iii) 15,000 shares owned by Boxwood FLTD
Partners, a limited partnership ("Boxwood"); (iv) 30,000 shares owned by
Stewart Spector IRA ("S. Spector"); (v) 15,000 shares owned by Barbara
Spector IRA Rollover ("B. Spector"); (vi) 20,000 shares owned by Karen
Dubrowsky IRA
28
("Dubrowsky"); and (vii) 93,750 shares issuable upon the exercise of
currently exercisable warrants. Mr. Seibald has voting and dispositive
power over the shares owned by SDS, Boxwood, S. Spector, B. Spector and
Dubrowsky. The amount reflected as owned by S. Spector includes 15,000
shares issuable upon the exercise of currently exercisable warrants and
excludes 135,000 shares issuable upon the exercise of warrants that are not
exercisable due to a restriction that precludes the beneficial ownership of
more than 9.999% of the outstanding common shares.
(7) Includes 125,000 shares issuable upon the exercise of currently exercisable
options.
(8) Includes (i) 125,000 shares issuable upon the exercise of currently
exercisable options and (ii) 15,380 shares held in a retirement trust for
the benefit of Mr. Haft.
(9) Includes shares owned by Eagle, of which Mr. Wallach is a Vice President.
Mr. Wallach is also President, Chairman and Chief Executive Officer of The
Robert Plan, Eagle's parent.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth information as of December 31, 2003 with
respect to compensation plans (including individual compensation arrangements)
under which our common shares are authorized for issuance, aggregated as
follows:
o All compensation plans previously approved by security holders; and
o All compensation plans not previously approved by security holders.
EQUITY COMPENSATION PLAN INFORMATION
----------------------------------------------------------------------------------------------------------------------------
Number of securities to be Weighted average exercise Number of securities remaining
issued upon exercise of price of outstanding available for future issuance
outstanding options, options, warrants and under equity compensation plans
warrants and rights rights (excluding securities reflected in
(a) (b) column (a))
(c)
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans 3,152,500 $.66 597,500
approved by security holders
----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans -0- -0- -0-
not approved by security
holders
----------------------------------------------------------------------------------------------------------------------------
Total 3,152,500 $.66 597,500
========= ==== =======
----------------------------------------------------------------------------------------------------------------------------
29
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
Sale of Brentwood Store
Effective February 27, 2003, we sold our Brentwood, New York store to
Abraham Weinzimer, one of our principal stockholders, at a purchase price of
$115,437 (equal to approximately 70% of the store's commission income during
2002). Concurrently with the purchase, the entity acquired by Mr. Weinzimer
entered into a franchise agreement with DCAP Management Corp., our franchise
subsidiary, on terms similar in most respects to our standard conversion
franchise agreements. The terms of the above sale were the result of arm's
length negotiations between us and Mr. Weinzimer that were based upon the terms
of other recent sales of our stores to persons who are not affiliated with us
and then current market conditions. No independent appraisal or valuation was
received in connection with the agreement.
Purchase of Pennsylvania Stores
Effective May 1, 2003, we acquired substantially all of the assets of AIA
Acquisition Corp., an insurance brokerage firm with offices located in eastern
Pennsylvania. The salient terms of the acquisition are as follows:
o A base purchase price of $904,000 (which represents (i) 69% of AIA's
includable commission income for the 12 months ended March 31, 2002 or
the year ended December 31, 2002, whichever was less, plus (ii) an
amount equal to AIA's collected accounts receivable and prepaid
expenses). The base purchase price was payable in Series A preferred
shares. The Series A preferred shares carry a 5% dividend, are
convertible into common shares at a conversion price of $.50 per share
and are redeemable on April 30, 2007 (or sooner under certain
circumstances).
o Additional cash consideration based upon the EBITDA of the combined
operations of AIA and our wholly-owned subsidiary, Barry Scott
Companies, Inc., during the five year period ending April 30, 2008.
The additional consideration cannot exceed an aggregate of $335,000.
Mr. Goldstein, our Chief Executive Officer, is President of AIA and members
of his family are principal stockholders of AIA. The terms of the acquisition
were the result of arm's length negotiations between us and AIA and were based
upon the sales price of stores to persons who are not affiliated with us and
current market conditions.
Guaranty
Mr. Goldstein has guaranteed the repayment of $2,500,000 of the $18,000,000
line of credit from Manufacturers and Traders Trust Co. discussed in Items 1(a)
and 6 of this Annual Report. In consideration of the guaranty, we have agreed
that, for so long as the guaranty remains in effect, we will pay him $50,000 per
annum and reimburse him for all premiums paid by him on a $2,500,000 insurance
policy on his life. In the event, at the time of his death, the guaranty is
still in effect, the
30
proceeds of the life insurance policy will be used to satisfy the guaranty. In
such event, Mr. Goldstein's estate would not be entitled to be indemnified for
the amount so paid as a guarantor.
Relationship
Certilman Balin Adler & Hyman, LLP, a law firm with which Mr. Certilman is
affiliated, serves as our counsel. It is presently anticipated that such firm
will continue to represent us and will receive fees for its services at rates
and in amounts not greater than would be paid to unrelated law firms performing
similar services.
31
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
-------- --------------------------------------
(a) Exhibits
--------
Exhibit
Number Description of Exhibit
------ ----------------------
2(a) Share Purchase Agreement, dated as of August 30, 2002, by and between
Progressive Agency Holdings Corp. and Blast Acquisition Corp.(1)
2(b) Asset Purchase Agreement, dated May 28, 2003, by and among AIA-DCAP
Corp., DCAP Group, Inc. and AIA Acquisition Corp.(2)
3(a) Restated Certificate of Incorporation(3)
3(b) Certificate of Designation of Series A Preferred Stock (2)
3(c) By-laws, as amended(4)
10(a) 1998 Stock Option Plan, as amended(4)
10(b) Subscription Agreement, dated as of October 2, 1998, between DCAP
Group, Inc. and Eagle Insurance Company and amendments thereto(5)
10(c) Form of Subscription Agreement with regard to private offering of
Units, dated June 2, 1999(6)
10(d) Form of Registration Rights Agreement with regard to private offering
of Units, dated June 2, 1999(6)
10(e) Form of Warrant Agreement with regard to private offering of Units,
dated June 2, 1999(6)
10(f) Stock Purchase Agreement dated May 17, 2000 by and between DCAP Group,
Inc., Dealers Choice Automotive Planning, Inc., Alyssa Greenvald,
Morton Certilman, DCAP Ridgewood, Inc., DCAP Bayside, Inc., DCAP
Freeport, Inc. and MC DCAP, Inc.(7)
10(g) Employment Agreement, dated as of May 10, 2001, between DCAP Group,
Inc. and Barry Goldstein(8)
10(h) Stock Option Agreement, dated as of May 10, 2001, between DCAP Group,
Inc. and Barry Goldstein(8)
10(i) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Barry Goldstein(4)
32
10(j) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Morton L. Certilman(4)
10(k) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Jay M. Haft(4)
10(l) Stock Purchase Agreement, dated as of February 27, 2003, between DCAP
Group, Inc. and Abraham Weinzimer with respect to sale of DCAP
Brentwood Inc.(4)
10(m) Financing and Security Agreement, dated July 10, 2003, by and between
Manufacturers and Traders Trust Company and Payments Inc.(9)
10(n) Grid Note, dated July 10, 2003, in the principal amount of $18,000,000
issued by Payments Inc. to Manufacturers and Traders Trust Company(9)
10(o) Security Agreement, dated July 10, 2003, by DCAP Group, Inc, DCAP
Management Corp., AIA-DCAP Corp., Aard-Vark Agency, Ltd., Barry Scott
Agency, Inc., Barry Scott Companies, Inc., Barry Scott Acquisition
Corp., Baron Cycle, Inc., Blast Acquisition Corp., Dealers Choice
Automotive Planning, Inc., IAH, Inc. and Intandem Corp. for the
benefit of Manufacturers and Traders Trust Company(9)
10(p) Pledge, Assignment and Security Agreement, dated July 10, 2003, by
DCAP Group, Inc. for the benefit of Manufacturers and Traders Trust
Company(9)
10(q) Pledge, Assignment and Security Agreement, dated July 10, 2003, by
Blast Acquisition Corp. for the benefit of Manufacturers and Traders
Trust Company(9)
10(r) Unit Purchase Agreement, dated as of July 2, 2003, by and among DCAP
Group, Inc. and the purchasers named therein(9)
10(s) Security Agreement, dated as of July 10, 2003, by and among Payments
Inc. and the secured parties named therein(9)
10(t) Pledge Agreement, dated as of July 10, 2003, by and among DCAP Group,
Inc. and the pledgees named therein(9)
10(u) Form of Secured Subordinated Promissory Note, dated July 10, 2003,
issued by DCAP Group, Inc. with respect to aggregate principal
indebtedness of $3,500,000(9)
10(v) Form of Warrant, dated July 10, 2003, for the purchase of an aggregate
of 525,000 shares of common stock of DCAP Group, Inc.(9)
10(w) Registration Rights Agreement, dated July 10, 2003, by and among DCAP
Group, Inc. and the purchasers named therein(9)
33
10(x) Letter agreement, dated October 31, 2003, between DCAP Group, Inc. and
Barry Goldstein
14 Code of Ethics
21 Subsidiaries
23 Consent of Holtz Rubenstein & Co., LLP
31 Rule 13a-14(a)/15d-14(a) Certification as adopted pursuant to Section
302 of the Sarbanes Oxley Act of 2002
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------
(1) Denotes document filed as an exhibit to our Current Report on Form 8-K for
an event dated August 30, 2002 and incorporated herein by reference.
(2) 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.
(3) 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.
(4) Denotes document filed as an exhibit to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 2002 and incorporated herein by
reference.
(5) Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB
for the period ended March 31, 2001 and incorporated herein by reference.
(6) Denotes document filed as an exhibit to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1999 and incorporated herein by
reference.
(7) Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB
for the period ended June 30, 2000 and incorporated herein by reference.
(8) Denotes document filed as an exhibit to our Quarterly Report on Form 10-QSB
for the period ended June 30, 2001 and incorporated herein by reference.
(9) Denotes document filed as an exhibit to Amendment No. 1 to our Current
Report on Form 8-K for an event dated May 28, 2003 and incorporated herein
by reference.
34
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by us during the last quarter of the
fiscal year ended December 31, 2003.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-------- ---------------------------------------
The following is a summary of the fees billed to us by Holtz Rubenstein &
Co., LLP, our independent auditors, for professional services rendered for the
fiscal years ended December 31, 2003 and December 31, 2002:
Fee Category Fiscal 2003 Fees Fiscal 2002 Fees
------------ ---------------- ----------------
Audit Fees(1) $44,400 $58,305
Audit-Related Fees(2) 1,675 10,750
Tax Fees - -
All Other Fees(3) 9,630 13,000
------- -------
Total Fees $55,705 $82,055
======= =======
----------
(1) Audit Fees consist of aggregate fees billed for professional services
rendered for the audit of our annual financial statements and review of the
interim financial statements included in quarterly reports or services that
are normally provided by the independent auditors in connection with
statutory and regulatory filings or engagements for the fiscal years ended
December 31, 2003 and December 31, 2002, respectively.
(2) Audit-Related Fees consist of aggregate fees billed for assurance and
related services that are reasonably related to the performance of the
audit or review of our financial statements and are not reported under
"Audit Fees." These fees related to a review of our Current Reports on Form
8-K and matters related to our acquisition of Barry Scott Companies, Inc.
(3) All Other Fees consist of aggregate fees billed for products and services
provided by Holtz Rubenstein, other than those disclosed above. These fees
related to the audits of our wholly-owned subsidiary, DCAP Management
Corp., and general accounting consulting services.
The Audit Committee is responsible for the appointment, compensation and
oversight of the work of the independent auditors and approves in advance any
services to be performed by the independent auditors, whether audit-related or
not. The Audit Committee reviews each proposed engagement to determine whether
the provision of services is compatible with maintaining the independence of the
independent auditors. All of the fees shown above were pre-approved by the Audit
Committee.
35
DCAP GROUP, INC. AND
SUBSIDIARIES
--------------------------------------------------------------------------------
REPORT ON AUDITS OF CONSOLIDATED
FINANCIAL STATEMENTS
Two Years Ended December 31, 2003
DCAP GROUP, INC. AND
SUBSIDIARIES
Contents
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003 Pages
--------------------------------------------------------------------------------
Financial Statements
Independent Auditors' Report F-2
Consolidated Balance Sheet F-3
Consolidated Statements of Income F-4
Consolidated Statement of Stockholders' Equity (Deficit) F-5
Consolidated Statements of Cash Flows F-6
Notes to Consolidated Financial Statements F-7 - F-21
Independent Auditors' Report
Board of Directors and Stockholders
DCAP Group, Inc. and Subsidiaries
Hewlett, New York
We have audited the accompanying consolidated balance sheet of DCAP Group, Inc.
and Subsidiaries as of December 31, 2003 and the related consolidated statements
of income, stockholders' equity (deficit) and cash flows for each of the years
in the two-year period ended December 31, 2003. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of DCAP Group, Inc. and
Subsidiaries as of December 31, 2003 and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2003 in conformity with accounting principles generally accepted in the United
States of America.
Holtz Rubenstein & Co., LLP
Melville, New York
February 13, 2004
F-2
DCAP GROUP, INC. AND
SUBSIDIARIES
Consolidated Balance Sheet
----------------------------------------------------------------------------------------------------------------------------
December 31, 2003
----------------------------------------------------------------------------------------------------------------------------
Assets
Current Assets:
Cash and cash equivalents $ 1,349,304
Accounts receivable, net of allowance for
doubtful accounts of $73,000 1,796,360
Finance contracts receivable $ 21,202,827
Less: Deferred interest (1,871,157)
Less: Allowance for doubtful accounts (247,509) 19,084,161
-------------------
Prepaid expenses and other current assets 123,402
------------
Total Current Assets 22,353,227
Property and Equipment, net 397,948
Goodwill 1,171,551
Other Intangibles, net 343,460
Deposits and Other Assets 353,628
------------
Total Assets $24,619,814
============
Liabilities and Stockholders' Equity
Current Liabilities:
Revolving credit line $ 8,968,082
Accounts payable and accrued expenses 1,327,529
Premiums payable 6,530,219
Current portion of long-term debt 125,000
Other current liabilities 233,703
-------------
Total Current Liabilities 17,184,533
-------------
Long-Term Debt 3,742,400
-------------
Other Liabilities 43,753
-------------
Mandatorily Redeemable Preferred Stock 904,000
-------------
Commitments
Stockholders' Equity:
Preferred stock, $.01 par value; authorized
1,000,000 shares; 0 shares issued and outstanding -
Common stock, $.01 par value; authorized 40,000,000 shares;
issued 16,068,018 160,680
Capital in excess of par 10,389,409
Deficit (6,876,306)
--------------
3,673,783
Treasury stock, at cost, 3,714,616 shares (928,655)
--------------
Total Stockholders' Equity 2,745,128
--------------
Total Liabilities and Stockholders' Equity $24,619,814
==============
--------------------------------------------------------------------------------
See notes to consolidated financial statements. F-3
DCAP GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Income
----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2003 2002
----------------------------------------------------------------------------------------------------------------------------
Revenues:
Commissions and fees $ 6,354,920 $ 2,473,921
Premium finance revenue 2,330,831 1,309,808
--------------------------------------
8,685,751 3,783,729
--------------------------------------
Operating Expenses:
General and administrative expenses 6,812,013 2,875,063
Depreciation and amortization 282,786 135,882
Premium finance interest expense 335,343 -
--------------------------------------
Total Operating Expenses 7,430,142 3,010,945
--------------------------------------
Operating Income 1,255,609 772,784
--------------------------------------
Other (Expense) Income:
Interest income 9,085 2,460
Interest expense (54,716) (64,299)
Interest expense - mandatorily redeemable preferred stock (30,133) -
Gain on sale of stores and business 178,662 -
--------------------------------------
102,898 (61,839)
--------------------------------------
Income Before Provision for Income Taxes and Minority Interest 1,358,507 710,945
Provision for Income Taxes 22,608 10,534
--------------------------------------
Income Before Minority Interest 1,335,899 700,411
Minority Interest - 1,936
--------------------------------------
Income from Continuing Operations 1,335,899 698,475
Discontinued Operations:
(Loss) income from operations of discontinued subsidiary, net of
income taxes of $0 and $3,194, respectively (46,096) 34,612
Gain on disposition of discontinued subsidiary,
net of income taxes of $22,000 - 312,920
--------------------------------------
Net Income $ 1,289,803 $ 1,046,007
======================================
Net Income Per Common Share:
Basic:
Income from continuing operations $ 0.11 $ 0.06
(Loss) income from operations of discontinued subsidiary (0.01) -
Gain on disposition of discontinued subsidiary - 0.03
--------------------------------------
Net income $ 0.10 $ 0.09
======================================
Diluted:
Income from continuing operations $ 0.09 $ 0.06
(Loss) income from operations of discontinued subsidiary - -
Gain on disposition of discontinued subsidiary - 0.03
--------------------------------------
Net income $ 0.09 $ 0.09
======================================
Weighted Average Number of Shares Outstanding
Basic 12,353,402 11,695,868
======================================
Diluted 14,746,305 12,037,194
======================================
----------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. F-4
DCAP GROUP, INC. AND
SUBSIDIARIES
Consolidated Statement of Stockholders' Equity (Deficit)
------------------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2003 and 2002
------------------------------------------------------------------------------------------------------------------------------------
Common Stock Preferred Stock Capital
------------------- --------------- in Excess Equity Treasury
Shares Amount Shares Amount of Par (Deficit) Stock Total
---------- -------- ------ ------ ----------- ------------ ---------- ----------
Balance, January 1, 2002 15,068,018 $150,680 - $ - $ 9,752,409 $(9,212,116) $(928,655) $ (237,682)
Securities Issued to Private Placement Investors 1,000,000 10,000 - - 490,000 - - 500,000
Net Income - - - - - 1,046,007 - 1,046,007
---------- -------- ------ ------ ----------- ------------ ---------- ----------
Balance, December 31, 2002 16,068,018 160,680 - - 10,242,409 (8,166,109) (928,655) 1,308,325
Warrants Issued with Private Placement - - - - 147,000 - - 147,000
Net Income - - - - - 1,289,803 - 1,289,803
---------- -------- ------ ------ ----------- ------------ ---------- ----------
Balance, December 31, 2003 16,068,018 $160,680 - $ - $10,389,409 $(6,876,306) $(928,655) $2,745,128
========== ======== ====== ====== =========== ============ ========== ==========
--------------------------------------------------------------------------------
See notes to consolidated financial statements. F-5
DCAP GROUP, INC. AND
SUBSIDIARIES
Consolidated Statements of Cash Flows
----------------------------------------------------------------------------------------------------------------------------
Years Ended December 31, 2003 2002
----------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net income $ 1,289,803 $ 1,046,007
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 282,786 153,175
Bad debt expense 21,408 4,869
Gain on sale of stores and business (178,662) -
Amortization of warrants 29,400 -
Gain on disposition of discontinued subsidiary - (312,920)
Minority interest - 1,936
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (1,095,662) (220,245)
Prepaid expenses and other current assets (30,833) (9,597)
Deposits and other assets (289,392) 43,989
Increase (decrease) in liabilities:
Premiums payable 6,530,219 -
Accounts payable and accrued expenses 530,298 (336,063)
Other current liabilities (11,601) (35,253)
--------------------------------------
Net Cash Provided by Operating Activities 7,077,764 335,898
--------------------------------------
Cash Flows from Investing Activities:
Increase in finance contracts receivable - net (19,084,161) -
Decrease in notes and other receivables - net 34,945 4,150
Proceeds from disposition of discontinued subsidiary 500,000 -
Proceeds from sale of stores and business 254,308 -
Purchase of property and equipment (133,217) (28,797)
Business acquisitions (106,039) (211,051)
Purchase of minority interest - (40,000)
--------------------------------------
Net Cash Used in Investing Activities (18,534,164) (275,698)
--------------------------------------
Cash Flows from Financing Activities:
Principal payments on long-term debt (269,781) (140,238)
Proceeds from long-term debt 3,500,000 -
Proceeds from revolving loan 17,769,118 -
Payments on revolving loan (8,801,036) -
Proceeds from private placement - 500,000
Decrease in due to officer - (33,333)
--------------------------------------
Net Cash Provided by Financing Activities 12,198,301 326,429
--------------------------------------
Net Increase in Cash and Cash Equivalents 741,901 386,629
Cash and Cash Equivalents, beginning of year 607,403 220,774
--------------------------------------
Cash and Cash Equivalents, end of year $ 1,349,304 $ 607,403
======================================
--------------------------------------------------------------------------------
See notes to consolidated financial statements. F-6
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
1. Organization and Nature of Business
DCAP Group, Inc. and Subsidiaries (the "Company") operate a network of
retail offices and franchise operations engaged in the sale of retail auto,
motorcycle, boat, business, and homeowner's insurance, and provide premium
financing of insurance policies for customers of their offices as well as
customers of non-affiliated entities. The Company also provides automobile
club services for roadside emergencies and tax preparation services.
Prior to July 14, 2003, the Company's premium finance business entailed the
origination of premium finance contracts which were sold to third parties,
and for which the Company earned a fee. On July 14, 2003, the Company
changed its business model with respect to its premium finance operations
from selling finance contracts to third parties to internally financing
those contracts.
In addition, the Company operated the International Airport Hotel in San
Juan, Puerto Rico (the "Hotel") through its wholly owned subsidiary, IAH,
Inc. The lease on the hotel was terminated in January 2003 and the
operations of this subsidiary have been presented as discontinued
operations in the accompanying financial statements.
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 the Company has a majority voting interest or voting control. All
significant intercompany accounts and transactions have been eliminated.
Commission and fee income - The Company recognizes commission revenue from
insurance policies at the beginning of the contract period, except for
commissions that are receivable annually, for which the Company recognizes
the commission revenue ratably. Refunds of commissions on the cancellation
of insurance policies are reflected at the time of cancellation.
Franchise fee revenue is recognized when substantially all the Company's
contractual requirements under the franchise agreement are completed.
Fees for income tax preparation are recognized when the services are
completed. Automobile club dues are recognized equally over the contract
period.
Allowance for doubtful accounts - Management must make estimates of the
uncollectability of accounts receivable. Management specifically analyzed
accounts receivable and analyzes historical bad debts, customer
concentrations, customer credit-worthiness, current economic trends and
changes in customer payment terms when evaluating the adequacy of the
allowance for doubtful accounts.
Finance income, fees and receivables - Until July 14, 2003, premium
financing fee revenue was earned based upon the origination of premium
finance contracts sold by agreement to third parties. The contract fee gave
consideration to an estimate as to the collectability of the loan amount.
Periodically, actual results were compared to estimates previously
recorded, and adjusted accordingly.
On July 14, 2003, the Company changed its business model with respect to
its premium finance operations from selling finance contracts to third
parties to internally financing those contracts.
Finance income consists of interest, service fees and delinquency fees.
Finance income, other than delinquency fees, is recognized using the
interest method or similar methods that produce a level yield over the life
of each loan (generally 9 to 10 months). Delinquency fees are earned when
collected. Upon cancellation of the underlying insurance policies, any
uncollected earned interest or fees are charged off.
--------------------------------------------------------------------------------
F-7
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Allowance for finance receivable losses - Losses on finance receivables
include an estimate of future credit losses on premium finance accounts.
Credit losses on premium finance accounts occur when the unearned premiums
received from the insurer upon cancellation of a financed policy are
inadequate to pay the balance of the premium finance account. The majority
of these shortfalls result in the write-off of unrealized interest. The
Company reviews 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 the
Company used. As of December 31, 2003, the allowance for finance receivable
losses was approximately $248,000.
Goodwill and intangible assets - In January 2002, the Company adopted SFAS
No. 141, "Business Combinations" and No. 142, "Goodwill and Intangible
Assets". SFAS No. 141 requires the use of the purchase method of accounting
and prohibits the use of the pooling-of-interests method of accounting for
business combinations initiated after June 30, 2001. SFAS No. 141 also
requires that the Company recognize acquired intangible assets apart from
goodwill if the acquired intangible assets meet certain criteria. It also
requires, upon adoption of SFAS No. 142, that the Company reclassify, if
necessary, the carrying amounts of intangible assets and goodwill based on
the criteria of SFAS No. 141.
SFAS No. 142 requires, among other things, that companies no longer
amortize goodwill, but instead test goodwill for impairment at least
annually. In addition, SFAS No. 142 requires that the Company identify
reporting units for the purpose of assessing potential future impairment of
goodwill, reassess the useful lives of other existing recognized intangible
assets and cease amortization of intangible assets with an indefinite
useful life.
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 its most recent analysis, the Company believes that no
impairment of goodwill exists at December 31, 2003.
Property and equipment - Property and equipment are stated at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the related assets. Leasehold improvements are being
amortized using the straight-line method over the estimated useful lives of
the related assets or the remaining term of the lease.
Concentration of credit risk - The Company invests its excess cash in
deposits and money market accounts with major financial institutions and
has not experienced losses related to these investments.
All finance contracts receivable are repayable in less than one year. In
the event of a default by the borrower, the Company is entitled to cancel
the underlying insurance policy financed and receive a refund for the
unused term of such policy from the insurance carrier. The Company
structures the repayment terms in an attempt to minimize principal losses
on finance contract receivables.
Cash and cash equivalents - The Company considers all highly liquid debt
instruments with a maturity of three months or less, as well as bank money
market accounts, to be cash equivalents.
Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
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
--------------------------------------------------------------------------------
F-8
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
reflect, in periods in which they have a dilutive effect, the impact of
common shares issuable upon exercise of stock options.
The reconciliation for the years ended December 31, 2003 and 2002 is as
follows:
Years Ending December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Weighted Average Number of Shares Outstanding 12,353,402 11,695,868
Effect of Dilutive Securities, common stock equivalents 2,392,903 341,326
------------------- ------------------
Weighted Average Number of Shares Outstanding, used for
computing diluted earnings per share 14,746,305 12,037,194
=================== ==================
Net income available to common shareholders for the computation of diluted earnings per share is computed
as follows:
Years Ending December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Net Income $ 1,289,803 $ 1,046,007
Interest Expense on Dilutive Convertible Preferred Stock 30,133 -
------------------- ------------------
Net Income Available to Common Shareholders for
Diluted Earnings Per Share $ 1,319,936 $ 1,046,007
=================== ==================
Advertising costs - Advertising costs are charged to operations when the
advertising first takes place. Included in general and administrative
expenses are advertising costs approximating $453,000 and $214,000 for the
years ended December 31, 2003 and 2002, respectively.
Impairment of long-lived assets - The Company reviews long-lived assets and
certain identifiable intangibles to be held and used for impairment on an
annual basis and whenever events or changes in circumstances indicate that
the carrying amount of an asset exceeds the fair value of the asset. If
other events or changes in circumstances indicate that the carrying amount
of an asset that the Company expects to hold and use may not be
recoverable, the Company will estimate the undiscounted future cash flows
expected to result from the use of the asset or its eventual disposition,
and recognize an impairment loss. The impairment loss, if determined to be
necessary, would be measured as the amount by which the carrying amount of
the assets exceeds the fair value of the assets. A similar evaluation is
made in relation to goodwill, with any impairment loss measured as the
amount by which the carrying value of such goodwill exceeds the expected
undiscounted future cash flows.
Income taxes - Deferred tax assets and liabilities are determined based
upon the differences between financial reporting and tax bases of assets
and liabilities, and are measured using the enacted tax rates and laws that
will be in effect when the differences are expected to reverse.
New accounting pronouncements - In November 2002, the FASB issued FASB
Interpretation (FIN) No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others, an interpretation of FASB Statements No. 5, 57 and 107 and
Rescission of FASB Interpretation No. 34". FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan
guarantees such as standby letters of credit and warranty obligations. It
also clarifies that at the time a company issues a guarantee, a company
must recognize an initial liability for the fair value of the obligations
it assumes under that guarantee and must disclose that information in its
interim and annual financial statements. The provisions of FIN 45 relating
to initial recognition and measurement must be applied on a prospective
basis to guarantees issued or modified after December 31, 2002. The
adoption of the initial recognition and measurement provisions did not have
a significant impact on the Company's
--------------------------------------------------------------------------------
F-9
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
financial condition or results of operations. The disclosure requirements
of FIN 45, which were effective for both interim and annual periods that
end after December 15, 2002, did not have a material impact on the
Company's financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities", to address perceived weaknesses in the accounting and
financial reporting for investments or interests in entities commonly known
as special purpose or off-balance-sheet entities. FIN 46 requires certain
variable interest entities to be consolidated by the primary beneficiary of
the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 was
required to be applied to preexisting entities of the Company as of the
beginning of the first quarter after June 15, 2003. FIN 46 was required to
be applied to all new entities with which the Company became involved
beginning February 1, 2003. The adoption of FIN No. 46 did not have a
material impact on the Company's financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement clarifies
accounting and reporting for derivative instruments, including certain
embedded derivatives, and for hedging activities under SFAS No. 133. SFAS
No. 149 is effective for contracts entered into or modified after June 30,
2003 and for hedging relationships designated after June 30, 2003. The
guidance should be applied prospectively. The adoption of SFAS No. 149 did
not have a material impact on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity".
This Statement was developed to respond to concerns expressed by users of
financial statements about issuers' classification in the statement of
financial position of certain financial instruments that have
characteristics of both liabilities and equity but that have been presented
either entirely as equity or between the liabilities section and the equity
section of the statement of financial position "mezzanine equity". This
Statement also addresses questions about the classification of certain
financial instruments that embody obligations to issue equity shares. SFAS
No. 150 aims to eliminate diversity in practice by requiring certain types
of "freestanding" financial instruments, such as mandatorily redeemable
instruments, to be reported as liabilities. Preferred dividends on these
instruments are now classified as interest expense. Retroactive
reclassification of amounts reported in historical financial statements for
periods prior to the effective date of SFAS 150 is not permitted. The
provisions of SFAS No. 150, which also include a number of new disclosure
requirements, were effective for instruments entered into or modified after
May 31, 2003 and pre-existing instruments as of the beginning of the first
interim period that commenced after June 15, 2003. The Company has
classified its Series A Preferred Stock as a long-term liability in
accordance with SFAS No. 150.
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 the
Company's website, that are capitalized and depreciated over two years. A
total of $48,163 and $0 in such costs were incurred during the years ended
December 31, 2003 and 2002, respectively.
Comprehensive income (loss) - Comprehensive income (loss) refers to
revenue, expenses, gains and losses that under generally accepted
accounting principles are included in comprehensive income but are excluded
from net income as these amounts are recorded directly as an adjustment to
stockholders' equity. At December 31, 2003 and 2002, there were no such
adjustments required.
Stock based compensation - The Company has elected the disclosure only
provisions of Statement of Financial Accounting Standard No. 123,
"Accounting for Stock-Based Compensation" ("FASB 123") in accounting for
its employee stock options. Accordingly, no compensation expense has been
recognized. Had the Company recorded compensation expense for the stock
options based on the fair value at the grant date for awards in the years
ended December 31, 2003 and 2002, consistent with the provisions of SFAS
123, the
--------------------------------------------------------------------------------
F-10
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Company's net income and net income per share would have been adjusted to
the following pro forma amounts:
2003 2002
----------------------------------------------------------------------------- ------------------- ------------------
Net Income, as reported $ 1,289,803 $ 1,046,007
Net Income, pro forma 1,184,839 668,132
Basic Income Per Share, as reported .10 .09
Basic Income Per Share, pro forma .10 .06
Diluted Income Per Share, as reported .09 .09
Diluted Income Per Share, pro forma .08 .06
The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing
model. The following weighted average assumptions were used for grants during the years ended
December 31, 2003 and 2002:
2003 2002
----------------------------------------------------------------------------- -------------------- --------------------
Dividend Yield 0.00% 0.00%
Volatility 95.88% 96.46%
Risk-Free Interest Rate 2.00% 6.00%
Expected Life 5 years 5 years
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
stock options.
3. Acquisitions
Barry Scott Companies - On August 30, 2002, the Company acquired all the
outstanding capital stock of Barry Scott Companies, Inc. for an acquisition
price of $917,000, including transaction costs of approximately $67,000.
Barry Scott Companies consists of a holding company and three insurance
agencies with 20 store locations throughout New York State. The insurance
agencies derive substantially all of their income from commissions and fees
associated with the sale of automobile insurance. The acquisition allows
for the expansion of the Company's geographical footprint within New York
State and allows the Company to capitalize on operational and
administrative efficiencies.
The goodwill amount recorded is comprised of the following: (i) the excess
of the purchase price over the tangible net assets and identified
intangibles acquired and (ii) the estimated direct transaction costs
associated with the acquisition.
The Company's consolidated statements of income include the revenues and
expenses of Barry Scott Companies from August 30, 2002.
AIA Acquisition Corp. - On May 28, 2003, the Company acquired (effective
May 1, 2003) substantially all of the assets of AIA Acquisition Corp.
("AIA"), an insurance brokerage firm with six offices located in eastern
Pennsylvania for a base purchase price of $904,000. The base purchase price
was payable with 904
--------------------------------------------------------------------------------
F-11
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
shares of the Company's Series A Preferred Stock. The Series A Preferred
Stock carries a 5.0% dividend, is convertible into the Company's Common
Stock at a conversion price of $.50 per share and is redeemable on April
30, 2007 (or sooner under certain circumstances). Additional contingent
cash consideration based upon the EBITDA of the combined operations of AIA
and the Company's wholly-owned subsidiary, Barry Scott Companies, Inc.,
during the five year period ending April 30, 2008 may be payable. The
additional cash consideration cannot exceed $67,000 in any one-year, and an
aggregate of $335,000 for the five year period.
The AIA insurance agencies derive substantially all of their income from
commissions and fees associated with the sale of automobile insurance. The
acquisition allows for the expansion of the Company's geographical
footprint outside New York State and allows for the Company to capitalize
on operational and administrative efficiencies.
On May 28, 2003, the Company entered into a two-year employment contract
with a former employee of AIA.
The goodwill amount recorded is comprised of the following: (i) the excess
of the purchase price over the tangible net assets and identified
intangibles acquired and (ii) the estimated direct transaction costs
associated with the acquisition.
The Company's consolidated statements of income include the revenues and
expenses of AIA from May 1, 2003.
The following pro forma results were developed assuming the acquisition of
AIA had occurred on January 1, 2002:
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Revenue $ 9,098,795 $ 4,962,858
Income from Continuing Operations 1,347,120 698,617
Income from Continuing Operations Per Share 0.11 0.06
The above unaudited pro forma condensed financial information is
presented for illustrative purposes only and is not indicative of the
condensed consolidated results of operations that actually would have
been realized had the Company and AIA been a combined entity during the
specified periods.
The following is a condensed balance sheet showing the fair values of
the assets acquired and the liabilities assumed of AIA as of the date
of acquisition:
Commissions Receivable $ 152,000
Property and Equipment 85,000
Other Assets 14,000
Intangible Assets 150,000
Goodwill Arising in the Acquisition 503,000
------------------
Net Assets Acquired $ 904,000
==================
--------------------------------------------------------------------------------
F-12
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
4. Goodwill
The changes in the carrying value of goodwill are as follows:
December 31, 2003 2002
------------------------------------------------------------------------------ ------------------- -------------------
Balance, beginning of year $ 619,382 $ 75,000
Additions, as a result of business combination 503,130 515,241
Addition, as a result of contingent acquisition and transaction costs 106,039 -
Addition, as a result of acquisition of minority interest - 29,141
Reduction, as a result of sale of stores (57,000) -
------------------- -------------------
Balance, end of year $ 1,171,551 $ 619,382
=================== ===================
5. Other Intangibles
At December 31, 2003 other intangible assets consist of the following:
Gross Carrying Amount:
Customer lists $ 253,550
Restrictive covenants 100,000
Vanity phone numbers 204,416
------------------
557,966
------------------
Accumulated Amortization:
Customer lists 59,516
Restrictive covenants 100,000
Vanity phone numbers 54,990
------------------
214,506
------------------
Balance, end of year $ 343,460
==================
The aggregate amortization expense for the years ended December 31, 2003
and 2002, was approximately $92,000 and $54,000, respectively.
Estimated amortization expense for the five years subsequent to December
31, 2003 is as follows:
Years Ending December 31,
------------------------------------------------------------------------------ ------------------- ------------------
2004 $ 77,000
2005 77,000
2006 68,000
2007 26,000
2008 14,000
The remaining weighted-average amortization period as of December 31, 2003
is as follows:
Customer Lists 3.06 years
Restrictive Covenants 0.00 years
Vanity Phone Numbers 11.00 years
--------------
5.41 years
==============
--------------------------------------------------------------------------------
F-13
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Other intangible assets are being amortized using the straight-line method
over a period of four to fifteen years.
6. Property and Equipment
At December 31, 2003 property and equipment consists of the following:
Useful Lives
-------------------------------------------------------------- ---------------- ------------------- ------------------
Furniture, Fixtures and Equipment 5 years $ 322,551
Office Equipment 5 years 536,579
Leasehold Improvements 3 - 5 years 215,823
Computer Hardware and Software 2 - 5 years 555,198
Entertainment Facility 20 years 200,538
------------------
1,830,689
Less Accumulated Depreciation and Amortization 1,432,741
------------------
$ 397,948
==================
Depreciation expense for the years ended December 31, 2003 and 2002
aggregated $78,815 and $74,951, respectively.
7. Accounts Payable and Accrued Expenses
At December 31, 2003 accounts payable and accrued expenses consists of the
following:
Accounts Payable $ 878,753
Interest 207,000
Payroll and Related Costs 81,000
Professional Fees 77,000
Other 83,776
------------------
$ 1,327,529
==================
8. Debentures Payable
In 1971, the Company, pursuant to a plan of arrangement, issued a series of
debentures which matured in 1977. As of December 31, 2003, $154,200 of
these debentures has not been presented for payment. Accordingly, this
balance has been included in other current liabilities in the accompanying
consolidated balance sheet. Interest has not been accrued on the remaining
debentures payable. In addition, no interest, penalties or other charges
have been accrued with regard to any escheat obligation of the Company.
9. Revolving Credit Facility
In July 2003, the Company obtained an $18,000,000 revolving line of credit
from Manufacturers and Traders Trust Co. (the "Bank"). The line bears
interest at the Bank's prime lending rate (4.0% at December 31, 2003) plus
1.5%, and matures on July 31, 2005. The Company can borrow against the line
to the extent of 80% of eligible premium finance receivables. As of
December 31, 2003, $8,968,082 was outstanding under this loan.
The line is secured by substantially all of the assets of the Company and a
$4,000,000 life insurance policy on the Company's Chairman and CEO. The
Company's Chairman and CEO has guaranteed the repayment of
--------------------------------------------------------------------------------
F-14
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
$2,500,000 of the line.
10. Long-Term Debt
At December 31, 2003, long-term debt is comprised of the following:
Note payable issued in connection with the purchase of Barry Scott
Companies, due in annual installments of $125,000 in August 2004 and
2005 and $235,000 in August 2006, plus interest at 5%. $ 485,000
Subordinated loan, which bears interest at 12.625% per annum, payable
monthly. The principal balance is due and payable on January 10,
2006. The loan is subordinate to the revolving credit facility, and
is secured by a security interest in the assets of the Company's
premium finance subsidiary and a pledge of the subsidiaries' stock. 3,500,000
Unamortized value of stock purchase warrants issued in connection with
subordinated loan. (117,600)
-------------------
3,867,400
Less Current Maturities 125,000
-------------------
$ 3,742,400
===================
Long-term debt matures as follows:
Year Ending December 31,
------------------------------------------------------------------------------- ------------------- ------------------
2004 $ 125,000
2005 125,000
2006 3,735,000
11. Sale of Stores and Business
During the year ended December 31, 2003, the Company sold two of its retail
insurance brokerage offices and the book of business relating to an
additional store for cash consideration aggregating approximately $254,000
and a note receivable of approximately $97,000. These sales resulted in a
gain of approximately $178,000. The assets sold included accounts
receivable of approximately $97,000, goodwill with a carrying value of
$57,000, property and equipment with a carrying amount of approximately
$10,000, and other assets of approximately $10,000.
12. Related Party Transaction
Professional fees - A law firm affiliated with a director of the Company
was paid legal fees of $237,000 and $92,000, for the years ended December
31, 2003 and 2002, respectively.
A director of the Company was paid a fee of $50,000 during the year ended
December 31, 2003 for consulting services in accordance with a consulting
agreement. This agreement expired on December 31, 2003 and was not renewed.
A director of the Company was paid a fee of $50,000 during the year ended
December 31, 2002 in connection with the IAH settlement.
--------------------------------------------------------------------------------
F-15
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Guarantee - The Company's Chairman and CEO personally guaranteed the
repayment of $2,500,000 of the Company's Revolving Credit Facility. In
consideration of this guaranty, the Company has agreed that for as long as
the guaranty remains in effect it will pay him $50,000 per annum. For the
year ended December 31, 2003 he was paid $50,000.
13. Income Taxes
The Company files a consolidated U.S. Federal Income Tax return that
includes all wholly-owned subsidiaries. State tax returns are filed on a
consolidated or separate basis depending on applicable laws.
The provision for income taxes from continuing operations is comprised of
the following:
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Current
Federal $ - $ -
State 22,608 10,534
------------------- ------------------
22,608 10,534
------------------- ------------------
Deferred
Federal - -
State - -
------------------- ------------------
- -
------------------- ------------------
$ 22,608 $ 10,534
=================== ==================
A reconciliation of the federal statutory rate to the Company's effective
tax rate is as follows:
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Computed expected tax expense 34.00% 34.00%
State taxes, net of federal benefit 10.00% 10.00%
Change in valuation allowance (42.33)% (42.52)%
------------------- ------------------
Total tax expense 1.67% 1.48%
=================== ==================
At December 31, 2003 the Company had net operating loss carryforwards for
tax purposes, which expire at various dates through 2021, of approximately
$1,900,000. These net operating loss carryforwards were subject to Internal
Revenue Code Section 382, which placed a limitation on the utilization of
the federal net operating loss to approximately $10,000 per year, as a
result of a greater than 50% ownership change of DCAP Group, Inc. in 1999.
During fiscal 2003, approximately $100,000 of available net operating loss
carryforwards expired as a result of the sale of certain subsidiaries. The
Company utilized net operating loss carryforwards of approximately
$1,300,000 and $1,001,000 during the years ended December 31, 2003 and
2002, respectively, to offset current taxable income.
Deferred tax assets at December 31, 2003 consist of the following:
Deferred Tax Assets:
Net operating loss carryovers $ 760,000
Less valuation allowance (760,000)
-------------------
-------------------
Net Deferred Tax Assets $ -
===================
--------------------------------------------------------------------------------
F-16
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
The Company has recorded a full valuation allowance against its net
deferred tax assets because of the uncertainty that the utilization of the
net operating loss will be realized as a result of the Section 382
limitation.
14. Commitments
Leases - The Company and each of its affiliates lease office space under
noncancellable operating leases expiring at various dates through August
2011. Many of the leases are renewable and include additional rent for real
estate taxes and other operating expenses. The minimum future rentals under
these lease commitments for leased facilities and office equipment are as
follows:
Year Ending December 31,
------------------------------------------------------------------------------- ------------------- ------------------
2004 $ 375,000
2005 229,000
2006 194,000
2007 147,000
2008 137,000
Thereafter 156,000
Rental expense approximated $492,000 and $252,000 for the years ended
December 31, 2003 and 2002, respectively.
Employment agreement - During 2003, the Company amended its employment
agreement with an officer, increasing the minimum salary to $300,000 per
annum for the remainder of the agreement. The employment agreement also
provides for discretionary bonuses and other perquisites commonly found in
such agreements. The employment agreement expires on April 1, 2005.
Litigation - The Company is involved in various lawsuits and claims
incidental to its business. In the opinion of management, the ultimate
liabilities, if any, resulting from such lawsuits and claims will not
materially affect the financial position of the Company.
15. Mandatorily Redeemable Preferred Stock
On May 8, 2003, the Company issued 904 shares of $.01 par value 5.0% Series
A Preferred Stock in connection with the acquisition of substantially all
of the assets of AIA Acquisition Corp. The Series A Preferred Stock has a
liquidation preference of $1,000 per share. Dividends on the Series A
Preferred Stock are cumulative and are payable in cash.
Each share of the Series A Preferred Stock is convertible at the option of
the holder at any time into shares of Common Stock of the Company, par
value $.01 per share, at a conversion rate of $.50 per share.
Subject to legal availability of funds, the Series A Preferred Stock is
mandatorily redeemable by the Company for cash at its liquidation
preference on or after April 30, 2007 (unless previously converted into
Common Stock of the Company). Redemption of the Series A Preferred Stock
could occur prior to April 30, 2007 upon a substantial sale of the Company,
as defined.
In accordance with SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", the
Series A Preferred Stock has been reported as a liability, and the
preferred dividends have been classified as interest expense.
--------------------------------------------------------------------------------
F-17
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
16. Stockholders' Equity
Preferred stock - During 2001, the Company amended its Certificate of
Incorporation to provide for the authority to issue 1,000,000 shares of
Preferred Stock, with a par value of $.01 per share. The Board of Directors
has the authority to issue shares of Preferred Stock from time to time in a
series and to fix, before the issuance of each series, the number of shares
in each series and the designation, liquidation preferences, conversion
privileges, rights and limitations of each series.
Private placement of securities - On August 30, 2002, the Company sold,
through a private placement, 1,000,000 shares of Common Stock for proceeds
of $500,000 or $.50 per share.
Warrants - On June 2, 1999, the Company sold, through a private placement,
33.5 units (each consisting of 45,453 common shares and 15,151 Class A,
15,151 Class B and 15,151 Class C warrants) at a purchase price of $50,000
per unit for net proceeds of $1,360,000 net of closing costs approximating
$315,000. Each Class A, B, and C warrant was initially exercisable at
$1.65, $2.06, and $2.48, respectively, and expires June 2, 2004. Each unit
was subject to increase, and the exercise prices of the warrants were
subject to reduction based upon the market price of the Company's Common
Stock one year after June 2, 1999.
On June 2, 2000, the Company issued 761,342 shares of Common Stock, 253,780
Class A, 253,780 Class B, and 253,780 Class C warrants to the private
placement investors pursuant to price protection provisions contained in
the offering agreement. Pursuant to those provisions, the Company had
agreed to issue to the investors additional shares and warrants based upon
the market price of the Company's Common Stock one year after the June 2,
1999 offering date (if lower than the market price at the time of the
offering). As a result, the per-share price was reduced from $1.10 to $.73
(the floor price provided for) and the additional shares and warrants were
issued. In addition, the price protection provision resulted in a reduction
of the exercise price of the Class A, B, and C warrants to $1.10, $1.37,
and $1.65, respectively.
In addition, the underwriter was issued an aggregate of 456,808 warrants
with an exercise price ranging from $.73 to $1.65.
All warrants issued in connection with the private placement are
outstanding at December 31, 2003, and expire June 2, 2004.
On July 10, 2003, in connection with the issuance of the subordinated debt,
the Company issued warrants to purchase 525,000 shares of Common Stock at
an exercise price of $1.25 per share. The warrants were valued at $147,000
and are being amortized as additional interest expense over the term of the
associated debt. The warrants expire on January 10, 2006.
Stock options - In November 1998, the Company 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 2,000,000 shares of Common Stock were originally permitted to be
granted, at a price to be determined by the Board of Directors or the Stock
Option Committee at the time of grant. During 2002, the Company increased
the number of shares of Common Stock authorized to be issued pursuant to
the 1998 Stock Option Plan to 3,750,000. 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 of the Company).
The Board of Directors or the Stock Option Committee will determine the
expiration date with respect to non-statutory options granted under this
plan.
--------------------------------------------------------------------------------
F-18
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
A summary of the status of the Company's stock option plans as of December
31, 2003 and 2002, and changes during the years then ended is presented
below:
Years Ended December 31, 2003 2002
----------------------------------------- ------------------------------------- --------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Stock Options Share Price Share Price
----------------------------------------- ------------------ ------------------ ------------------- ------------------
Outstanding, beginning of year 2,900,000 $ .65 1,450,000 $ 1.01
Granted 295,000 .71 1,450,000 .30
Expired - - - -
Forfeited (42,500) .30 - -
------------------ ------------------ ------------------- ------------------
Outstanding, end of year 3,152,500 $ .66 2,900,000 $ .65
================== ================== =================== ==================
Weighted-Average Fair Values of
Options Granted During Year $ .51 $ .22
================== ==================
The following table summarizes information about stock options outstanding
at December 31, 2003:
Options Outstanding Options Exercisable
--------------------------------------------------------- --------------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Outstanding Price
------------------ ------------------- ------------------ ------------------ ------------------ -------------------
$ 0.25 - .47 2,492,500 2.96 yrs. $ .28 1,962,500 $ .29
$ 0.82 - .85 210,000 4.81 yrs. $ .83 52,500 $ .83
$ 2.69 450,000 0.17 yrs. $ 2.69 450,000 $ 2.69
Common shares reserved
Warrants 3,265,898
==================
Stock Option Plan 3,750,000
==================
17. Business Segments
The Company currently has two reportable business segments: Insurance and
Premium Finance. The Insurance segment sells retail auto, motorcycle, boat,
life, business, and homeowner's insurance and franchises. In addition, this
segment offers tax preparation services and automobile club services for
roadside emergencies. Insurance revenues are derived from activities within
the United States, and all long-lived assets are located within the United
States. The Premium Finance segment offers property and casualty
policyholders loans to finance the policy premiums.
In December 2002, the Company disposed of its 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 years ended
December 31, 2003 and 2002.
--------------------------------------------------------------------------------
F-19
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Revenue, operating income, and depreciation and amortization and assets
pertaining to the segments in which the Company operates are presented
below.
Premium
Year Ended December 31, 2003 Finance Insurance Other (1) Total
----------------------------------------- ------------------ ------------------ ------------------- ------------------
Revenues from External Customers $ 2,330,831 $ 6,354,920 $ - $ 8,685,751
Interest Income - 1,223 7,862 9,085
Interest Expense 335,343 84,849 - 420,192
Depreciation and Amortization 101,165 175,286 6,335 282,786
Segment Profit (Loss) 839,311 1,298,868 (802,280) 1,335,899
Segment Assets 20,261,744 3,097,098 1,260,972 24,619,814
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
Premium
Year Ended December 31, 2002 Finance Insurance Other (1) Total
----------------------------------------- ------------------ ------------------ ------------------- ------------------
Revenues from External Customers $ 1,309,808 $ 2,473,921 $ - $ 3,783,729
Interest Income - 2,051 409 2,460
Interest Expense - 64,299 - 64,299
Depreciation and Amortization 1,666 134,216 - 135,882
Segment Profit (Loss) 1,035,789 125,108 (462,422) 698,475
Segment Assets 260,290 2,097,603 791,500 3,149,393
(1) Column represents corporate-related items and, as it relates to
segment profit (loss), income, expense and assets not allocated to
reportable segments.
18. Major Customers
At December 31, 2003, revenues from major customers consisted of the
following:
Customer % of Total Revenue Segment
-------------------------- ---------------------------------------------------------------- --------------------------
A 25% Insurance
At December 31, 2002, revenues from major customers consisted of the
following:
Customer % of Total Revenue Segment
-------------------------- ---------------------------------------------------------------- --------------------------
A 35% Premium Finance
B 12% Insurance
19. Fair Value of Financial Instruments
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
--------------------------------------------------------------------------------
F-20
DCAP GROUP, INC. AND
SUBSIDIARIES
Notes to Consolidated Financial Statements
--------------------------------------------------------------------------------
Two Years Ended December 31, 2003
--------------------------------------------------------------------------------
Current Assets and Current Liabilities: The carrying values of cash,
accounts receivables, finance contract receivables and payables and certain
other short-term financial instruments approximate their fair value.
Long-Term Debt: The fair value of the Company's long-term debt, including
the current portion, was estimated using a discounted cash flow analysis,
based on the Company's assumed incremental borrowing rates for similar
types of borrowing arrangements. The carrying amount of variable and fixed
rate debt at December 31, 2003 approximates fair value.
20. Retirement Plan
Qualified employees are eligible to participate in a salary reduction plan
under Section 401(k) of the Internal Revenue Code. Participation in the
Plan is voluntary, and any participant may elect to contribute up to a
maximum of $12,000 per year. The Company will match 25% of the employee's
contribution up to 6%. Contributions for the years ended December 31, 2003
and 2002 approximated $17,000 and $3,000, respectively.
21. Supplementary Information - Statement of Cash Flows
Cash paid during the years for:
Years Ended December 31, 2003 2002
------------------------------------------------------------------------------- ------------------- ------------------
Interest $ 127,345 $ 57,533
=================== ==================
Income Taxes $ 17,608 $ 10,534
=================== ==================
During the year ended December 31, 2003, the Company issued 904 shares of
Series A Preferred Stock with a value of $904,000 in connection with a
business acquisition.
22. Discontinued Operations
The Company operated the International Airport Hotel in San Juan, Puerto
Rico through its subsidiary, IAH, Inc., and had been in litigation with the
Ports Authority of Puerto Rico concerning the lease on the hotel. In
December 2002, the Company agreed in principle to a settlement agreement
whereby the Ports Authority would pay the Company $500,000. Operations
ceased on January 27, 2003. Costs applied in arriving at the gain on the
sale of the discontinued subsidiary for the year ended December 31, 2002
consist of a write off of the remaining equipment used in the operations of
the hotel as well as an accrual of costs and expenses directly associated
with the close down (including severance pay) and a fee of $50,000 paid to
a director of the Company for assistance in managing the previous
litigation and negotiating the settlement.
Revenues from the discontinued operation totaled $64,561 and $828,861 for
the years ended December 31, 2003 and 2002, respectively. Pretax net income
(loss) from the discontinued operation totaled $(46,096) and $37,806 for
the years ended December 31, 2003 and 2002, respectively.
--------------------------------------------------------------------------------
F-21
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
DCAP GROUP, INC.
Dated: March 11, 2004 By: /s/ Barry B. Goldstein
-----------------------------
Barry B. Goldstein
Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
Signatures Capacity Date
---------- -------- ----
President, Chairman of the Board,
Chief Executive Officer, Chief
Financial Officer, Treasurer and
Director (Principal Executive,
/s/ Barry B. Goldstein Financial and Accounting Officer) March 11, 2004
-------------------------
Barry B. Goldstein
/s/ Morton L. Certilman Secretary and Director March 11, 2004
-------------------------
Morton L. Certilman
/s/ Jay M. Haft Director March 11, 2004
-------------------------
Jay M. Haft
Director
-------------------------
Robert M. Wallach