For the last quarter ended September 30, 2007, the company's revenues have decreased 10% to $2.1 million since last quarter. This was caused by the reduced sale of insurance policies due to continuing heightened competition from the voluntary insurance market. As a result the company incurred a net income decrease of 56% to $59 thousand. Over the last quarter the stockholder equity has increased by 1% to $6.4 million and the tangible assets have increased 3% to $3.5.
The company is taking some actions to counter the increasing competition. On October 1, 2007, the company has launched an advertising campaign in order to build brand awareness in New York State.
Also on October 16, 2007, the company has announced the continuation of Barry B. Goldstein's services as a director and CEO of the company. He has served as CEO since 2001.
The increasing competition seems to be seriously affecting the company's abilities to generate sales. Assuming the company's revenue will continue to decrease at current rates it would diminish in the next 5 years. The company is adequately financed to continue operating for at least a year. However if the advertising campaign would not give results the company's net income would turn to loses in 2 years.
Here's the description from company's SEC filing:
Overview
There are 71 store locations owned or franchised by us of which 66 are located in New York State. In the New York metropolitan area, there are 44 DCAP franchises. There are also 17 DCAP Insurance Barry Scott Agency locations and five DCAP Insurance Accurate Agency locations outside the New York metropolitan area (all located in central and western New York State). There are five DCAP Insurance Atlantic Agency locations in eastern Pennsylvania. All of the DCAP Insurance Barry Scott Agency, DCAP Insurance Atlantic Agency and DCAP Insurance Accurate Agency locations are wholly-owned by us.
Our insurance storefronts serve as insurance agents or brokers and place various types of insurance on behalf of customers. We focus on automobile, motorcycle and homeowner's insurance and our customer base is primarily individuals rather than businesses.
The stores receive commissions from insurance companies for their services. We receive fees from the franchised locations in connection with their use of the DCAP name. Neither we nor the stores currently serve as an insurance company and therefore do not assume underwriting risks; however, as discussed below, Commercial Mutual Insurance Company is seeking to convert from an advance premium insurance company to a stock property and casualty insurance company. In the event of such conversion, the surplus notes issued by Commercial Mutual and held by us may be converted into a controlling equity interest in Commercial Mutual.
Payments Inc., our wholly-owned subsidiary, is an insurance premium finance agency that offers premium financing to clients of DCAP, DCAP Insurance Barry Scott Agency, DCAP Insurance Atlantic Agency and DCAP Insurance Accurate Agency offices, as well as non-affiliated insurance agencies. We currently operate within the states of New York, Pennsylvania and New Jersey.
We also offer automobile club services for roadside emergencies. Income tax preparation services are also offered in connection with the franchise operation of the DCAP stores.
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. In addition, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. Further, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.
Commission and fee income
We recognize commission revenue from insurance policies at the beginning of the contract period. Refunds of commissions on the cancellation of insurance policies are reflected at the time of cancellation.
Franchise fee revenue from initial franchise fees is recognized when substantially all of our contractual requirements under the franchise agreement are completed. Franchisees also pay a monthly franchise fee plus an applicable percentage of advertising expense. We are obligated to provide marketing and training support to each franchisee.
Franchise fee income is recognized when substantially all of our contractual requirements under the franchise agreement are completed.
Automobile club dues are recognized equally over the contract period.
Finance income, fees and receivables
For our premium finance operations, we are using the interest method to recognize interest income over the life of each loan in accordance with Statement of Financial Accounting Standard No. 91, "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases."
Upon the establishment of a premium finance contract, we record the gross loan payments as a receivable with a corresponding reduction for deferred interest. The deferred interest is amortized to interest income using the interest method over the life of each loan. The weighted average interest rate charged with respect to financed insurance policies was approximately 26.4% and 26.5% per annum for the nine months ended September 30, 2007 and 2006, respectively. Delinquency fees are earned when collected. Upon completion of collection efforts, after cancellation of the underlying insurance policies, any uncollected earned interest or fees are charged off.
Allowance for finance receivable losses
Losses on finance receivables include an estimate of future credit losses on premium finance accounts. Credit losses on premium finance accounts occur when the unearned premiums received from the insurer upon cancellation of a financed policy are inadequate to pay the balance of the premium finance loan amount, which includes accrued interest and late fees. The majority of these shortfalls result in the write-off of the remaining principal balance against the allowance for finance receivable losses and the unrealized actual interest and late fees are charged against the premium finance revenue. 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. For the nine months ended September 30, 2007 and 2006, the provision for finance receivable losses was $396,065 and $496,456, respectively, and actual principal write-offs for such periods (net of recoveries of previous write-offs) were $434,328 and $477,293, respectively. If our provision for finance receivable losses was understated by 10% because our actual write-offs were greater than anticipated, the effect would have been a reduction in our earnings per share by approximately $0.01 (basic) for the nine months ended September 30, 2007 and 2006.
Goodwill and intangible assets
The carrying value of goodwill was initially reviewed for impairment as of January 1, 2002, and is reviewed annually or whenever events or changes in circumstances indicate that the carrying amount might not be recoverable. If the fair value of the operations to which goodwill relates is less than the carrying amount of those operations, including unamortized goodwill, the carrying amount of goodwill is reduced accordingly with a charge to expense. Based on our most recent analysis, we believe that no impairment of goodwill exists at September 30, 2007.
Stock-based compensation
We account for stock-based compensation in accordance with SFAS No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R"). Under the provisions of SFAS 123R, stock-based compensation cost is estimated at the grant date based on the award's fair-value as calculated by a Black Scholes Merton option pricing model (the "Black Scholes model") and is recognized as expense ratably over the requisite service period. The Black Scholes model requires various highly judgmental assumptions including volatility, forfeiture rates, and expected option life. If any of the assumptions used in the model change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
Income Taxes
Effective January 1, 2007, we began to measure and record tax contingency accruals in accordance with Financial Accounting Standards Board Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN 48"). Under FIN 48, we recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities, based on the technical merits of the position. We measure tax benefits in our financial statements from such a position as the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. The impact on our reassessment of our tax positions in accordance with FIN 48 did not have a material impact on our results of operations, financial condition or liquidity.
Results of Operations
Nine Months ended September 30, 2007 compared to Nine Months ended September 30, 2006
Our net income for the nine months ended September 30, 2007 was $283,178 as compared to $513,702 for the nine months ended September 30, 2006.
During the nine months ended September 30, 2007, revenues from our insurance-related operations were $4,486,855 as compared to $5,390,085 for the nine months ended September 30, 2006. The revenue decrease of $903,230 was primarily attributable to the sale of fewer insurance policies in 2007 than in 2006. Such reduction in sales was generally caused by the continued heightened competition from the voluntary insurance market which is offering lower premium rates to the non-standard insured.
Premium finance revenues decreased $666,450 during the nine months ended September 30, 2007 as compared to the nine months ended September 30, 2006. This decrease is a direct result of the decrease in the number of policies sold as discussed in the paragraph above.
Our general and administrative expenses for the nine months ended September 30, 2007 were $875,522 less than for the nine months ended September 30, 2006. This decrease was primarily due to a reduction in personnel at our premium finance operation, a reduction in variable compensation paid to employees due to a reduction in policies sold at our stores, our Compensation Committee determining that no bonus is payable to our Chief Executive Officer for 2006 (and accordingly no bonus accrual being provided for during the first nine months of 2007; in contrast, a bonus for 2005 was provided during the first nine months of 2006), a decrease in fees paid to service our premium finance operations, and a decrease in advertising expenses, net of reimbursements.
Our provision for finance receivable losses for the first nine months of 2007 was $100,391 less than for the first nine months of 2006. This was the result of a lower provision for finance receivable losses in the first nine months of 2007 caused by a decrease in volume.
Our premium finance interest expense during the nine months ended September 30, 2007 was $105,700 less than for the nine months ended September 30, 2006. This decrease was the result of a decrease in the average outstanding balance of our revolving credit line for the nine months ended September 30, 2007 compared to the nine months ended September 30, 2006.
Our interest income - notes receivable for the nine months ended September 30, 2007 was $112,787 more than for the nine months ended September 30, 2006. On January 31, 2006, we purchased surplus notes of Commercial Mutual Insurance Company. We recorded eight months of interest in the first nine months of 2006 as compared to nine months of interest in the first nine months of 2007.
During the nine months ended September 30, 2007, our provision for income taxes was $238,049 as opposed to $342,468 for the nine months ended September 30, 2006. This was due primarily to the lower income before income taxes in 2007.
Our insurance-related operations, on a stand-alone basis, generated a net profit before income taxes of $494,686 during the nine months ended September 30, 2007 as compared to a net profit before income taxes of $986,205 during the nine months ended September 30, 2006. This decrease was primarily due to decreased revenues, offset by a reduction in variable compensation paid on commissions generated, a reduction in advertising expense, net of reimbursements, and the gain on the sale of the book of business of one of our stores. Our premium finance operations, on a stand-alone basis, generated a net profit before income taxes of $365,231 during the nine months ended September 30, 2007 as compared to a net profit before income taxes of $529,979 during the nine months ended September 30, 2006. The decrease was primarily due to reduced premium finance revenue in 2007, offset by reductions in personnel, provision for finance receivable losses, fees paid to service our premium finance operations, and premium financing interest expense. Loss before income taxes from corporate-related items not allocable to reportable segments was $338,690 during the nine months ended September 30, 2007 as compared to $660,014 during the nine months ended September 30, 2006. This decrease was primarily due to an increase in interest income-notes receivable related to the purchase of the surplus notes issued by Commercial Mutual, and a decrease in compensation expense.
Three Months ended September 30, 2007 compared to Three Months ended September 30, 2006
Our net income for the three months ended September 30, 2007 was $59,124 as compared to $106,108 for the three months ended September 30, 2006.
During the three months ended September 30, 2007, revenues from our insurance-related operations were $1,359,996 as compared to $1,636,855 for the three months ended September 30, 2006. The revenue decrease of $276,859 was primarily attributable to the sale of fewer insurance policies in 2007 than in 2006. Such reduction in sales was generally caused by the continued heightened competition from the voluntary insurance market which is offering lower premium rates to the non-standard insured.
Premium finance revenues decreased $161,617 during the three months ended September 30, 2007 as compared to the three months ended September 30, 2006. This decrease is a direct result of the decrease in the number of policies sold as discussed in the paragraph above.
Our general and administrative expenses for the three months ended September 30, 2007 were $284,785 less than for the three months ended September 30, 2006. This decrease was primarily due to a reduction in variable compensation paid to employees due to a reduction in policies sold at our stores, our Compensation Committee determining that no bonus is payable to our Chief Executive Officer for 2006 (and accordingly no bonus accrual being provided for during the third quarter of 2007; in contrast, a bonus for 2005 was provided during the third quarter of 2006), a decrease in fees paid to service our premium finance operations and a decrease in advertising expenses, net of reimbursements.
Our provision for finance receivable losses for the three months ended September 30, 2007 was $48,059 less than for the three months ended September 30, 2006. This was the result of a lower provision for finance receivable losses in 2007 caused by a decrease in volume.
Our premium finance interest expense during the three months ended September 30, 2007 was $31,130 less than for the three months ended September 30, 2006. This decrease was the result of a decrease in the average outstanding balance of our revolving credit line for the three months ended September 30, 2007 compared to the three months ended September 30, 2006.
During the three months ended September 30, 2007, our provision for income taxes was $54,732 as opposed to $70,739 for the three months ended September 30, 2006. This was due primarily to the lower income before income taxes in 2007.
Our insurance-related operations, on a stand-alone basis, generated a net profit before income taxes of $91,687 during the three months ended September 30, 2007 as compared to a net profit before income taxes of $235,755 during the three months ended September 30, 2006. This decrease was primarily due to decreased revenues, offset by a reduction in variable compensation paid on commissions generated, and a decrease in advertising expenses, net of reimbursements. Our premium finance operations, on a stand-alone basis, generated a net profit before income taxes of $123,345 during the three months ended September 30, 2007 as compared to a net profit before income taxes of $119,548 during the three months ended September 30, 2006. This increase was primarily due to reductions in provision for finance receivable losses, fees paid to service our premium finance operations, and premium financing interest expense, offset by reduced premium finance revenue in 2007. Loss before income taxes from corporate-related items not allocable to reportable segments was $101,176 during the three months ended September 30, 2007 as compared to $178,456 during the three months ended September 30, 2006. This decrease was primarily due to a decrease in compensation expense.
Liquidity and Capital Resources
As of September 30, 2007, we had $1,000,725 in cash and cash equivalents and a working capital deficit of $763,754. As of December 31, 2006, we had $1,196,412 in cash and cash equivalents and working capital of $2,031,120.
As discussed below, during 2007, the holders of $1,500,000 outstanding principal amount of subordinated debt agreed to extend the maturity date of the debt from September 30, 2007 to September 30, 2008. The $1,500,000 principal balance of these notes is included in our September 30, 2007 balance sheet under "Current Liabilities." In addition, as discussed below, effective March 23, 2007, the holder of our shares of Series A Preferred Stock (which were mandatorily redeemable on April 30, 2007) exchanged such shares for an equal number of shares of Series B Preferred Stock, which are mandatorily redeemable on April 30, 2008. The mandatorily redeemable balance of $780,000 is included in our September 30, 2007 balance sheet under "Current Liabilities." We plan to seek to either (i) further extend the maturity and redemption dates of these subordinated debt and redeemable Preferred Stock obligations, (ii) refinance the obligations, and/or (iii) extend the term of our line of credit discussed below and utilize it to satisfy a portion of the outstanding balance of the obligations.
We believe that, based on our present cash resources and the anticipated turnover of our existing receivables, and, assuming that our efforts with regard to the subordinated debt and redeemable Preferred Stock obligations, as discussed above, are successful, we will have sufficient cash on a short-term basis and over the next 12 months to fund our two operating business segments and our company-wide working capital needs.
During the nine months ended September 30, 2007, our cash and cash equivalents decreased by $195,687. This was due primarily to the following:
• Net cash provided by operating activities during the nine months ended September 30, 2007 was $132,484 primarily due to the following: (i) net income of $283,178, (ii) non-cash charges to net income of $485,661, which include depreciation and amortization, deferred income taxes, amortization of warrants, and stock-based payments and (iii) a decrease in accounts receivable of $428,854, which were offset primarily by the accretion of discount on notes receivable of $740,864. The decrease in accounts receivable is primarily the result of a January 2007 payment of a revenue accrual from an insurance company, which did not continue in 2007 and the conversion of certain amounts due from franchisees into notes receivable.
• Though fluctuations in our premium finance business impact our cash position and daily operations, our cash flows from operating activities do not reflect changes in the premium finance contract receivables or borrowing under our revolving credit facility associated with that business. Changes in the premium finance contract receivables are considered investing activities as they include the making and collection of loans and borrowings under our revolving line of credit are considered financing activities.
• Net cash provided by investing activities during the nine months ended September 30, 2007 was $1,327,797 primarily due to a decrease in finance contracts receivable of $1,354,332. This reduction was caused by the financing of fewer insurance policies in 2007 than in 2006.
• Net cash used in financing activities during the nine months ended September 30, 2007 was $1,655,968 primarily due to the following: (i) payments of $31,584,318 on our revolving credit line with Manufacturers and Traders Trust Company ("M&T") for premium finance purposes, offset by proceeds of $30,233,649 from the revolving credit line and (ii) principal payments on long term debt and lease obligations of $417,499.
Our premium finance operations are financed pursuant to a $20,000,000 revolving line of credit from M&T entered into on July 28, 2006. The line of credit bears interest at either (i) M&T's prime rate or (ii) LIBOR plus 2.25%, matures on June 30, 2008 and is secured by substantially all of our assets. We can borrow against the line to the extent of 85% of eligible premium finance receivables. As of September 30, 2007, $9,601,676 was outstanding under the line. As of September 30, 2007, of the $14,732,316 reflected on the Balance Sheet as "Finance contracts receivable," approximately $11,734,011 represents eligible receivables for purposes of our finance credit agreement. The line of credit also allows for a $2,500,000 term loan (of the $20,000,000 credit line availability) to be used to provide liquidity for ongoing working capital purposes. Any draws against this line bear interest at LIBOR plus 2.75%. As of July 28, 2006, we made our first draw of $1,300,000 against the term line. The draw is repayable in quarterly principal installments of $130,000 each, commencing September 1, 2006. The remaining principal balance is payable on June 30, 2008. Interest is payable monthly.
We have no current commitments for capital expenditures. However, we may, from time to time, consider acquisitions of complementary businesses, products or technologies.
In connection with our initial acquisition of the line of credit from M&T, we obtained a $3,500,000 secured subordinated loan to support our premium finance operations. During 2005, we utilized the M&T line of credit to repay an aggregate of $2,000,000 of the subordinated debt. The remaining balance of the loan was due in January 2006 and carries interest at the rate of 12-5/8% per annum. In May 2005, we obtained an extension of the maturity date of the remaining subordinated debt to September 30, 2007. During 2007, the holders of the $1,500,000 outstanding principal amount of subordinated debt agreed to extend the maturity date of the debt from September 30, 2007 to September 30, 2008. We have the right to prepay the subordinated debt (subject to M&T's consent) without penalty.
Effective March 23, 2007, the holder of our Series A Preferred Stock exchanged such shares for an equal number of shares of Series B Preferred Stock. The Series B Preferred Stock is mandatorily redeemable on April 30, 2008.
Commercial Mutual Insurance Company
On January 31, 2006, we purchased $3,750,000 of surplus notes issued by Commercial Mutual Insurance Company for a price of $3,075,141, of which $1,303,434 was paid by delivery of a six month promissory note which provided for interest at the rate of 7.5% per annum. The promissory note was paid in full on July 28, 2006. Accrued but unpaid interest on the surplus notes totaled $1,794,688 at the time of the purchase. The surplus notes are past due and provide for interest at the prime rate or 8.5% per annum, whichever is less. Payments of principal and interest on the surplus notes may only be made out of the surplus of Commercial Mutual and require the approval of the Insurance Department of the State of New York.
In March 2007, Commercial Mutual's Board of Directors adopted a resolution to convert Commercial Mutual from an advance premium insurance company to a stock property and casualty insurance company. Commercial Mutual has advised us that it has obtained permission from the Superintendent of Insurance of the State of New York to proceed with the conversion process (subject to certain conditions as discussed below).
The conversion by Commercial Mutual to a stock property and casualty insurance company is subject to a number of conditions, including the approval of the plan of conversion by the Superintendent of Insurance and Commercial Mutual's policyholders. As part of the approval process, the Superintendent of Insurance is required to have an appraisal performed with respect to the fair market value of Commercial Mutual. Such appraisal is to be based upon Commercial Mutual's latest filings with the Insurance Department and any significant subsequent developments and is to consider the assets and liabilities of Commercial Mutual and any other factors bearing on its value. We, as a holder of the Commercial Mutual surplus notes, at our option, would be able to exchange the surplus notes for an equitable share of the securities or other consideration, or both, of the corporation into which Commercial Mutual would be converted. Based upon the amount payable on the surplus notes and the statutory surplus of Commercial Mutual, we believe that, following any conversion by Commercial Mutual into a stock corporation, we could hold a controlling equity interest in Commercial Mutual. It is anticipated that the conversion will be completed within the next twelve months. No assurances can be given that the conversion will occur.
arrangements that have or are reasonably likely to have a curr
Off-Balance Sheet Arrangements
We have no off-balance sheetent or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
