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, 2002
( ) 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
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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: $3,783,729
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: $2,483,804 as of January 31, 2003.
(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 28, 2003.
Transitional Small Business Disclosure Format: Yes No X
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DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Page No.
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Forward Looking Statements................................................................................1
Explanatory Note .........................................................................................1
PART I
Item 1. Description of Business......................................................................2
Item 2. Description of Property......................................................................8
Item 3. Legal Proceedings............................................................................9
Item 4. Submission of Matters to a Vote of Security Holders.........................................10
PART II
Item 5. Market for Common Equity and Related Stockholder Matters....................................11
Item 6. Management's Discussion and Analysis or Plan of Operation...................................12
Item 7. Financial Statements........................................................................14
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................................................14
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act...........................................15
Item 10. Executive Compensation......................................................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters.................................................................18
Item 12. Certain Relationships and Related Transactions..............................................21
PART IV
Item 13. Exhibits, List and Reports on Form 8-K......................................................25
Item 14. Controls and Procedures.....................................................................28
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
associated with the following:
o our ability to obtain the necessary level of financing to maintain and
grow our premium finance operation
o the decline in the number of insurance companies offering insurance
products in our markets
o the volatility of insurance premium pricing
o government regulation
o competition from larger, better financed and more established
companies
o the possibility of tort reform and a resultant decrease in the demand
for insurance
o the dependence on our executive management
o our ability to raise additional capital which may be required.
Any one or more of these uncertainties, risks and other influences could
materially affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual results,
performance and achievements could differ materially from those expressed or
implied in these forward-looking statements. We undertake no obligation to
publically update or revise any forward-looking statements, whether from new
information, future events or otherwise.
Explanatory Note
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Throughout this Annual Report, the words "DCAP Group," "we," "our," and
"us" refer to DCAP Group, Inc. and the operations of DCAP Group, Inc. as a
whole. References to "DCAP Insurance" and the "DCAP Companies" in this Annual
Report mean our wholly-owned subsidiary, Dealers Choice Automotive Planning,
Inc. and affiliated companies, and the operations of our insurance-related
subsidiaries.
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 and Barry Scott brand names
o premium financing of insurance policies for our DCAP clients as well
as clients of non-affiliated entities
Our business strategy anticipates the development of a broad-based
insurance and finance distribution 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 purchased Barry Scott Companies (as discussed below) which has 20
store locations.
We also have closed a number of unsuccessful stores and terminated franchises
that were not performing well.
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.
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. 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.
2
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. See Item 3 of
this Annual Report.
Developments During 2001
The following material events occurred in March 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. These transactions, which closed in
November 2001, are discussed in Item 12 of this Annual Report.
o We repurchased common shares from Messrs. Lang and Weinzimer as
discussed in Item 12.
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. The
termination of the employment agreements is discussed in Item 12.
(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.
3
There are 73 store locations owned or franchised by us. All but one are
located in New York State. In the New York metropolitan area, there are 50 DCAP
franchises, two company-owned DCAP stores, one joint venture DCAP store and two
Barry Scott locations. There are also 18 Barry Scott locations outside the New
York metropolitan area, primarily in central New York State.
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.
We also offer automobile club services for roadside emergencies and income
tax preparation services in connection with the operation of the DCAP and Barry
Scott stores.
Through our wholly-owned subsidiary, Payments, Inc., we provide insurance
premium financing services to our DCAP locations as well as non-DCAP 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. Commencing November 2003,
Payments, Inc. will be permitted to furnish premium finance services to our
Barry Scott locations.
We were incorporated in 1961 under the name Executive House, Inc. We
changed our name to EXTECH Corporation in 1991. In February 1999, we acquired
the DCAP Companies and began our insurance operations. At that time we changed
our name to DCAP Group, Inc.
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, 2002, approximately 73% 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.
4
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 21% of our insurance
revenues during the year ended December 31, 2002.
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 2002, fees received in connection with automobile club
services constituted approximately 6% of our insurance revenues.
Income Tax Return Preparation
Many our stores 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 2002, fees received in connection with income tax return
preparation constituted approximately 1% of our insurance revenues.
5
Premium Financing
Customers who purchase insurance policies are often unable to pay the
premium in a lump sum and, therefore, require financing. Our wholly owned
subsidiary, Payments, Inc., is licensed by the New York State Banking Department
as a premium finance agency. In addition, although Payments, Inc. currently only
operates in New York, it has been granted permission to conduct business in
Pennsylvania and New Jersey.
Payments, Inc. has a contract with another premium finance agency which has
agreed to purchase premium finance receivables as originated by Payments, Inc.
Payments, Inc. is entitled to a fee with respect to the purchased receivables,
subject to certain conditions. Payments, Inc. retains none of the receivables.
See Item 6 of this Annual Report for a discussion of the status of Payments,
Inc.'s premium financing arrangements.
In April 2001, there were 26 insurance agencies (all of which being DCAP
stores) that were utilizing the services of Payments, Inc. At December 31, 2002,
that number had grown to 127. The majority of agencies that currently use
Payments, Inc.'s services are not affiliated with DCAP.
Structure and Operations
As stated above, we currently have 73 offices, of which 50 are franchises,
22 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
6
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.
Strategy
In order to achieve our goal of building a broad-based insurance and
finance distribution network, we currently have the following three-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
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 and Barry Scott 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 or Barry Scott 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 2003, 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. See Item 12 of this Annual
Report.
Our final strategy 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.
7
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, 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.
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 differentiations 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.
Employees
We employ approximately 73 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.
We currently also have three wholly-owned or joint venture DCAP stores that
are located as follows:
8
DCAP
Store Locations
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White Plains, New York
Brentwood, New York
Greenbrook, New Jersey
Our Barry Scott offices are located in the following cities:
Barry Scott
Store Locations
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Albany, New York
Balston Spa, New York
Binghamton, New York
Cobleskill, New York
E. Greenbush, New York
Elmira, New York
Glens Falls, New York
Ithaca, New York
Kingston, New York
Middletown, New York
Oneonta, New York
Plattsburgh, New York
Poughkeepsie, New York
Rego Park, Queens, New York
Rome, New York
Schenectady, New York
Syracuse, New York
Troy, New York
Utica, New York
Our 23 wholly-owned or joint venture offices 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 $347,000.
ITEM 3. LEGAL PROCEEDINGS
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On February 26, 1996, our subsidiary, IAH, Inc., brought an action in the
Superior Court of San Juan, Puerto Rico for declaratory judgment and possessory
injunction against the Ports Authority of Puerto Rico with respect to the
International Airport Hotel in San Juan, Puerto Rico. The action sought a
declaratory judgment that IAH exercised an option with respect to its lease for
the hotel for an extension of the term of five years commencing on January 1,
1996 or, in the alternative, that the
9
Ports Authority executed a new lease agreement for a ten year period commencing
on that date. IAH continued to operate the hotel during the pendency of the
action. Reference is made to "Developments During 2002" in Item 1(a) of this
Annual Report for a discussion of the settlement of the action.
Subsequent to the settlement, the union representing IAH's employees
commenced an action with the National Labor Relations Board. The action alleges
that IAH ceased operations and terminated the employment of its employees
without notifying the union and has therefore interfered with, restrained and
coerced employees in the exercise of their rights. We believe that the action is
without merit and will vigorously defend our position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Our Annual Meeting of Stockholders was held on December 12, 2002. 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 7,334,131 9,783
Morton L. Certilman 7,334,621 9,293
Jay M. Haft 7,334,821 9,093
Robert Wallach 7,334,731 9,183
2. Approval of an increase in the number of common shares authorized to be
issued pursuant to our 1998 Stock Option Plan from 3,000,000 to 3,750,000.
For 5,436,758
Against 56,309
Abstain 658,200
Broker Non-Vote 1,192,647
10
PART II
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 NASD OTC Electronic 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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2002 Calendar Year
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First Quarter $.28 $.22
Second Quarter .30 .23
Third Quarter .43 .28
Fourth Quarter .52 .25
2001 Calendar Year
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First Quarter $.40 $.25
Second Quarter .37 .26
Third Quarter .33 .25
Fourth Quarter .27 .23
(b) Holders
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As of February 21, 2003, there were approximately 2,295 record holders of
our common shares.
(c) Dividends
---------
Holders of our common shares are entitled to dividends when, as and if
declared by our Board of Directors out of funds legally available. 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 finance the development and expansion of our business.
Future
11
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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We operate 23 storefronts, including 20 acquired through our August 2002
acquisition of Barry Scott Companies, Inc. We also have 50 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 homeowners 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, licensed by the New York State Banking Department, which offers
premium financing to clients of DCAP offices, as well as non-DCAP insurance
agencies. We currently operate solely within New York State, but are permitted
to conduct business also in Pennsylvania and New Jersey.
Results of Operations
Our net income from continuing operations for the year ended December 31,
2002 was $698,475 as compared to a net loss of $1,028,604 for the year ended
December 31, 2001.
During the year ended December 31, 2002, revenues from our
insurance-related operations were $2,473,921 as compared to $2,350,094 during
the year ended December 31, 2001. The increase in revenues was generally due to
revenues for the four months ended December 31, 2002 from Barry Scott Companies,
which was acquired on August 30, 2002, offset by the sale (and conversion to
franchise status) of eight DCAP offices effective as of March 28, 2001.
Premium finance revenues increased $1,050,354 during the year ended
December 31, 2002 as compared to the year ended December 31, 2001. This increase
was the result of (i) our renegotiation in September 2001 of our agreement
regarding the sale of premium finance receivables
12
that has given rise to increased revenues per transaction, (ii) an increase in
the number of franchises utilizing our premium finance services, and (iii) an
expansion of our premium finance marketing efforts to non-DCAP insurance
agencies. On March 5, 2003, we were advised by the premium finance agency that
currently purchases our premium finance receivables that it is exiting the
personal lines premium finance business and will discontinue purchasing our
premium finance receivables effective July 30, 2003. We are currently seeking
alternative financing arrangements for our premium finance business. Continued
growth in this business segment is dependent upon the establishment of an
alternative financing source upon terms that provide for funding capacity
greater than that currently in existence. We can give no assurance that we will
be able to obtain an alternative financing source or, if obtained, whether the
terms of the financing will be as beneficial as those currently in place or will
provide for additional funding capacity.
Our selling general and administrative expenses for the year ended December
31, 2002 were $258,229 less than for the year ended December 31, 2001. This
decrease were primarily due to the sale of stores discussed above offset by
expenses for the four months ended December 31, 2002 resulting from the
operation of Barry Scott Companies. Further, our depreciation and amortization
expenses decreased $142,548 between the years ended December 31, 2001 and 2002
primarily due to the sale of the stores and a write off of fixed assets during
the fourth quarter of 2001.
Our insurance-related operations during the year ended December 31, 2002,
on a stand-alone basis, generated a net profit of $125,108 as compared to a net
loss of $821,555 for the year ended December 31, 2001. Our premium finance
operations during the year ended December 31, 2002, on a stand-alone basis,
generated a net profit of $1,035,789 as compared to a net profit of $234,128
during the year ended December 31, 2001. Losses from corporate-related items not
allocable to reportable segments were $462,422 during the year ended December
31, 2002 as compared to $441,177 for the year ended December 31, 2001.
In January 2003, we discontinued the operations of the International
Airport Hotel in San Juan, Puerto Rico. During the fiscal year ended December
31, 2002, this discontinued operation generated a net income of $34,612 as
compared to a net income of $99,053 for the year ended December 31, 2001. As
discussed in Item 1(b) of this Annual Report, in January 2003, in consideration
for IAH's agreement to release all rights with respect to the hotel, the owner
of the hotel paid to IAH $500,000. The gain of $312,920 on the disposition of
this discontinued subsidiary is comprised of the $500,000 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 amount. See Item
10 of this Annual Report.
Income Taxes
We have recorded a full valuation allowance against our net deferred tax
assets because of the uncertainty that sufficient taxable income will be
realized during the carry-forward period to utilize the deferred tax asset.
13
Liquidity and Capital Resources
As of December 31, 2002, we had $607,403 in cash and cash equivalents and
working capital of $904,232. As of December 31, 2001, we had $220,774 in cash
and cash equivalents and a working capital deficiency of $598,263.
Cash and cash equivalents increased between December 31, 2001 and December
31, 2002 primarily due to (i) net cash of $335,898 provided by operating
activities for the year ended December 31, 2002 based on our net income of
$1,046,007 and depreciation and amortization expenses of $153,175 for the year,
offset by an increase in current assets of $185,853, a decrease in current
liabilities of $371,316 for the year and the gain of $312,920 in 2002 on the
disposition of our discontinued subsidiary; and (ii) net cash of $326,429
provided by financing activities for the year ended December 31, 2002 based on
proceeds from a private placement of $500,000, offset primarily by principal
payments of long-term debt and capital lease obligations of $140,238 for the
year; offset by (iii) cash of $275,698 used in investing activities for the year
ended December 31, 2002 based primarily on our payment of $211,051 ($325,000,
net of cash acquired) at the closing of our acquisition of Barry Scott
Companies.
In the opinion of our management, our liquidity at December 31, 2002 was
sufficient to meet our cash requirements for the 12 month period ending December
31, 2003.
We have no current commitments for capital expenditures. However, we may,
from time to time, consider acquisitions of complementary businesses, products
or technologies. See Item 12 of this Annual Report.
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,
2002.
14
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 49 President, Chairman of the Board, Chief Executive
Officer, Chief Financial Officer, Treasurer and
Director
Morton L. Certilman 71 Secretary and Director
Jay M. Haft 67 Director
Robert Wallach 50 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 operates insurance agencies in Pennsylvania. 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
(concurrently with our acquisition of DCAP Insurance) 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
15
school seminars, The Practicing Law Institute, The Institute of Real 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
(concurrently with our acquisition of DCAP Insurance) 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 technical product, service and marketing companies. He
is a director of many public and private corporations, including Robotic Vision
Systems, Inc., Encore Medical Corporation, DUSA Pharmaceuticals, Inc., and Oryx
Technology Corp., all of whose securities are traded on the Nasdaq Stock Market.
Mr. Haft is a past member of the Florida Commission for Government
Accountability to the People, and a national trustee and Treasurer of the Miami
Ballet. He is also a trustee of Florida International University and serves on
the advisory board of the Wolfsonian Museum in Miami, Florida. 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, an insurance company holding
company that provides services to insurance companies. 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.
16
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, 2002. To our knowledge, based solely
on a review of written representations that no reports were required, during the
fiscal year ended December 31, 2002, our officers, directors and 10%
stockholders complied with all Section 16(a) filing requirements applicable to
them, except that Mr. Haft filed a Form 4 one day late (which form reported one
transaction).
ITEM 10. EXECUTIVE COMPENSATION
-------- ----------------------
Summary Compensation Table
The following table sets forth certain information concerning the
compensation for the fiscal years ended December 31, 2002, 2001 and 2000 for
Barry B. Goldstein, our Chief Executive Officer:
Annual Compensation Long-Term Compensation
Name and ------------------------- Awards All Other
Principal Position Year Salary Bonus Shares Underlying Options Compensation
------------------ ---- ------ ----- ------------------------- ------------
Barry B. Goldstein 2002 $200,000 $20,000 1,000,000 -
Chief Executive Officer 2001 200,000(1) - 1,000,000 -
2000 - - - -
----------------
(1) Includes amounts earned as a consultant prior to his employment.
Options Tables
OPTION GRANTS IN FISCAL YEAR ENDED DECEMBER 31, 2002
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 1,000,000 83.3% $.30 May 15, 2007
17
AGGREGATED OPTION EXERCISES IN FISCAL YEAR
ENDED DECEMBER 31, 2002 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, 2002 at December 31, 2002
Name on Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
---- ----------- -------- ------------------------- -------------------------
Barry B. Goldstein - N/A 1,400,000/600,000 $146,000/$84,000
Long-Term Incentive Plan Awards
No awards were made to Mr. Goldstein during the fiscal year ended December
31, 2002 under any long-term incentive plan.
Compensation of Directors
Our directors are not entitled to receive any compensation for their
services as directors. However, 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, effective January 1, 2003, Mr. Certilman is entitled
to receive a fee of $50,000 per annum from us for consulting services. Further,
effective May 17, 2002, we granted to each of Messrs. Certilman and Haft a five
year option to purchase up to 125,000 of our common shares at an exercise price
of $.30 per share.
Employment Contracts, Termination of Employment and Change-in-Control
Arrangements
Effective April 1, 2001, we entered into a four year employment agreement
with Mr. Goldstein pursuant to which he is employed as our President, Chairman
of the Board and Chief Executive Officer. Mr. Goldstein is entitled to receive a
salary of $200,000 per annum plus such additional compensation as may be
determined by the Board of Directors.
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 28, 2003
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.
18
Name and Address Number of Shares Approximate
of Beneficial Owner Beneficially Owned Percent of Class
------------------- ------------------ ----------------
Barry B. Goldstein 1,625,000(1)(2) 11.6%
1158 Broadway
Hewlett, New York
Eagle Insurance Company 1,486,893(3) 12.0%
c/o The Robert Plan
Corporation
999 Stewart Avenue
Bethpage, New York
Robert M. Wallach 1,486,893(4) 12.0%
c/o The Robert Plan
Corporation
999 Stewart Avenue
Bethpage, New York
Morton L. Certilman 1,401,005(1)(5) 11.0%
The Financial Center at
Mitchel Field
90 Merrick Avenue
East Meadow, New York
Jay M. Haft 1,336,393(1)(6) 10.5%
1001 Brickell Bay Drive
Miami, Florida
Jack Seibald 1,000,000(7) 8.1%
1336 Boxwood Drive West
Hewlett Harbor, New York
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 5,849,291(1)(2)(5) 39.9%
19
----------------
(4 persons) (6)(8)
(1) Based upon Schedule 13D filed under the Securities Exchange Act of 1934.
(2) Represents (i) 1,600,000 shares issuable upon the exercise of options that
are exercisable currently or within 60 days, (ii) 5,000 shares held by Mr.
Goldstein's minor child and (iii) 20,000 shares held in a retirement trust
for the benefit of Mr. Goldstein. Mr. Goldstein disclaims beneficial
ownership of the shares held by his child and retirement trust.
(3) Eagle is a wholly-owned subsidiary of The Robert Plan Corporation.
(4) 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, of which Mr. Wallach is President, Chairman and Chief
Executive Officer.
(5) Includes 350,000 shares issuable upon the exercise of currently exercisable
options.
(6) Includes (i) 350,000 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.
(7) Based upon Schedule 13G filed under the Securities Exchange Act of 1934.
Represents (i) 500,000 shares held jointly by Mr. Seibald and his wife,
Stephanie Seibald, and (ii) 500,000 shares held by SDS Partners I, Ltd., a
limited partnership that has granted to Mr. Seibald the power to vote and
dispose of such shares.
(8) 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, 2002 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.
20
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted average Number of securities
to be issued upon exercise price of remaining available for
exercise of outstanding future issuance under
outstanding options, options, warrants equity compensation
warrants and rights and rights plans (excluding securities
(a) (b) reflected in column (a))
(c)
--------------------- ----------------- ---------------------------
Equity compensation 2,900,000 $.65 850,000
plans approved by
security holders
Equity compensation -0- -0- -0-
plans not approved
by security holders
--------- -------
Total 2,900,000 $.65 850,000
========= ==== =======
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------- ----------------------------------------------
March 2001 Transactions
In March 2001, the following transactions occurred:
o We entered into agreements with Messrs. Lang, Weinzimer and Certilman,
each then one of our executive officers, that provided for our sale to
them of a total of eight of our DCAP stores. Pursuant to the
agreements, which were closed in November 2001 following shareholder
approval, Mr. Lang acquired three of the stores for a total purchase
price of approximately $257,000, Mr. Weinzimer acquired three of the
stores for a total purchase price of $285,000 and an entity owned by
Mr. Certilman (we refer to the entity as "Mr. Certilman") acquired two
of the stores for a total purchase price of approximately $225,000.
The locations of the stores are as follows:
o Lang: Amityville, New York
Medford, New York
Seaford, New York
o Weinzimer: Hempstead, New York
Hicksville, New York
Jamaica, New York
21
o Certilman: East Meadow, New York
Flushing, New York
At the time of execution of the agreements with Messrs. Lang and
Weinzimer, each of them paid to us the total amount of his respective
purchase price. At the time of execution of the agreement with Mr.
Certilman, we received approximately $197,000 of the purchase price.
The balance of $28,000 was paid at the closing of the acquisition
through the assumption of our obligation to an unaffiliated third
party in that amount. The obligation was incurred in May 2000 in
connection with our acquisition of the third party's interest in one
of the stores acquired by Mr. Certilman. Pending the closing of the
sales, each of Messrs. Lang, Weinzimer and Certilman managed his
respective stores and was entitled to receive a management fee equal
to the net profits of the stores. Each of them was also responsible
for all losses incurred during the interim period.
o At the closing, we entered into franchise agreements with the entities
acquired by Messrs. Lang, Weinzimer and Certilman. The franchise
agreements are similar in most respects to our standard conversion
franchise agreements.
In general, none of the franchisees will be allowed to terminate their
respective franchise agreements prior to March 31, 2003. Pending the
closing, Messrs. Lang, Weinzimer and Certilman were responsible for
charges as if the franchise agreements had been executed. Counsel for
Mr. Lang's entities has notified us of their election to terminate
their respective franchise agreements effective March 31, 2003. Mr.
Weinzimer's entities have agreed to extend the March 31, 2003 date to
March 31, 2005.
o We reacquired a total of 3,714,616 of the shares owned by 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 agreed with Mr. Lang to terminate his employment agreement that was
scheduled to expire in February 2004, and DCAP Management, our
wholly-owned subsidiary that operates our franchise business, entered
into a new employment agreement with him which expired on September
30, 2001. Based upon Mr. Lang's agreement to forgo the compensation
otherwise payable to him for the balance of the original employment
term ($667,000, net of the amount payable to him pursuant to his new
employment agreement), we granted to Mr. Lang a price concession of
approximately $85,000 in connection with the purchase of his three
stores. This price concession resulted in the purchase price of
$257,000 for Mr. Lang.
o We agreed with Mr. Weinzimer to terminate his employment agreement
that was scheduled to expire in February 2004. Based upon Mr.
Weinzimer's agreement to
22
forgo the compensation otherwise payable to him for the balance of the
employment term ($729,000), we granted to Mr. Weinzimer a price
concession of approximately $85,000 in connection with the purchase of
his three stores. This price concession resulted in the purchase price
of $285,000 for Mr. Weinzimer.
o We agreed with Mr. Certilman to terminate his employment agreement
that was scheduled to expire in February 2004. Concurrently, based
upon Mr. Certilman's agreement to forgo the compensation otherwise due
him for the balance of the term of the employment agreement
($365,000), we agreed to cancel indebtedness of approximately $141,000
that Mr. Certilman owed to us.
o We agreed with Mr. Haft to terminate his employment agreement that was
scheduled to expire in February 2004.
o Each of Messrs. Lang, Weinzimer, Certilman and Haft resigned as an
officer of DCAP Group. Messrs. Lang and Weinzimer also resigned as our
directors.
The terms of the above sales agreements were the result of arm's length
negotiations between us and each of Messrs. Lang, Weinzimer and Certilman that
were based upon the terms of other recent sales of our stores to persons who are
not affiliated with us, then current market conditions and the termination of
the employment agreements with each of them, as discussed above. No independent
appraisal or valuation was received in connection with the agreements. We did
not utilize a special independent committee of our Board of Directors to perform
an analysis of the fairness of the transactions or to negotiate the terms of the
sales on our behalf.
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 on terms substantially
similar to those entered into by Mr. Weinzimer in March 2001 when he purchased
three of our stores (as discussed above). 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.
Contemplated Transaction
We have agreed in principle with AIA Acquisition Corp., an insurance
brokerage firm with six offices located in eastern Pennsylvania, to acquire
substantially all of AIA's assets. Barry B. Goldstein, our Chief Executive
Officer, is President of AIA and members of his family are principal
stockholders of AIA. The contemplated terms provide for the following:
23
o A base purchase price approximately equal to 69% of AIA's commission
income for the 12 months ended March 31, 2002 or the year ended
December 31, 2002, whichever is less, payable in DCAP Group preferred
stock. Based on the above, the base purchase price will not exceed
approximately $760,000 (exclusive of amounts payable for accounts
receivable and prepaid expenses).
o Additional consideration based upon the combined operations of AIA and
Barry Scott Companies during the five year period following the
closing. The additional consideration is payable in cash and cannot
exceed an aggregate of $335,000.
No definitive agreement has been entered into with AIA and we can give no
assurance that the transaction will be completed on the above terms or
otherwise.
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. Certilman Balin has also served as counsel to DCAP Insurance
and Messrs. Lang and Weinzimer with respect to certain matters; however, it did
not serve as counsel to DCAP Insurance or Messrs. Lang and Weinzimer in
connection with our acquisition of DCAP Insurance, to Messrs. Lang or Weinzimer
in connection with the transactions with them discussed under "March 2001
Transactions" or to Mr. Weinzimer in connection with the transaction with him
discussed under "Brentwood Store" above. In addition, Certilman Balin did not
serve as counsel to either us or Mr. Certilman in connection with the
transactions with him discussed under "March 2001 Transactions" above.
24
ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K
-------- --------------------------------------
(a) Exhibits
--------
Exhibit
Number Description of Exhibit
------ ----------------------
2 Share Purchase Agreement, dated as of August 30, 2002, by and between
Progressive Agency Holdings Corp. and Blast Acquisition Corp.(1)
3(a) Restated Certificate of Incorporation(2)
(b) By-laws, as amended(2)
10(a) 1998 Stock Option Plan, as amended
10(b) Stock Option Agreement, dated February 25, 1999, between DCAP Group,
Inc. and Morton L. Certilman(3)
10(c) Stock Option Agreement, dated February 25, 1999, between DCAP Group,
Inc. and Jay M. Haft(3)
10(d) Subscription Agreement, dated as of October 2, 1998, between DCAP
Group, Inc. and Eagle Insurance Company and amendments thereto(3)
10(e) Form of Subscription Agreement with regard to private offering of
Units, dated June 2, 1999(4)
10(f) Form of Registration Rights Agreement with regard to private offering
of Units, dated June 2, 1999(4)
10(g) Form of Warrant Agreement with regard to private offering of Units,
dated June 2, 1999(4)
10(h) Sale and Assignment Agreement, dated as of September 1, 1999, among
Payments, Inc., Flatiron Credit Company, Inc. and Westchester Premium
Acceptance Corp.(4)
10(i) Letter agreement, dated as of June 1, 2001, among Westchester Premium
Acceptance Corporation, Payments, Inc. and Input 1, LLC.(5)
10(j) 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.(6)
25
10(k) Agreement, dated as of March 28, 2001, between DCAP Group, Inc. and
Kevin Lang with respect to sale of DCAP Bayshore, Inc., DCAP Medford,
Inc. and DCAP Seaford, Inc.(7)
10(l) Agreement, dated as of March 28, 2001, between DCAP Group, Inc. and
Abraham Weinzimer with respect to sale of Diversified Coverage Asset
Planning, Inc., ADCAP Brokerage, Inc. and DCAP Hicksville, Inc.(7)
10(m) Asset Purchase Agreement, dated as of March 28, 2001, between East
Meadow Agency, Inc., DCAP Flushing, Inc. and MLC East Meadow/Flushing
LLC(7)
10(n) Agreement, dated as of March 28, 2001, between DCAP Group, Inc. and
Kevin Lang with respect to repurchase of shares(7)
10(o) Agreement, dated as of March 28, 2001, between DCAP Group, Inc. and
Abraham Weinzimer with respect to repurchase of shares(7)
10(p) Letter agreement, dated as of March 28, 2001, between DCAP Group, Inc.
and Abraham Weinzimer(7)
10(q) Letter agreement, dated as of March 28, 2001, between DCAP Group, Inc.
and Morton L. Certilman(7)
10(r) Letter agreement, dated as of March 28, 2001, between DCAP Group, Inc.
and Jay M. Haft(7)
10(s) Employment Agreement, dated as of March 28, 2001, between DCAP
Management, Inc. and Kevin Lang(7)
10(t) Employment Agreement, dated as of May 10, 2001, between DCAP Group,
Inc. and Barry Goldstein(8)
10(u) Stock Option Agreement, dated as of May 10, 2001, between DCAP Group,
Inc. and Barry Goldstein(8)
10(v) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Barry Goldstein
10(w) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Morton L. Certilman
10(x) Stock Option Agreement, dated as of May 15, 2002, between DCAP Group,
Inc. and Jay M. Haft
26
10(y) Stock Purchase Agreement, dated as of February 27, 2003, between DCAP
Group, Inc. and Abraham Weinzimer with respect to sale of DCAP
Brentwood Inc.
21 Subsidiaries
99 Certificate of Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
----------------
(1) Denotes document filed as an exhibit to our Current Report on Form 8-K for
an event dated August 30, 2002.
(2) 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.
(3) 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.
(4) 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.
(5) Denotes document filed as an exhibit to our Annual Report on Form 10-KSB
for the year ended December 31, 2001 and incorporated herein by reference.
(6) 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.
(7) Denotes document filed as an exhibit to our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 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.
------------
(b) Reports on Form 8-K
-------------------
One report on Form 8-K was filed by us during the last quarter of the
fiscal year ended December 31, 2002 as follows:
Date of Report: August 30, 2002 (Amendment No. 1)
Item Reported: 7
27
ITEM 14. CONTROLS AND PROCEDURES
-------- -----------------------
Within 90 days prior to the filing date of this report, our Chief Executive
Officer and Chief Financial Officer conducted an evaluation of the effectiveness
of our disclosure controls and procedures. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures are effective in alerting him in a timely manner to
material information required to be included in our SEC reports. In addition,
our Chief Executive Officer and Chief Financial Officer reviewed our internal
controls, and there have been no significant changes in our internal controls or
in other factors that could significantly affect those controls subsequent to
the date of our last evaluation.
28
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
REPORT ON AUDITS OF
-------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
TWO YEARS ENDED DECEMBER 31, 2002
---------------------------------
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
REPORT ON AUDITS OF
-------------------
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
TWO YEARS ENDED DECEMBER 31, 2002
---------------------------------
INDEX
-----
Page
----
Independent auditors' report F-2
Consolidated balance sheet F-3
Consolidated statements of operations 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-22
CONSOLIDATED FINANCIAL STATEMENTS
---------------------------------
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, 2002 and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for each of the
years in the two-year period ended December 31, 2002. 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, 2002 and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2002 in conformity with accounting principles generally accepted in the United
States of America.
HOLTZ RUBENSTEIN & CO., LLP
Melville, New York
February 5, 2003 (except for Note 22b
which is dated March 5, 2003)
F-2
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED BALANCE SHEET
--------------------------
DECEMBER 31, 2002
-----------------
ASSETS
------
CURRENT ASSETS:
Cash and cash equivalents $ 607,403
Accounts receivable, net of allowance for
doubtful accounts of $43,000 668,204
Other receivable 500,000
Note receivable - former officer 34,945
Prepaid expenses and other current assets 177,235
-----------------
Total current assets 1,987,787
PROPERTY AND EQUIPMENT, net 232,277
GOODWILL 619,382
OTHER INTANGIBLES, net 285,197
DEPOSITS AND OTHER ASSETS 24,750
-----------------
$ 3,149,393
=================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 797,231
Current portion of long-term debt 13,846
Current portion of capital lease obligations 47,657
Deferred revenue 70,621
Debentures payable 154,200
-----------------
Total current liabilities 1,083,555
-----------------
LONG-TERM DEBT 693,301
-----------------
CAPITAL LEASE OBLIGATIONS 42,957
-----------------
DEFERRED REVENUE 21,255
-----------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; authorized 40,000,000 shares;
issued 16,068,018 160,680
Preferred stock, $.01 par value; authorized
1,000,000 shares; 0 shares issued and outstanding -
Capital in excess of par 10,242,409
Deficit (8,166,109)
-----------------
2,236,980
Treasury stock, at cost, 3,714,616 shares (928,655)
-----------------
1,308,325
-----------------
$ 3,149,393
=================
See notes to consolidated financial statements
F-3
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
Years Ended
December 31,
2002 2001
REVENUES:
Commissions and fees $2,473,921 $2,350,094
Premium finance revenue 1,309,808 259,454
Other operating departments - 5,758
---------- ---------
3,783,729 2,615,306
---------- ---------
OPERATING EXPENSES:
General and administrative expenses 2,875,063 3,133,292
Depreciation and amortization 135,882 278,430
---------- ----------
Total operating expenses 3,010,945 3,411,722
---------- ----------
OPERATING INCOME (LOSS) 772,784 (796,416)
---------- ----------
OTHER (EXPENSE) INCOME:
Interest income 2,460 15,960
Interest expense (64,299) (47,429)
Gain on sale of DCAP stores - 56,043
Loss on disposal of property and equipment - (252,791)
---------- ----------
(61,839) (228,217)
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 710,945 (1,024,633)
INCOME TAXES 10,534 16,913
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST 700,411 (1,041,546)
MINORITY INTEREST 1,936 (12,942)
---------- ----------
INCOME (LOSS) FROM CONTINUING OPERATIONS 698,475 (1,028,604)
DISCONTINUED OPERATIONS:
Income from operations of discontinued subsidiary, net of
income taxes of $3,194 and $3,423, respectively 34,612 99,053
Gain on disposition of discontinued subsidiary, net of income
taxes of $22,000 312,920 -
---------- ----------
NET INCOME (LOSS) $1,046,007 $ (929,551)
========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic and Diluted:
Income (loss) from continuing operations $ 0.06 $ (0.09)
Income from operations of discontinued subsidiary - 0.01
Gain on disposition of discontinued subsidiary 0.03 -
---------- ----------
Net income (loss) $ 0.09 $ (0.08)
========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
Basic 11,695,868 12,238,222
========== ==========
Diluted 12,037,194 12,238,222
========== ==========
See notes to consolidated financial statements
F-4
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------
Capital
Common Stock Preferred Stock in Excess Equity Subscription Treasury
Shares Amount Shares Amount of Par (Deficit) Receivable Stock Total
---------- -------- ------ ------ ---------- ------------ ------------ --------- -----------
Balance, January 1, 2001 15,068,018 $150,680 - $ - $9,752,409 $(8,282,565) $(228,000) $ - $1,392,524
Cancellation in connection
with sale of stores - - - - - - 228,000 - 228,000
Purchase of 3,714,616 shares
of treasury stock - - - - - - - (928,655) (928,655)
Net loss - - - - - (929,551) - - (929,551)
---------- ------- --- --- ----------- ------------ ---------- ---------- ----------
Balance, December 31, 2001 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
========== ======== === === =========== =========== ========== ========= ==========
See notes to consolidated financial statements
F-5
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOW
------------------------------------
Years Ended
December 31,
-----------------------------
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES: ---------- ----------
Net income (loss) $1,046,007 $ (929,551)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 153,175 293,605
Bad debt expense 4,869 232,666
Gain on disposition of discontinued subsidiary (312,920) -
Minority interest 1,936 (12,942)
Gain on sale of stores - (56,043)
Loss on disposal of fixed assets - 252,791
Forgiveness of note receivable - 141,454
Changes in operating assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (220,245) 124,522
Prepaid expenses and other current assets (9,597) 25,986
Deposits and other assets 43,989 29,972
Decrease in liabilities:
Accounts payable and accrued expenses (336,063) (1,078,732)
Deferred revenue (35,253) (225,959)
---------- ----------
Net cash provided by (used in) operating activities 335,898 (1,202,231)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (28,797) (25,577)
Decrease in notes and other receivables - net 4,150 53,303
Purchase of Barry Scott Companies, net of cash acquired (211,051) -
Purchase of minority interest (40,000) -
Proceeds from sale of DCAP stores - 844,091
Decrease in restricted cash - other current assets - 236,134
---------- ---------
Net cash (used in) provided by investing activities (275,698) 1,107,951
---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and capital lease obligations (140,238) (235,704)
Decrease (increase) in due to officer (33,333) 33,333
Proceeds from private placement 500,000 -
---------- ---------
Net cash provided by (used in) financing activities 326,429 (202,371)
---------- ---------
Net increase (decrease) in cash and cash equivalents 386,629 (296,651)
Cash and cash equivalents, beginning of year 220,774 517,425
---------- ---------
Cash and cash equivalents, end of year $ 607,403 $ 220,774
========== =========
See notes to consolidated financial statements
F-6
DCAP GROUP, INC. AND SUBSIDIARIES
---------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
YEARS ENDED DECEMBER 31, 2002 AND 2001
--------------------------------------
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 provides premium
financing of insurance policies for their DCAP clients as well as clients of
non-affiliated entities. The Company also provides automobile club services for
road-side emergencies and tax preparation services. 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 are shown as
discontinued operations in the financial statements.
In March 2001, the Company entered into agreements with three shareholders
that provided for the sale of a total of eight DCAP stores for cash
consideration of an aggregate of $767,000. The Company recognized a net gain of
approximately $56,000 on the sale of the stores. At the time of execution of the
agreements with two of the shareholders, they each paid to the Company the total
amount of their respective purchase price. At the time of execution of the
agreement with the remaining shareholder, the Company received approximately
$197,000 of the purchase price. The balance was paid at the closing of the
acquisition through the assumption of a liability.
At the closing of the store sales, the Company entered into franchise
agreements with the three shareholders on terms similar to those previously
entered into by one of the shareholders, except that, in general, none of the
franchisees will be allowed to terminate their respective franchise agreements
prior to March 31, 2003.
During fiscal 2001, the Company reacquired a total of 3,714,616 of the
issued shares from two of these shareholders in consideration of the
cancellation of indebtedness owed to the Company by them in the aggregate amount
of $928,655. Notes in the original principal amount of $33,000 plus accrued
interest are still owed to the Company from one of the shareholders.
In addition, the Company agreed with one of the shareholders to terminate
his employment agreement that was scheduled to expire in February 2004.
Concurrently, the Company agreed to cancel indebtedness of $141,454 that the
shareholder owed to the Company pursuant to his purchase of the Company's
interest in certain DCAP stores.
2. Summary of Significant Accounting Policies:
-------------------------------------------
a. Principles of consolidation
---------------------------
The accompanying consolidated financial statements include the
accounts of all subsidiaries and joint ventures in which the Company has a
majority voting interest or voting control. All significant intercompany
accounts and transactions have been eliminated.
b. Revenue recognition
-------------------
The Company recognizes commission revenue from insurance policies at
the beginning of the contract period, on income tax preparation when the
services are completed and on automobile club dues equally over the contract
period. Franchise fee revenue is recognized when substantially all the Company's
contractual requirements under the franchise agreement are completed. Refunds of
commissions on the cancellation of insurance policies are reflected at the time
of cancellation.
F-7
2. Summary of Significant Accounting Policies: (Cont'd)
------------------------------------------
b. Revenue recognition (cont'd)
-------------------
Premium financing fee revenue is earned based upon the origination of
premium finance contracts sold by agreement to third parties. The contract fee
gives consideration to an estimate as to the collectability of the loan amount.
Periodically, actual results are compared to estimates previously recorded, and
adjusted accordingly.
c. 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 Company's
previous business combinations were accounted for by using the purchase method
and, as of January 2002, the net carrying amount of goodwill from prior purchase
transactions was approximately $75,000. The adoption of SFAS No 142 did not have
a material effect on the 2001 consolidated results of operations.
d. 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.
e. 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.
f. Statement of cash flows
-----------------------
For purposes of the consolidated statement of cash flows, 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.
F-8
2. Summary of Significant Accounting Policies: (Cont'd)
------------------------------------------
g. 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.
h. Net income (loss) per share
---------------------------
Basic net income per share is computed by dividing income available to
common shareholders by the weighted-average number of common shares outstanding.
Diluted earnings per share reflect, in periods in which they have a dilutive
effect, the impact of common shares issuable upon exercise of stock options. For
the year ended December 31, 2001, the effect of any common stock equivalents
would have been anti-dilutive.
The reconciliation for the year ended December 31, 2002 is as follows:
2002
----------
Weighted average number of shares outstanding 11,695,868
Effect of dilutive securities - common stock equivalents 341,326
----------
Diluted shares outstanding 12,037,194
==========
i. Advertising costs
-----------------
Advertising costs are charged to operations when the advertising first
takes place.
j. 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.
k. 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.
F-9
2. Summary of Significant Accounting Policies: (Cont'd)
------------------------------------------
l. New accounting pronouncements
-----------------------------
In April 2002, the Financial Accounting Standards Board (FASB) issued
SFAS No. 145, "Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB
Statement No. 13, and Technical Corrections". This Statement rescinds FASB
Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and
an amendment of that Statement, FASB Statement No. 64, "Extinguishments of Debt
Made to Satisfy Sinking-Fund Requirements". This Statement also rescinds FASB
Statement No. 44, "Accounting for Intangible Assets of Motor Carriers". This
Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an
inconsistency between the required accounting for sale-leaseback transactions
and the required accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions. The provisions of this
Statement related to the rescission of Statement 4 shall be applied in fiscal
years beginning after May 15, 2002. All other provisions of this Statement shall
be effective for financial statements issued on or after May 15, 2002.
In August 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which establishes new standards of
accounting and reporting for costs associated with exit or disposal activities.
This standard requires that a liability is recorded as of the date an obligation
is incurred. This Statement also requires that an exit or disposal liability be
initially measured at fair value. SFAS No. 146 does not apply to disposal
activities qualifying as a discontinued operation. This Statement is effective
for exit or disposal activities initiated after December 31, 2002.
Currently, the Company does not believe that the adoption of SFAS No.
145 and SFAS No. 146 will have a material impact on its financial position and
results of operations.
m. 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. No costs were incurred during 2002
or 2001.
n. Reclassifications
-----------------
Certain reclassifications have been made to the consolidated financial
statements for the year ended December 31, 2001 to conform with the
classifications used in 2002.
o. Comprehensive income (loss)
---------------------------
Comprehensive income (loss) refers to revenues, 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,
2002, there were no such adjustments required.
F-10
3. Acquisition of 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 operations include the revenues
and expenses of Barry Scott Companies from August 30, 2002.
The following pro forma results were developed assuming the acquisition of
Barry Scott Companies had occurred on January 1, 2001:
Years Ended
December 31,
-----------------------------------
2002 2001
--------------- ---------------
Revenues $ 6,085,105 $ 5,757,221
Income (loss) from continuing operations 758,944 (1,429,257)
Income (loss) from continuing operations per share 0.06 (0.11)
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
Barry Scott Companies 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 as of the date of acquisition:
Cash $ 181,000
Commissions receivable 198,000
Other assets 215,000
Intangible assets 104,000
Goodwill arising in the acquisition 515,000
----------
1,213,000
Current liabilities (296,000)
----------
Net assets acquired $ 917,000
==========
4. Goodwill:
--------
For the year ended December 31, 2002 the changes in the carrying value of
goodwill are as follows:
Balance, beginning of year $ 75,000
Additions as a result of business combination 515,241
Addition as a result of acquisition of minority interest 29,141
---------------
Balance, end of year $ 619,382
===============
F-11
5. Other Intangibles:
------------------
At December 31, 2002 other intangible assets consist of the following:
Gross carrying amount:
Customer lists $103,550
Restrictive covenants 100,000
Vanity phone numbers 204,416
--------
407,966
--------
Accumulated amortization:
Customer lists 8,629
Restrictive covenants 72,777
Vanity phone number 41,363
--------
122,769
--------
Balance, end of year $285,197
========
The aggregate amortization expense for the years ended December 31, 2002
and 2001 was approximately $54,000 and $35,000, respectively.
Estimated amortization expense for the five years subsequent to December
31, 2002 is as follows:
Years Ended
December 31,
------------
2003 $67,000
2004 40,000
2005 40,000
2006 31,000
2007 14,000
The remaining weighted-average amortization period as of December 31,
2002 is as follows:
Customer lists 3.67 years
Restrictive covenants 1.00 years
Vanity Phone numbers 12.00 years
------
7.17 years
Other intangible assets are being amortized using the straight-line method
over a period of three to fifteen years.
6. Note Receivable:
----------------
The note receivable at December 31, 2002 is an amount due from a former
officer approximating $35,000 including accrued interest. The note is due on
demand, together with accrued interest.
F-12
7. Property and Equipment:
-----------------------
At December 31, 2002 property and equipment consists of the following:
Furniture, fixtures and equipment $ 329,962
Office equipment 548,537
Leasehold improvements 320,125
Computer hardware and software 380,800
Transportation equipment 9,026
Entertainment facility 200,538
----------
1,788,988
Less accumulated depreciation and amortization 1,556,711
----------
$ 232,277
==========
8. Accounts Payable and Accrued Expenses:
--------------------------------------
At December 31, 2002 accounts payable and accrued expenses consists of the
following:
Accounts payable $640,562
Payroll and related costs 42,000
Professional fees 80,000
Other 34,669
--------
$797,231
========
9. 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, 2002, $154,200 of these
debentures have not been presented for payment. Accordingly, this balance has
been included as a current liability 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.
10. Long-Term Debt:
---------------
At December 31, 2002, 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 $275,000 in August, 2006,
plus interest at 5% $525,000
Mortgage payable, due in monthly installments
of $1,803, including interest at 9%, per annum
through May 2017. The obligation is
collateralized by the Company's entertainment
facility having a book value of $129,000 174,501
Other 7,646
---------
707,147
Less current maturities 13,846
--------
$693,301
========
F-13
10. Long-Term Debt: (Cont'd)
--------------
Long-term debt matures as follows:
Years Ended
December 31,
------------
2003 $ 14,000
2004 132,000
2005 132,000
2006 283,000
2007 9,000
Thereafter 137,000
11. Capitalized Lease Obligations:
------------------------------
The future minimum lease payments of capital leases and the present value
of the net minimum lease payments as of December 31, 2002 are as follows:
Years Ended
December 31,
------------
2003 $ 67,118
2004 44,193
2005 6,012
-----------
Minimum lease payment 117,323
Less amount representing interest 26,709
-----------
Present value of net minimum lease payments 90,614
Less current maturities 47,657
-----------
Long-term portion of capitalized lease obligations $ 42,957
===========
12. Related Party Transaction:
--------------------------
a. Rent
During the year ended December 31, 2001, the Company leased its
corporate office facility from a partnership of which a stockholder/officer is
affiliated. Rent expense amounted to $1,500 for the year ended December 31,
2001.
b. Professional fees
A law firm affiliated with a director of the Company was paid legal
fees of $92,000 and $87,000, for the years ended December 31, 2002 and 2001,
respectively.
A director of the company was paid a fee of $50,000 in connection with
the IAH settlement (see Note 21).
F-14
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,
---------------------
2002 2001
-------- ---------
Provision (benefit) at federal statutory rates $ 10,534 $(316,047)
Loss in excess of available benefit - 332,960
-------- ---------
$ 10,534 $ 16,913
======== =========
At December 31, 2002 the Company had net operating loss carryforwards for
tax purposes of approximately $4,100,000. The tax loss carryforwards expire at
various dates through 2021.
Included in the net operating loss carryforward is approximately $1,250,000
that was 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.
Deferred tax assets at December 31, 2002 consist of the following:
Deferred tax assets:
Net operating loss carryovers $ 1,618,000
Other 18,000
-----------
Total deferred tax asset 1,636,000
Less valuation allowance (1,636,000)
-----------
Net deferred tax assets $ -
===========
The Company has recorded a full valuation allowance against its net
deferred tax assets because of the uncertainty that sufficient taxable income
will be realized during the carryforward period to utilize the deferred tax
asset.
14. Commitments:
------------
a. 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:
F-15
14. Commitments: (Cont'd)
-----------
Years Ended
December 31,
------------
2003 $ 347,000
2004 239,000
2005 161,000
2006 103,000
2007 71,000
Thereafter 223,000
Rental expense approximated $252,000 and $407,000 for the years ended
December 31, 2002 and 2001, respectively.
b. Employment agreement
--------------------
During 2001, the Company entered into an employment agreement with an
officer, which provides for minimum salary of $200,000 per annum. The employment
agreement also provides for discretionary bonuses and other perquisites commonly
found in such agreements. In addition, the Company granted the officer the right
and option to purchase up to 1,000,000 shares of the Company's common stock. The
employment agreement expires on April 1, 2005.
c. Litigation
----------
The Company is party to an action filed with the National Labor
Relations Board, by the union representing the employees of the Company's
discontinued subsidiary. The action charges that the Subsidiary ceased
operations and terminated the employment of its employees without notifying the
union and has therefore interfered with, restrained and coerced employees in the
exercise of their rights. The Company believes that the action is without merit
and will vigorously defend its position.
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. Stockholders' Equity:
---------------------
a. 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.
b. Private placement of securities
-------------------------------
(i) 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.
F-16
15. Stockholders' Equity: (Cont'd)
--------------------
(ii) 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 price of the warrants were subject to reduction based upon the
market price of the Company's common shares one year after June 2, 1999.
On June 2, 2000, the Company issued 761,342 common shares, 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 shares 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, 2002, and expire June 2, 2004.
c. Stock options
-------------
In November 1998, the Company adopted the 1998 Stock Option Plan which
provides for the issuance of incentive stock options or 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 common shares
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.
A summary of the status of the Company's stock option plans as of
December 31, 2002 and 2001, and changes during the years then ended is presented
below:
F-17
15. Stockholders' Equity: (Cont'd)
--------------------
Years Ended
December 31,
------------------------------------------------------
2002 2001
-------------------------- ------------------------
Weighted Weighted
Average Average
Exercise Exercise
Fixed Stock Options Shares Price Shares Price
------------------- ------------ ----------- ------------- -----------
Outstanding, beginning of year 1,450,000 $ 1.01 950,000 $ 2.51
Granted 1,450,000 .30 1,000,000 .25
Expired - - (100,000) 1.00
Forfeited - - (400,000) 2.69
------------ ------- ------------- ---------
Outstanding, end of year 2,900,000 $ .65 1,450,000 $ 1.01
============ ====== ============= =========
Weighted average fair value
of options granted during year $ .22 $ .18
====== =========
The following table summarizes information about stock options
outstanding at December 31, 2002:
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 - .30 2,450,000 3.92 yrs $0.28 1,700,000 $0.29
$2.69 450,000 1.17 yrs. $2.69 450,000 $2.69
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, 2002 and 2001, consistent with the
provisions of SFAS 123, the Company's net income (loss) and net income (loss)
per share would have been adjusted to the following pro forma amounts:
c. Stock options (cont'd)
-------------
2002 2001
--------------- ----------------
Net income (loss), as reported $ 1,046,007 $ (929,551)
Net income (loss), pro forma 668,132 (929,551)
Basic income (loss) per share, as reported .09 (.08)
Basic income (loss) per share, pro forma .06 (.08)
Diluted income (loss) per share, as reported .09 (.08)
Diluted income (loss) per share, pro forma .06 (.08)
F-18
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following range of weighted average
assumptions were used for grants during the year ended December 31, 2002:
Dividend yield 0.00%
Volatility 96.46%
Risk-free interest rate 6.00%
Expected life 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.
d. Common shares reserved
----------------------
Warrants 2,740,898
Stock Option Plans 3,750,000
16. 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. Such loans are sold to a third party upon
origination.
In December 2002, the Company disposed of its Hotel segment as part of a
settlement agreement (see note 21). Accordingly, the segment information shown
in the following table excludes the activity of this segment for the years ended
December 31, 2002 and 2001.
Revenue, operating income, and depreciation and amortization and assets
pertaining to the segments in which the Company operates are presented below.
Year Ended Premium
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.
F-19
16. Business Segments: (Cont'd)
-----------------
Year Ended Premium
December 31, 2001 Finance Insurance Other (1) Total
------------------------ ------------ -------------- --------------- -------
Revenues from
external customers $ 259,454 $ 2,350,094 $ 5,758 $ 2,615,306
Interest income - 5,577 10,383 15,960
Interest expense - 47,429 - 47,429
Depreciation and
amortization - 278,430 - 278,430
Segment profit (loss) 234,128 (821,555) (441,177) (1,028,604)
Segment assets 51,719 853,862 326,391 1,231,962
(1) Column represents corporate-related items and, as it relates to segment
profit (loss), income, expense and assets not allocated to reportable
segments.
17. Major Customers:
----------------
At December 31, 2002, revenues from two major customers consisted of the
following:
Customer % of Total Revenue Segment
-------- ------------------ ---------------------
A 35% Premium Finance
B 12% Insurance
18. Fair Value of Financial Instruments:
------------------------------------
The methods and assumptions used to estimate the fair value of the
following classes of financial instruments were:
Current Assets and Current Liabilities: The carrying amount of cash,
current receivables, notes receivable 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, 2002 approximates fair value.
19. Advertising Costs:
------------------
Included in selling, general and administrative expenses are advertising
costs approximating $214,000 and $216,000 for the years ended December 31, 2002
and 2001, respectively.
F-20
20. Supplementary Information - Statement of Cash Flows:
----------------------------------------------------
Cash paid during the years for:
Years Ended
December 31,
-----------------------------------
2002 2001
------------- -------------
Supplemental disclosures:
Interest $ 57,533 $ 73,670
============= =============
Income Taxes $ 10,534 $ 25,232
============= =============
21. 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 principal to a settlement agreement whereby the
Ports Authority would pay the Company $500,000. Operations ceased on January 27,
2003. The remaining assets of the discontinued subsidiary consist primarily of
the $500,000 receivable from the Ports Authority and receivables generated in
the normal course of business. Costs applied in arriving at the gain on the sale
of the discontinued subsidiary 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 $828,861 and $905,158 for the years ended
December 31, 2002 and 2001, respectively. Pretax net income from the
discontinued operation totaled $37,806 and $102,476 for the years ended December
31, 2002 and 2001, respectively.
22. Subsequent Events:
------------------
(a) In February 2003, the Company sold one of its retail offices to a
stockholder and a former officer of the Company, for cash consideration of
$115,000.
In addition, concurrently with the sale, the purchaser and the Company
entered into a franchise agreement.
(b) On March 5, 2003, the Company was notified by the premium finance
agency that is purchasing the premium finance receivables originated by the
Company, that they are exiting the personal lines premium finance business and
will discontinue purchasing finance receivables from the Company on July 30,
2003. Management is currently exploring various alternatives to securing new
financing arrangements for its premium finance business, and does not believe
that the cancellation of its current agreement will have an adverse effect on
the operations of the Company.
(c) The Company has agreed in principle to acquire substantially all of the
assets of AIA Acquisition Corp. ("AIA"), an insurance brokerage firm located in
eastern Pennsylvania. The Company's CEO is President and his family members are
principal stockholders of AIA. The proposed purchase price is as follows:
i. Base purchase price equal to approximately 69% of AIA's commission
income for the twelve-month period ended March 31, 2002 or December 31,
2002, whichever is less, payable in the Company's preferred stock. The base
purchase price is not expected to exceed $760,000, exclusive of amounts
payable for accounts receivable and prepaids.
ii. Contingent consideration based upon the combined operations of AIA
and Barry Scott Companies during the five-year period following the
closing. The contingent consideration is payable in cash and cannot exceed
an aggregate of $335,000.
F-21
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant caused this amendment to the report to be signed on its
behalf by the undersigned, thereunto duly authorized.
DCAP GROUP, INC.
Dated: March 10, 2003 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 10, 2003
--------------------------
Barry B. Goldstein
/s/ Morton L. Certilman Secretary and Director March 10, 2003
--------------------------
Morton L. Certilman
/s/ Jay M. Haft Director March 10, 2003
--------------------------
Jay M. Haft
Director
--------------------------
Robert M. Wallach
29
Certification
-------------
I, Barry B. Goldstein, Chief Executive Officer and Chief Financial Officer
of DCAP Group, Inc., certify that:
1. I have reviewed this annual report on Form 10-KSB of DCAP Group, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d- 14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 10, 2003
/s/ Barry B. Goldstein
-------------------------
Barry B. Goldstein
Chief Executive Officer and
Chief Financial Officer