Effective July 1, 2009, with the acquisition of KICO, substantially all of our continuing operations consists of underwriting property and casualty insurance. KICO is a medium-sized multi-line regional property and casualty insurance company writing business exclusively through independent agents and brokers (“producers”).   We are 33 DCAP franchiseslicensed to write insurance in the state of New York. KICO provides direct markets to small to medium-sized producers located primarily in the New York metropolitan area.  Franchisees currently payCity area, also known as Downstate New York.

KICO’s competitive advantage in the marketplace is the service it provides to its producers, policyholders and claimants.  Our insurance producers value their relationship with us since they receive excellent, consistent personal service coupled with competitive rates and commission levels. We believe there are many producers looking for an initial franchise feeinsurer like KICO, which offers the producer a potential for growth and good service.  KICO consistently is rated above average in the important areas of $25,000underwriting, claims handling and service to offerproducers. We believe that the excellent service we provide to our producers, policyholders and claimants provides a foundation for growth.

We believe our rates are competitive with other carriers’ rates in our markets.  We believe that consistency and the reliable availability of our insurance products underis important to our producers.  We do not seek to grow by competing based solely upon price.  We seek to develop long term relationships with our select producers who understand and appreciate the DCAP name.  Franchisees are obligated to also pay us monthly fees duringconservative consistent path we have chosen.  We carefully underwrite all of our business utilizing the termCLUE database, motor vehicle reports, credit reports, physical inspection of risks and other underwriting software. In the franchise agreement, generally commencingevent that a material misrepresentation is discovered in the underwriting process, the policy is voided. If a material misrepresentation is discovered after a six to twelve month period fromclaim is presented, we deny the date on which the storefront opens for business.  Monthly fees payable by franchisees constituted approximately 45%claim. We write homeowners and dwelling fire business in New York City and Long Island and are cognizant of our revenues from continuing operations during the year ended December 31, 2008.exposure to hurricanes. We received no initial franchise feeshave mitigated this risk by adding mandatory hurricane deductibles to all policies. Our claim and underwriting expertise enables us to write personal lines business in 2008.all areas of New York City and Long Island at a profit.

We generate business through independent retail and wholesale agents and brokers whom we refer to offer an additional service to the walk-in customers who comprise the bulk of their customer base,collectively as producers. These producers sell policies for KICO as well as to existing customers.

We also provide support services to stores such as:manage the results of our producers through periodic reviews of volume and profitability. We continuously monitor the performance of our producers by assessing leading indicators and metrics that signal the need for corrective action. Corrective action may include increased frequency of producer meetings and more detailed business planning.

We also managecompete with both large national and regional carriers in the cooperative advertising program in which allproperty and casualty insurance marketplace.  Inside our selected producers’ offices, we compete with the other carriers available to that producer.  Most of our franchisees participate.competition is from carriers with far greater capital and brand recognition.  We feel we can compete with any carrier based on service, stressing the development of our personal underwriting relationships for the producer, and the fair and expedient handling of claims to the insured.

We are required to establish reserves for incurred losses that are unpaid, including reserves for claims and loss adjustment expenses (“LAE”), which represent the expenses of settling and adjusting those claims. These reserves are balance sheet liabilities representing estimates of future amounts required to pay losses and loss expenses for claims that have occurred at or before the balance sheet date, whether already known to us or not yet reported. Our policy is to establish these losses and loss reserves after considering all information known to us as of the date they are recorded.

Many insurance stores.buyers, agents and brokers use the ratings assigned by A.M. Best and other agencies to assist them in assessing the financial strength and overall quality of the companies from which they are considering purchasing insurance.  Since KICO became a stock property and casualty insurance company effective July 1, 2009, it has been seeking an A.M. Best rating. A. M. Best ratings are derived from an in-depth evaluation of an insurance company’s balance sheet strengths, operating performances and business profiles. A.M. Best evaluates, among other factors, the company’s capitalization, underwriting leverage, financial leverage, asset leverage, capital structure, quality and appropriateness of reinsurance, adequacy of reserves, quality and diversification of assets, liquidity, profitability, spread of risk , revenue composition, market position, management, market risk and event risk. A.M. Best ratings are intended to provide an independent opinion of an insurer’s ability to meet its obligations to policyholders and are not an evaluation directed at investors. An A.M. Best rating will allow us to expand our writings by adding producers not now available to us.  We currently have a Demotech rating of A (Excellent) which qualifies our policies for banks and finance companies.

Customers who purchase insurance policies are often unable to pay the premium in a lump sum and, therefore, require extended payment terms.  Premium finance involves making a loan to the customer that is secured by the unearned portion of the insurance premiums being financed and held by the insurance carrier.  Our wholly-owned subsidiary, Payments Inc., is licensed as a premium finance agency in the states of New York and Pennsylvania.

Prior to February 1, 2008, Payments Inc. provided premium financing in connection with the obtaining of insurance policies.  Effective February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio.  The purchaser of the portfolio has agreed that, during the five year period following the closing (subject to automatic renewal for successive two year terms under certain circumstances), it will purchase, assume and service all eligible premium finance contracts originated by Payments in the states of New York and Pennsylvania.  In connection with such purchases, Payments will be entitled to receive a fee generally equal to a percentage of the amount financed. Our premium financing business currently consists of the placement fees that Payments will earn from placing contracts. Placement fees earned from placing contracts constituted approximately 47%5.2% and 99.4% of our revenues from continuing operations during the yearyears ended December 31, 2008.2009 and 2008, respectively.

The regulatory framework under which our premium finance procedures are established is generally set forth in the premium finance statutes of the states in which we operate.  Among other restrictions, the interest rate that may be charged to the insuredsinsured for financing their premiums is limited by these state statutes.  See “Government Regulation.”

Our principal executive offices and the administrative offices of Payments Inc. are located at 11581154 Broadway, Hewlett, New York.  Our central processing offices areinsurance underwriting business is located at 1762 Central Avenue, Albany,15 Joys Lane, Kingston, New York.

None.

PART II

Our common shares are quoted on The NASDAQ Capital Market under the symbol “DCAP.“KINS.”

Set forth below are the high and low sales prices for our common shares for the periods indicated, as reported on The NASDAQ Capital Market.

As of April 6, 2009,March 26, 2010, there were approximately 852777 record holders of our common shares.

Holders of our common shares are entitled to dividends when, as and if declared by our Board of Directors out of funds legally available.  There are also currently outstanding 7801,299 Series DE preferred shares.  These shares are entitled to cumulative aggregate dividends of $78,000$149,412 per annum (10%(11.5% of their liquidation preference of $780,000)$1,299,231).  The Series DE preferred shares are mandatorily redeemable on July 31, 2009.2011.  No dividends may be paid on our common shares unless a payment is made to the holders of the Series DE preferred shares of all dividends accumulated or accrued at such time.

We have not declared or paid any dividends in the past to the holders of our common shares 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 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.

None.

None.

Until December 2008, our continuing operations primarily consisted of the ownership and operation of 19 insurance brokerage and agency storefronts, including 12 Barry Scott locations in New York State, three Atlantic Insurance locations in Pennsylvania, and four Accurate Agency locations.locations in New York State. In December 2008, due to declining revenues and profits, we made a decision to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during December 2008 and the sale of the remaining 19 Retail Business locations.  On March 30,April 17, 2009, an asset purchase agreement (the “Purchase Agreement”) was fully executed pursuant to which we agreed to sellsold substantially all of the assets, including the book of business, of the 16 remaining Retail Business locations that we ownowned in New York State (the “Assets”“New York Sale& #8221;). The closingEffective June 30, 2009, we sold all of the saleoutstanding stock of the Assets is subject to a number of conditions.subsidiary that operated our three remaining Retail Business locations in Pennsylvania (the “Pennsylvania Sale”).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Purchase Agreement on MarchPennsylvania Sale effective June 30, 2009, our Retail Business has been reclassifiedpresented as discontinued operations and prior periods have been restated.

In our continuing operations,Through April 30, 2009, we receivereceived fees from 33 franchised locations in connection with their use of the DCAP name. Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business.  As a result of the sale, our franchise business has been presented as discontinued operations and prior periods have been restated.

Payments Inc., our wholly-owned subsidiary, is an insurance premium finance agency that is licensed within the states of New York and Pennsylvania. Until February 1, 2008, Payments Inc. offered premium financing to clients of DCAP, Barry Scott, Atlantic Insurance and Accurate Agency offices, as well as non-affiliated insurance agencies.  On February 1, 2008, Payments Inc. sold its outstanding premium finance loan portfolio. As a result of the sale, our business of internally financing insurance contracts has been reclassifiedpresented as discontinued operations.  Effective February 1, 2008, revenues from our premium financing business have consisted of placement fees based upon premium finance contracts purchased, assumed and serviced by the purchaser of the loan portfolio.

In our Retail Business discontinued operations, the insurance storefronts serveserved as insurance agents or brokers and placeplaced various types of insurance on behalf of customers.  Our Retail Business focusesfocused on automobile, motorcycle and homeowner’s insurance and our customer base iswas primarily individuals rather than businesses.

The stores from our Retail Business discontinued operations receivereceived commissions from insurance companies for their services.  NeitherPrior to July 1, 2009, neither we nor the stores have served as an insurance company and therefore we havedid not assumedassume underwriting risks; however, as discussed above, effective July 1, 2009, we acquired a 100% equity interest in Item 1(b)KICO.

Our consolidated financial statements include the accounts of DCAP Group,Kingstone Companies, Inc. and all majority-owned and controlled subsidiaries. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires our management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing these financial statements, our management has utilized information available including our past history, industry standards and the current economic environment, among other factors, in forming its estimates and judgments of certain amounts included in the consolidated financial statements, giving due consideration to materiality. It is possible that the ultimate outcome as anticipated by our managementman agement in formulating its estimates inherent in these financial statements might not materialize. However, application of the critical accounting policies below involves the exercise of judgment and use of assumptions as to future uncertainties and, as a result, actual results could differ from these estimates. In addition, other companies may utilize different estimates, which may impact comparability of our results of operations to those of companies in similar businesses.

We recognize commission revenue fromcompleted the acquisition of KICO on July 1, 2009. Accordingly, our consolidated revenues and expenses reflect significant changes as a result of this acquisition particularly through the addition of our insurance policies at the beginningunderwriting business that now includes all of the contract period.  Refundsoperations of commissions on the cancellation of insurance policies are reflected at the time of cancellation.KICO.

Automobile club dues are recognized equally overWe have changed the contract period.presentation of our business results by reclassifying our previously reported continuing operations based on reporting standards for insurance underwriters. The prior period disclosures have been restated to conform to the current presentation. General corporate overhead not incurred by our underwriting business is allocated to other operating expenses.

In December 2008, due to declining revenues and profits, we made a decision to restructure our network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of our least profitable locations during December 2008 and the sale of the remaining 19 Retail Business locations. On March 30,April 17, 2009, an asset purchase agreement (the “Purchase Agreement”) was fully executed pursuant to which we agreed to sellsold substantially all of the assets, including the book of business, of the 16 remaining Retail Business locations that we ownowned in New York State (the “Assets”“New York Sale”). The closingEffective June 30, 2009, we sold all of the saleoutstanding stock of the Assets is subject to a number of conditions.subsidiary that operated our three remaining Retail Business locations in Pennsylvania (the “Pennsylvania Sale”).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Purchase Agreement on MarchPennsylva nia Sale effective June 30, 2009, our Retail Business has been reclassifiedpresented as discontinued operations and prior periods have been restated.

Effective May 1, 2009, we sold all of the outstanding stock of the subsidiaries that operated our DCAP franchise business.  As a result of the sale, our franchise business has been presented as discontinued operations and prior periods have been restated.

On February 1, 2008, we sold our outstanding premium finance loan portfolio. As a result of the sale, our premium financing operations have been reclassifiedpresented as discontinued operations.

Separate discussions follow for results of continuing operations and discontinued operations.

 

During the year ended December 31, 20082009 (“2008”2009”), revenues from continuing operations were $911,000$7,666,000, as compared to $649,000$430,000 for the year ended December 31, 20072008 (“2007”2008”).  The 40%increase in total revenues was due to the increases in all sources of revenue stemming from the acquisition of KICO that occurred on July 1, 2009.

Net investment income of $226,000 and net realized losses on investments of $31,000 for 2009 were attributable to the acquisition of KICO on July 1, 2009. The positive cash flow from operations was the result of the aforementioned acquisition. The tax equivalent investment yield, excluding cash, was 4.91% at December 31, 2009. Realized capital gains from securities acquired in the KICO acquisition had a cost basis equal to their fair market value as of the acquisition date on July 1, 2009.

Total expenses in 2009 were $7,885,000, as compared to $1,563,000 in 2008. The increase in total expenses in both periods was due to the increases in all categories of $262,000expenses stemming from the acquisition of KICO that occurred on July 1, 2009.

Gain on acquisition of Kingstone Insurance Company of $5,178,000 in commissions and fees2009 is attributable to the bargain purchase which was a result of $427,000 in premium finance placement fees earned in 2008,the excess of net assets acquired from KICO compared to none in 2007. Effective February 1, 2008, we began earning placement fees in accordance with the terms of the sale of our premium finance portfolio. The increase in revenue was offset by a reduction of $110,000 in initial franchise fees, due to a lack of new franchises in 2008 compared to five in 2007.acquisition cost.

Our general and administrative expensesInterest income from CMIC notes receivable in 2008 were $1,860,000,2009 was $61,000, as compared to $2,275,000$765,000 in 2007.2009. The 18% decrease of $415,000 was primarily attributable to decreases in: (i) franchise advertising costs, (ii) executive compensation, and (iii) fees paid to consultants.

Our continuing operations generated a net loss beforeThe benefit from income taxes of $587,000(including state taxes) was $67,000 in 20082009, as compared to a net loss beforetax benefit of $447,000 in 2008. The tax benefit on income taxes of $885,000 in 2007.  The 34% decrease of $298,000 was primarily duefrom continuing operations is attributable to the inceptiongain on acquisition of earning premium finance placement feesKICO being treated as a permanent difference for income tax purposes. In addition, the tax benefit resulting from the losses of discontinued operations was recorded in 2008 and reductions in general and administrative and interest expenses, offset by a decrease in interest income from our surplus notes.continuing operations.

Retail Business

The following table summarizes the changes in the results of our Retail Business discontinued operations (in thousands) for the periods indicated:

The decrease in revenue and expenses in our discontinued Retail Business revenue was $4,042,000 in 20082009 as compared to $5,096,000 in 2007.  The 21% revenue decrease of $1,054,000 was primarily attributable to a reduction in commissions and fees earned due to the sale of fewer insurance policies in 2008 than in 2007.  Such reduction in sales was generally caused by the continued heightened competition from the voluntary insurance market, which is offering lower premium rates to our main customer, the non-standard insured.

The following table summarizes the changes in the results of our change in net lossfranchise business discontinued operations (in thousands) for the periods indicated.indicated:

There was no activity in our discontinued premium finance business in 2009. Our net losspremium finance portfolio was sold on February 1, 2008.  Premium finance operations for 2008 only includes the year ended Decemberperiod from January 1, 2008 through January 31, 20082008.

Net income was $977,000 as$4,821,000 for 2009, compared to a net loss of $47,000$977,000 in 2008. The increase in net income was due to the inclusion of KICO’s operations effective July 1, 2009, the gain on acquisition of KICO, and the cessation of our discontinued operations.

Our insurance underwriting business reported on a standalone basis for the year endedperiod from July 1, 2009 (date of KICO acquisition) through December 31, 2007.2009 follows:

Effective July 1, 2009, the primary sources of December 31, 2008,cash flow is from our insurance underwriting subsidiary, KICO, which are gross premiums written, ceding commissions from our quota share reinsurers, loss payments by our reinsurers, investment income and proceeds from the sale or maturity of investments. Funds are used by KICO for ceded premium payments to reinsurers, which are paid on a net basis after subtracting losses paid on reinsured claims and reinsurance commissions. KICO also uses funds for loss payments and loss adjustment expenses on our net business, commissions to producers, salaries and other underwriting expenses as well as to purchase investments and fixed assets.

In connection with the plan of conversion of CMIC, we had $142,949have agreed with the Insurance Department that for a period of two years following the effective date of conversion of July 1, 2009, no dividend may be paid by KICO to us without the approval of the Insurance Department. We have also agreed with the Insurance Department that any intercompany transaction between KICO and us must be filed with the Insurance Department 30 days prior to implementation.

Net cash provided by operating activities was $1,199,000 in 2009. Net cash used in operations was $753,000 in 2008. The increase in cash flow in 2009 was primarily a result of additional operating cash flows provided through the acquisition of KICO on July 1, 2009.

Net cash used in financing activities during 2009 was $404,000, due to $1,448,000 of principal payments on long-term debt and cash equivalentslease obligations, offset by $1,050,000 of proceeds from newly issued long-term debt. The acquisition of KICO on July 1, 2009 had no effect on our financing activities.

In August 2008, the holders of $1,500,000 outstanding principal amount of notes payable (the “Notes Payable”) agreed to extend the maturity date of the debt from September 30, 2007 to September 30, 2008.  In August 2008, the maturity date of the Notes Payable was further extended from September 30, 2008 to the earlier of July 10, 2009 or 90 days following the conversion of Commercial Mutual Insurance Company (“CMIC”) to a stock property and casualty insurance company and the issuance to us of a controlling interest in Commercial MutualCMIC (subject to acceleration under certain circumstances).  In exchange for this extension, the holders arewere entitled to receive an aggregate incentive payment equal to $10,000 times the number of months (or partial months) the debt iswas outstanding after September 30, 2008 through the maturity date. IfThe agreement provided that, if a prepayment of principal reducesreduced the debt below $1,500,000, the incentive paymentpay ment for all subsequent months willwould be reduced in proportion to any such reduction to the debt. The agreement also provided that the aggregate incentive payment iswas due upon full repayment of the debt.  The $1,500,000

On May 12, 2009, three of the holders exchanged an aggregate of $519,231 of Notes Payable principal balancefor Series E Preferred Stock having an aggregate redemption amount equal to such aggregate principal amount of notes (see discussion below). Concurrently, we paid $49,543 to the three holders, which amount represents all accrued and unpaid interest and incentive payments through the date of exchange. In addition, on May 12, 2009, we prepaid $686,539 in principal of the Notes Payable is included in our December 31, 2008 balance sheet under “Current portionto the five remaining holders of long-term debt.”  the notes, together with $81,200, which amount represents accrued and unpaid interest and incentive payments on such prepayment.

Effective April 16, 2008,May 12, 2009, the holder of our Series B preferred shares (which provided for dividends at the rate of 5% per annum and an outside mandatory redemption date of April 30, 2008)D Preferred Stock exchanged such shares for an equal number of shares of Series C preferred shares (which provided for dividends at the rate of 10% per annum and an outside mandatory redemption date of April 30, 2009).  Effective August 23, 2008, the outside mandatory redemption date for the preferred shares was further extended toE Preferred Stock which are mandatorily redeemable on July 31, 2009 through the issuance of Series D preferred shares in exchange for the Series C preferred shares. The mandatorily redeemable balance of $780,000 is included in our December 31, 2008 balance sheet under “Current Liabilities”. 2011.

Effective July 1, 2009, CMIC converted from an asset purchase agreement (the “Purchase Agreement”) was fully executed pursuantadvance premium cooperative to which our wholly-owned subsidiaries, Barry Scott Agency, Inc.a stock property and DCAP Accurate, Inc. agreed to sell substantially all of their assets, includingcasualty insurance company. Upon the book of business,effectiveness of the 16 Retail Business locations thatconversion, CMIC’s name was changed to Kingstone Insurance Company (“KICO”). Pursuant to the plan of conversion, we ownacquired a 100% equity interest in New York State (the “Assets”).  The closingKICO in consideration of the saleexchange of the Assets is subject to a number of conditions.  We expect to satisfy the conditions and complete the sale of the Assets in April 2009. The purchase price for the Assets is approximately $2,337,000, of which approximately $1,786,000 is to be paid to us at closing, and the remainder of the purchase price is to be satisfied by the delivery of promissory notes in the aggregateour $3,750,000 principal amount of $551,000. As additional consideration,surplus notes of CMIC.  In addition, we will be entitledforgave all accrued and unpaid interest of $2,246,000 on the surplus notes as of the date of exchange (see Note 3 to receive through Septemberour Consolidated Financial Statements).