KINS

Business Context and Reporting Period

Company: DCAP Group, Inc. (formerly Kingstone Companies, Inc.)
Filing Type: Form 10-QSB (Quarterly Report)
Period Ended: March 31, 1999
Business Overview: The Company operates two distinct segments following the acquisition of Dealers Choice Automotive Planning Inc. ("DCAP") on February 25, 1999. The DCAP segment places various insurance policies (auto, life, homeowner, etc.) and offers tax preparation and roadside assistance services. The second segment operates the International Airport Hotel in San Juan, Puerto Rico, through subsidiary IAH, Inc.

Key Financial Metrics

Note: Q1 1999 results include DCAP operations only from February 25, 1999.

Material Changes vs. Prior Period

• Revenue Surge: Total revenues increased by approximately 288% to $1.1 million, driven primarily by the inclusion of DCAP commissions and fees ($799,499), which were non-existent in the prior year.
• Profitability Turnaround: The Company moved from a net loss of $1,579 in Q1 1998 to a net income of $33,605 in Q1 1999. The Hotel segment contributed $61,753 to net income, while the DCAP segment contributed $8,346.
• Working Capital Deterioration: Despite profitability, working capital shifted from a surplus of $1.06 million (Dec 31, 1998) to a deficit of $913,923 (March 31, 1999). This was caused by the consolidation of DCAP's working capital deficiency (~$888,000) and the elimination of an inter-company receivable previously held by the parent company.
• Capital Structure: The Company issued 1,486,893 shares to Eagle Insurance Company for approximately $1 million and issued shares to DCAP principals as part of the acquisition consideration.

Outlook, Risks, and Contingencies

• Liquidity Needs: Management states the Company requires additional financing to meet cash flow needs due to the working capital deficit. A private placement of up to $2,000,000 is being pursued for advertising, premium finance operations, and working capital.
• Year 2000 (Y2K) Compliance:
  • DCAP: Two IT systems require remediation. Estimated costs are up to $50,000 for headquarters systems and $112,000 ($92,000 lease + $20,000 database) for storefront systems. Completion is targeted for Q3 1999.
  • Hotel: No IT systems exist; only a switchboard upgrade is needed, which is low-cost and procedural.
  • Third-Party Risk: The Company relies on major insurance carriers (e.g., Chubb, Travelers) to be Y2K compliant. Contingency plans are being developed for potential carrier failures.
• Legal Proceedings: Regent National Bank is suing DCAP and related entities for alleged breach of contract regarding unpaid insurance financing loans, claiming damages in excess of $800,000. DCAP has asserted counterclaims for $40,000. A separate action by DCAP against Regent seeking $4 million is stayed pending the Pennsylvania case.
• Forward-Looking Risks: Risks include lack of experience in new business lines, volatility in insurance pricing, and the uncertainty of the Hotel lease litigation.

Investor Verification Checklist

• Financing Status: Verify if the proposed $2,000,000 private placement has been consummated, given the current working capital deficit.
• Legal Exposure: Monitor the status of the Regent National Bank litigation and the potential impact of the $800,000+ claim on future cash flows.
• Y2K Costs: Confirm actual Y2K remediation expenses against the estimated $162,000 total to ensure no budget overruns.
• DCAP Integration: Assess whether the DCAP segment can sustain profitability beyond the initial acquisition period, as it contributed significantly less to net income than the Hotel segment in its first partial quarter.
• Related Party Transactions: Review the terms of the promissory notes issued to DCAP principals (Lang and Weinzimer) totaling $228,000.