q.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
 
(Mark one)
     
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
OR
     
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________to _________

Commission File Number 0-1665

KINGSTONE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
     
Delaware
(State or other jurisdiction of
incorporation or organization)
 
36-2476480
(I.R.S. Employer
Identification Number)
1154 Broadway
Hewlett, NY 11557
(Address of principal executive offices)

(516) 374-7600
(Registrant’s telephone number, including area code)
 
 (Former Name, if Changed Since Last Report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of  “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
             
Large accelerated filer o
 
Accelerated filero
 
Non-accelerated filer o
(Do not check if a smaller reporting company)
 
Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of May 13, 2010, there were 3,042,543 shares of the registrant’s common stock outstanding.

 
 
 
 


KINGSTONE COMPANIES, INC.
INDEX
                 
           
PAGE
                 
PART I — FINANCIAL INFORMATION
   
2
 
   
Item 1 -
 
 Financial Statements
   
2
 
       
 Condensed Consolidated Balance Sheets at March 31, 2010 (Unaudited) and December 31, 2009
   
3
 
       
 Condensed Consolidated Statements of Operations and Comprehensive Income  for the three months ended March 31, 2010 (Unaudited) and 2009 (Unaudited)
   
4
 
       
 Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2010 (Unaudited) and for the year ended December 31, 2009
   
5
 
       
 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 (Unaudited) and 2009  (Unaudited)
   
6
 
       
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
   
7
 
   
Item 2 -
 
 Management’s Discussion and Analysis of Financial Condition and Results of Operations
   
24
 
   
Item 3 -
 
 Quantitative and Qualitative Disclosures About Market Risk
   
35
 
   
Item 4T-
 
 Controls and Procedures
   
35
 
                 
PART II — OTHER INFORMATION
   
36
 
   
Item 1 -
 
Legal Proceedings
   
36
 
   
Item 1A -
 
Risk Factors
   
36
 
   
Item 2 -
 
Unregistered Sales of Equity Securities and Use of Proceeds
   
36
 
   
Item 3 -
 
Defaults Upon Senior Securities
   
36
 
   
Item 4 -
 
Reserved
   
36
 
   
Item 5 -
 
Other Information
   
36
 
   
Item 6 -
 
Exhibits
   
36
 
Signatures
   
 
 
 EXHIBIT 31(a)
 EXHIBIT 31(b)
 EXHIBIT 32


 
 
 
 

Forward-Looking Statements
 
This Quarterly 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 Quarterly Report may not occur.  Generally these statements relate to business plans or strategies, projected or anticipated benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us, or projections involving anticipated revenues, earnings or other aspects of our operating results.  The words "may," "will," "expect," "believe," "anticipate," "project," "plan," "intend," "estimate," and "continue," and their opposites and similar expressions are intended to identify forward-looking statements.  We caution you that these statements are not guarantees of future performance or events and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, that may influence the accuracy of the statements and the projections upon which the statements are based.  Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2009 under “Factors That May Affect Future Results and Financial Condition”.
 
Any one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking statements made by us ultimately prove to be accurate.  Our actual results, performance and achievements could differ materially from those expressed or implied in these forward-looking statements.  We undertake no obligation to publicly update or revise any forward-looking statements, whether from new information, future events or otherwise.
 

 
1
 
 

PART I.  FINANCIAL INFORMATION
 
Item 1.                       Financial Statements.
 


 




 
2
 
 

 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Condensed Consolidated Balance Sheets
           
   
March 31,
   
December 31,
 
   
2010
   
2009
 
   
(unaudited)
       
 Assets
           
 Short term investments
  $ 385,392     $ 225,336  
 Fixed-maturity securities, available for sale, at fair value (amortized cost of $12,926,257
               
 at March 31, 2010 and $12,676,867 at December 31, 2009)
    13,071,634       12,791,080  
 Equity securities, available-for-sale, at fair value (cost of $1,831,168 at March 31, 2010
               
 and $1,973,738 at December 31, 2009)
    2,053,071       2,186,926  
 Total investments
    15,510,097       15,203,342  
 Cash and cash equivalents
    760,599       625,320  
 Investment income receivable
    173,374       135,251  
 Premiums receivable, net of of provision for uncollectible amounts
    4,840,077       4,479,363  
 Receivables - reinsurance contracts
    962,376       564,408  
 Reinsurance receivables, net of of provision for uncollectible amounts
    20,245,656       20,849,621  
 Notes receivable-sale of business
    1,051,596       1,119,365  
 Deferred acquisition costs
    3,119,493       2,917,984  
 Intangible assets, net
    4,493,171       4,612,100  
 Property and equipment, net of accumulated depreciation
    1,622,735       1,659,015  
 Equities in pools and associations
    220,708       220,708  
 Other assets
    320,134       257,276  
 Total assets
  $ 53,320,016     $ 52,643,753  
                 
 Liabilities
               
 Loss and loss adjustment expenses
  $ 16,536,820     $ 16,513,318  
 Unearned premiums
    14,976,136       14,088,187  
 Advance premiums
    428,429       411,676  
 Reinsurance balances payable
    1,897,031       1,918,169  
 Deferred ceding commission revenue
    2,841,284       3,298,245  
 Notes payable (payable to related parties of $785,000 at March 31, 2010
               
 and $585,000 at December 31, 2009)
    1,479,685       1,085,637  
 Accounts payable, accrued liabilities and other liabilities
    1,838,296       2,446,558  
 Deferred income taxes
    1,173,779       1,173,256  
 Mandatorily redeemable preferred stock
    1,299,231       1,299,231  
 Liabilties of discontinued operations
    6,500       26,000  
 Total liabilities
    42,477,191       42,260,277  
                 
 Commitments
               
                 
 Stockholders' Equity:
               
 Common stock, $.01 par value; authorized 10,000,000 shares; issued 3,854,536 shares at
               
 March 31, 2010 and 3,804,536 shares at December 31, 2009; outstanding 3,038,511
               
 shares at March 31, 2010 and 2,988,511 shares at December 31, 2009
    38,546       38,046  
 Preferred stock, $.01 par value; authorized
               
 1,000,000 shares; 0 shares issued and outstanding
    -       -  
 Capital in excess of par
    12,251,468       12,051,332  
 Accumulated other comprehensive income
    242,405       216,086  
 Accumulated deficit
    (469,212 )     (701,606 )
      12,063,207       11,603,858  
 Treasury stock, at cost, 816,025 shares
    (1,220,382 )     (1,220,382 )
 Total stockholders' equity
    10,842,825       10,383,476  
                 
 Total liabilities and stockholders' equity
  $ 53,320,016     $ 52,643,753  

See notes to condensed consolidated financial statements.
 

 
3
 
 

 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
             
Condensed Consolidated Statements of Operations and Comprehensive Income (Unaudited)
 
Three Months Ended March 31,
 
2010
   
2009
 
             
 Revenues
           
 Net premiums earned
  $ 2,217,947     $ -  
 Ceding commission revenue
    1,809,593       -  
 Net investment income
    132,280       -  
 Net realized gains on investments
    34,660       -  
 Other income
    221,104       112,037  
 Total revenues
    4,415,584       112,037  
                 
 Expenses
               
 Loss and loss adjustment expenses
    1,434,618       -  
 Commission expense
    1,136,619       -  
 Other underwriting expenses
    702,376       -  
 Other operating expenses
    539,619       281,913  
 Depreciation and amortization
    156,687       4,436  
 Interest expense
    45,202       80,267  
 Interest expense - mandatorily redeemable preferred stock
    37,353       19,500  
 Total expenses
    4,052,474       386,116  
                 
 Income (loss) from operations
    363,110       (274,079 )
 Interest income-CMIC note receivable
    -       30,469  
 Income (loss) from continuing operations before taxes
    363,110       (243,610 )
 Income tax expense (benefit)
    144,564       (87,775 )
 Income (loss) from continuing operations
    218,546       (155,835 )
 Income (loss) from discontinued operations, net of taxes
    13,848       (15,679 )
 Net income (loss)
    232,394       (171,514 )
                 
 Gross unrealized investment holding gains
               
 arising during period
    39,879       -  
 Income tax expense related to items of
               
 other comprehensive income
    (13,559 )     -  
 Comprehensive income (loss)
  $ 258,714     $ (171,514 )
                 
Basic and diluted earnings (loss) per common share:
               
Income (loss) from continuing operations
  $ 0.07     $ (0.05 )
Loss from discontinued operations
  $ 0.01     $ (0.01 )
Income (loss) per common share
  $ 0.08     $ (0.06 )
                 
Number of weighted average common shares used in computation
               
of basic and diluted earnings (loss) per share
    2,992,400       2,972,746  
                 
 
See notes to condensed consolidated financial statements.
 

 
4
 
 


KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
                                                             
Consolidated Statement of Stockholders' Equity (Unaudited)
                                     
Year ended Decemeber 31, 2009 and Three Months Ended March 31, 2010
                               
                                                             
                                 
Accumulated
                         
                           
Capital
   
Other
                         
   
Common Stock
   
Preferred Stock
   
in Excess
   
Comprehensive
   
Accumulated
   
Treasury Stock
       
   
Shares
   
Amount
   
Shares
   
Amount
   
of Par
   
Income
   
(Deficit)
   
Shares
   
Amount
   
Total
 
Balance, December 31, 2008
    3,788,771     $ 37,888       -     $ -     $ 11,962,512     $ -     $ (5,522,448 )     816,025     $ (1,220,382 )   $ 5,257,570  
Stock-based payments
    15,765       158       -       -       88,820       -       -       -       -       88,978  
Net income
    -       -       -       -       -               4,820,842       -       -       4,820,842  
Net unrealized gains on securities
                                                                            -  
available for sale, net of income tax
    -       -       -       -       -       216,086       -       -       -       216,086  
Balance, December 31, 2009
    3,804,536       38,046       -       -       12,051,332       216,086       (701,606 )     816,025       (1,220,382 )     10,383,476  
Stock-based payments
    50,000       500       -       -       200,136       -       -       -       -       200,636  
Net income
    -       -       -       -       -       -       232,394       -       -       232,394  
Net unrealized gains on securities
                                                                               
available for sale, net of income tax
    -       -       -       -       -       26,319       -       -       -       26,319  
Balance, March 31, 2010
    3,854,536     $ 38,546       -     $ -     $ 12,251,468     $ 242,405     $ (469,212 )     816,025     $ (1,220,382 )   $ 10,842,825  
                                                                                 
 


See notes to condensed consolidated financial statements.

 
5
 
 


 KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
 
Consolidated Statements of Cash Flows (Unaudited)
           
Three Months Ended March 31,
 
2010
   
2009
 
             
 Cash flows provided by (used in) operating activities:
           
 Net income (loss)
  $ 232,394     $ (171,514 )
Adjustments to reconcile net income (loss) to net cash (used in) provided by operations:
         
 Gain on sale of investments
    (34,660 )     -  
 Depreciation and amortization
    156,687       4,436  
 Stock-based payments
    200,636       6,792  
 Deferred income taxes
    (13,036 )     (94,000 )
 (Increase) decrease in assets:
               
 Short term investments
    (160,056 )     -  
 Premiums receivable, net
    (360,714 )     -  
 Receivables - reinsurance contracts
    (397,968 )     -  
 Reinsurance receivables, net
    603,965       -  
 Deferred acquisition costs
    (201,509 )     -  
 Other assets
    (100,784 )     (11,361 )
 Increase (decrease) in liabilities:
               
 Loss and loss adjustment expenses
    23,502       -  
 Unearned premiums
    887,949       -  
 Advance premiums
    16,753       -  
 Reinsurance balances payable
    (21,138 )     -  
 Deferred ceding commission revenue
    (456,961 )     -  
 Accounts payable, accrued liabilities and other liabilities
    (608,262 )     76,742  
 Net cash used in operating activities of continuing operations
    (233,202 )     (188,905 )
 Operating activities of discontinued operations
    (19,500 )     249,849  
 Net cash flows (used in) provided by operations
    (252,702 )     60,944  
                 
 Cash flows used in investing activities:
               
 Purchase - fixed-maturity securities
    (249,390 )     -  
 Purchase - equity securities
    (233,135 )     -  
 Sale - equity securities
    410,167       -  
 Increase in accrued interest - Commercial Mutual Insurance Company
    -       (30,468 )
 Collections of notes receivable and accrued interest - Sale of businesses
    67,769       -  
 Other investing activities
    (1,478 )     -  
 Net cash used in investing activities of continuing operations
    (6,067 )     (30,468 )
 Investing activities of discontinued operations
    -       (745 )
 Net cash flows used in investing activities
    (6,067 )     (31,213 )
                 
 Cash flows provided by (used in) financing activities:
               
 Proceeds from long term debt (includes $200,000 from related parties)
    400,000       -  
 Principal payments on long-term debt
    (5,952 )     (17,798 )
 Net cash used in (provided by) financing activities of continuing operations
    394,048       (17,798 )
 Financing activities of discontinued operations
    -       -  
 Net cash flows provided by (used in) financing activities
    394,048       (17,798 )
                 
 Increase in cash and cash equivalents
    135,279       11,933  
 Cash and cash equivalents, beginning of period
    625,320       142,949  
 Cash and cash equivalents, end of period
  $ 760,599     $ 154,882  
                 
 

See notes to condensed consolidated financial statements.
 
 
 
6
 
 
KINGSTONE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1 - Basis of Presentation and Nature of Business
 
On July 1, 2009, Kingstone Companies, Inc. (referred to herein as "Kingstone" or the “Company”) completed the acquisition of 100% of the issued and outstanding common stock of Kingstone Insurance Company (“KICO”) (formerly Commercial Mutual Insurance Company (“CMIC”)) pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company (see Note 3). Pursuant to the plan of conversion, Kingstone acquired a 100% equity interest in KICO, in consideration for the exchange of $3,750,000 principal amount of surplus notes of CMIC. In addition, Kingstone forgave all accrued and unpaid interest of approximately $2,246,000 on the surplus notes as of the date of conversion. 
 
Effective July 1, 2009, Kingstone, through its subsidiary KICO, offers property and casualty insurance products to small businesses and individuals in New York State. The effect of the KICO acquisition is only included in the Company’s results of operations and cash flows for the period from July 1, 2009 (the KICO acquisition date) through March 31, 2010. Accordingly, only the disclosures for the three month period ended March 31, 2010 will include KICO. As a result, disclosures for the three month periods ended March 31, 2010 and 2009 are not comparable.

Until December 2008, continuing operations primarily consisted of the ownership and operation of a network of retail insurance brokerage and agency offices engaged in the sale of retail auto, motorcycle, boat, business, and homeowner's insurance.
 
In December 2008, due to declining revenues and profits, the Company made a decision to restructure its network of retail offices (the “Retail Business”). The plan of restructuring called for the closing of seven of the least profitable locations during the month of December 2008 and the entry into negotiations to sell the remaining 19 locations of the Retail Business. On April 17, 2009, the Company sold substantially all of the assets, including the book of business, of its 16 remaining Retail Business locations that it owned in New York State (the “New York Sale”) (see Note 14). Effective June 30, 2009, the Company sold all of the outstanding stock of the subsidiary that operated its three remaining Retail Locations in Pennsylvania (the “Pennsylvania Sale”) (see Note 14).  As a result of the restructuring in December 2008, the New York Sale on April 17, 2009 and the Pennsylvania Sale effective June 30, 2009, the Retail Business has been presented as discontinued operations and prior periods have been restated.
 
Until May 2009, the Company operated a DCAP franchise business.  Effective May 1, 2009, the Company sold all of the outstanding stock of the subsidiaries that operated such DCAP franchise business (see Note 14).  As a result of the sale, the franchise business has been presented as discontinued operations and prior periods have been restated.
 
Note 2 – Accounting Policies and Basis of Presentation
 
Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements included in this report have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and the instructions to Securities and Exchange Commission (“SEC”) Form 10-Q and Article 8-03 of SEC Regulation S-X. The principles for condensed interim financial information do not require the inclusion of all the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2009 and notes thereto included in the Company’s Annual Report on Form 10-K filed on April 7, 2010. The accompanying condensed consolidated financial statements have not been audited by an independent registered public accounting firm in accordance with standards of the Public Company Accounting Oversight Board (United States) but, in the opinion of management, such financial statements include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the Company’s financial position and results of operations. The results of operations for the three months ended Mach 31, 2010 may not be indicative of the results that may be expected for the year ending December 31, 2010.
 
 
7
 
 
Use of Estimates
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
Reclassification
 
The Company has reclassified certain amounts in its 2009 consolidated balance sheet and 2009 statements of operations to conform to the 2010 presentation. None of these reclassifications had an effect on the Company’s consolidated net earnings, total stockholders’ equity or cash flows.
 
Principles of Consolidation

The consolidated financial statements consist of Kingstone and its wholly-owned subsidiaries. Subsidiaries acquired on July 1, 2009 include KICO and its subsidiaries, CMIC Properties, Inc. (“CMIC Properties”) and 15 Joys Lane, LLC (“15 Joys Lane”), which together own the land and building from which KICO operates. All material intercompany transactions have been eliminated in consolidation.
 
Accounting Pronouncements
 
Accounting guidance adopted in 2010
 
In June 2009, the Financial Accounting Standards Board (“FASB”) issued new guidance which requires more information about transfers of financial assets, including securitization transactions, and where entities have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity,” changes the requirements for derecognizing financial assets, and requires additional disclosures. The new guidance enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and an entity’s continuing involvement in transferred financial assets. The Company adopted this new guidance on January 1, 2010, with no material effects on its financial statements as of March 31, 2010.
 
In June 2009, the FASB issued new guidance which concerns the consolidation of variable interest entities and changes how a reporting entity determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be consolidated. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity’s purpose and design and the reporting entity’s ability to direct the activities of the other entity that most significantly affect the other entity’s economic performance. The new guidance requires a reporting entity to provide additional disclosures about its involvement with variable interest entities and any significant changes in risk exposure due to that involvement. A reporting entity is required to disclose how its involvement with a variable interest entity affects the reporting entity’s financial statements. The Company adopted this new guidance on January 1, 2010, with no material effects on its financial statements as of March 31, 2010. The Company will apply this guidance on a transaction by transaction basis going forward.
 
 
8
 
 
In January 2010, the FASB issued new guidance that requires additional disclosure of the fair value of assets and liabilities. This guidance requires additional disclosures to be made about significant transfers in and out of Levels 1 and 2 of the fair value hierarchy within GAAP. The Company adopted this guidance on January 1, 2010, with the required disclosure included in “Note 5 — Fair Value Measurements”.
 
Accounting guidance not yet effective
 
The guidance issued by the FASB in January 2010 also requires additional disclosure about the gross activity within Level 3 of the fair value hierarchy within GAAP as opposed to the net disclosure currently required. This disclosure will be effective for annual and interim periods beginning after December 15, 2010. As this guidance relates to disclosure rather than measurement of assets and liabilities, there will be no effect on the financial results or position of the Company. The Company will comply with this disclosure requirement when it becomes effective.
 
Pending accounting guidance
 
The Emerging Issues Task Force of the FASB is discussing Issue No. 09-G, “Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts.” At issue is how the definition of acquisition costs should be interpreted in assessing whether certain costs relating to the acquisition of new or renewal insurance contracts qualify as deferred acquisition costs. The Task Force reached a consensus-for-exposure that acquisition costs that qualify as deferrable should include only those costs that are directly related to the acquisition of insurance contracts by applying a model similar to the accounting for loan origination costs. That definition would not include, for example, any costs incurred in the acquisition of new or renewal contracts related to unsuccessful contract acquisitions. Also, advertising costs incurred by insurance entities should not be included in deferred acquisition costs. While this exposure is being discussed by practitioners, there is no date issued yet for this guidance to be effective.
 
The amount included in the category “other deferred acquisition expenses” may be significantly reduced as a result of the adoption of this pending guidance.
 
Note 3 - Acquisition of Kingstone Insurance Company
 
On July 1, 2009, Kingstone completed the acquisition of 100% of the issued and outstanding common stock of KICO, pursuant to the conversion of CMIC from an advance premium cooperative to a stock property and casualty insurance company.  The total purchase price was $5,996,461.

As of June 30, 2009, Kingstone held two surplus notes issued by CMIC in the aggregate principal amount of $3,750,000. Previously accrued and unpaid interest on the notes as of June 30, 2009 was approximately $2,246,000. Pursuant to the plan of conversion, effective July 1, 2009, Kingstone acquired a 100% equity interest in KICO in consideration of the exchange of the principal amount of surplus notes of CMIC. In addition, Kingstone forgave all accrued and unpaid interest on the surplus notes as of the date of conversion. The transaction was considered a bargain purchase, resulting in a gain on acquisition.

The Company began consolidating KICO’s financial statements as of the closing date in accordance with GAAP. The purchase consideration has been allocated to the assets acquired and liabilities assumed, including separately identified intangible assets, based on their fair values as of the close of the acquisition.

 
9
 
 
Note 4 - Investments 

The amortized cost and fair value of investments in fixed-maturity securities, equities and short term investments as of March 31, 2010 and December 31, 2009 are summarized as follows:
 

   
March 31, 2010
 
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost (a)
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
   
(unaudited)
 
Fixed-Maturity Securities:
                               
U.S. Treasury securities and
                               
obligations of U.S. government
                               
 corporations and agencies (b)
  $ 3,549,616     $ 43,430     $ (28,218 )   $ -     $ 3,564,828     $ 15,212  
                                                 
Political subdivisions of States,
                                         
 Territories and Possessions
    5,751,979       62,034       (12,728 )     -       5,801,285       49,306  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    3,624,662       90,837       (9,978 )     -       3,705,521       80,859  
 Total fixed-maturity securities
    12,926,257       196,301       (50,924 )     -       13,071,634       145,377  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    742,747       47,436       (3,688 )     -       786,495       43,748  
 Common stocks
    1,088,421       178,509       (354 )     -       1,266,576       178,155  
 Total equity securities
    1,831,168       225,945       (4,042 )     -       2,053,071       221,903  
                                                 
 Short term investments
    385,392       -       -       -       385,392       -  
                                                 
 Total
  $ 15,142,817     $ 422,246     $ (54,966 )   $ -     $ 15,510,097     $ 367,280  


   
December 31, 2009
  
 
Cost or
   
Gross
   
Gross Unrealized Losses
         
Unrealized
 
   
Amortized
   
Unrealized
   
Less than 12
   
More than 12
   
Fair
   
Gains/
 
 Category
 
Cost (a)
   
Gains
   
Months
   
Months
   
Value
   
(Losses)
 
                                     
Fixed-Maturity Securities:
                               
U.S. Treasury securities and
                               
obligations of U.S. government
                               
 corporations and agencies (b)
  $ 3,549,616     $ 38,790     $ (23,929 )   $ -     $ 3,564,477     $ 14,861  
                                                 
Political subdivisions of States,
                                         
 Territories and Possessions
    5,751,979       82,480       (12,356 )     -       5,822,103       70,124  
                                                 
 Corporate and other bonds
                                               
 Industrial and miscellaneous
    3,375,272       54,384       (25,156 )     -       3,404,500       29,228  
 Total fixed-maturity securities
    12,676,867       175,654       (61,441 )     -       12,791,080       114,213  
                                                 
 Equity Securities:
                                               
 Preferred stocks
    716,903       33,661       (5,564 )     -       745,000       28,097  
 Common stocks
    1,256,835       191,075       (5,984 )     -       1,441,926       185,091  
 Total equity securities
    1,973,738       224,736       (11,548 )     -       2,186,926       213,188  
                                                 
 Short term investments
    225,336       -       -       -       225,336       -  
                                                 
 Total
  $ 14,875,941     $ 400,390     $ (72,989 )   $ -     $ 15,203,342     $ 327,401  
 
 
 
10
 
 
(a) The cost or amortized cost of securities acquired in the KICO acquisition are equal to their fair value as of the July 1, 2009 acquisition date.

(b) Includes U. S. Treasury securities with fair values at March 31, 2010 and December 31, 2009 of $605,340 and $608,327, respectively, held in trust pursuant to the New York State Insurance Department’s minimum funds requirement.

A summary of the amortized cost and fair value of the Company’s investments in fixed-maturity securities by contractual maturity as of March 31, 2010 and December 31, 2009 is shown below:
 
   
March 31, 2010
   
December 31, 2009
 
   
Amortized
         
Amortized
       
 Remaining Time to Maturity
 
Cost
   
Fair Value
   
Cost
   
Fair Value
 
   
(unaudited)
             
 Less than one year
  $ 1,190,320     $ 1,165,399     $ 1,190,319     $ 1,176,050  
 One to five years
    5,202,936       5,275,823       5,202,936       5,260,443  
 Five to ten years
    5,195,177       5,262,435       4,945,787       4,986,236  
 More than 10 years
    1,337,824       1,367,977       1,337,825       1,368,351  
 Total
  $ 12,926,257     $ 13,071,634     $ 12,676,867     $ 12,791,080  
 
The actual maturities may differ from contractual maturities because certain borrowers have the right to call or prepay obligations with or without penalties.

Major categories of the Company’s net investment income are summarized as follows:
 
   
Three months ended
 
   
March 31,
 
   
2010
   
2009
 
   
(unaudited)
 
 Income
 
 
   
 
 
 Fixed-maturity securities
  $ 129,107     $ -  
 Equity securities
    27,301       -  
 Cash and cash equivalents
    1,850       -  
 Other
    15       -  
 Total
    158,273       -  
 Expenses
               
 Investment expenses
    25,993       -  
 Net investment income
  $ 132,280     $ -  
 
There were no proceeds from the sale and maturity of fixed-maturity securities for the three months ended March 31, 2010 and 2009.

Proceeds from the sale of equity securities were $410,167 and $-0- for the three months ended March 31, 2010 and 2009.

The Company’s gross realized gains and losses on investments are summarized as follows:
 
 
 
11
 
 
 

   
Three months ended
 
   
March 31,
 
   
2010
   
2009
 
   
(unaudited)
 
 Fixed-maturity securities
           
 Gross realized gains
  $ -     $ -  
 Gross realized losses
    -       -  
      -       -  
                 
 Equity securities
               
 Gross realized gains
    46,398       -  
 Gross realized losses
    (11,738 )     -  
      34,660       -  
                 
Other-than-temporary impairment losses
       
 Fixed-maturity securities
    -       -  
 Equity securities
    -       -  
      -       -  
                 
 Cash and short term investments
    -       -  
                 
 Net realized gains
  $ 34,660     $ -  
 
Impairment Review
 
The Company regularly reviews its fixed-maturity securities and equity securities portfolios to evaluate the necessity of recording impairment losses for other-than-temporary declines in the fair value of investments. In evaluating potential impairment, management considers, among other criteria: (i) the current fair value compared to amortized cost or cost, as appropriate; (ii) the length of time the security’s fair value has been below amortized cost or cost; (iii) specific credit issues related to the issuer such as changes in credit rating, reduction or elimination of dividends or non-payment of scheduled interest payments; (iv) management’s intent and ability to retain the investment for a period of time sufficient to allow for any anticipated recovery in value to cost; and (v) current economic conditions.
 
OTTI losses are recorded in the consolidated statement of operations as net realized losses on investments and result in a permanent reduction of the cost basis of the underlying investment. The determination of OTTI is a subjective process and different judgments and assumptions could affect the timing of loss realization. The Company determined there was no OTTI for its portfolio of fixed maturity investments, equity securities and short term investments for the three months ended March 31, 2010.  Significant factors influencing the Company’s determination that unrealized losses were temporary included the magnitude of the unrealized losses in relation to each security’s cost, the nature of the investment and management’s intent and ability to retain the investment for a period of time sufficient to allow for anticipated recovery of fair value to the Company’s cost basis.

The Company held securities with unrealized losses representing declines that were considered temporary at March 31, 2010 as follows:

 
12
 
 
 
 
   
Less than 12 months
   
12 months or more
   
Total
 
  
             
No. of
                         
   
Fair
   
Unrealized
   
Positions
   
Fair
   
Unrealized
   
Fair
   
Unrealized
 
 Category
 
Value
   
Losses
   
Held
   
Value
   
Losses
   
Value
   
Losses
 
   
(unaudited)
 
 Fixed-Maturity Securities:
                                         
 U.S. Treasury securities and
                                         
obligations of U.S. government
                                     
 corporations and agencies
  $ 1,411,089     $ (28,218 )     4     $ -     $ -     $ 1,411,089     $ (28,218 )
                                                         
 Political subdivisions of States,
                                                       
 Territories and Possessions
    2,184,932       (12,728 )     7       -       -       2,184,932       (12,728 )
                                                         
 Corporate and other bonds
                                                       
 Industrial and miscellaneous
    549,844       (9,978 )     2       -       -       549,844       (9,978 )
 Total fixed-maturity securities
    4,145,865       (50,924 )     13       -       -       4,145,865       (50,924 )
                                                         
 Equity Securities:
                                                       
 Preferred stocks
  $ 44,484     $ (3,688 )     2     $ -     $ -     $ 44,484     $ (3,688 )
 Common stocks
    1,388,128       (354 )     1       -       -       1,388,128       (354 )
 Total equity securities
    1,432,612       (4,042 )     3       -       -       1,432,612       (4,042 )
                                                         
 Total
  $ 5,578,477     $ (54,966 )     16     $ -     $ -     $ 5,578,477     $ (54,966 )
 
Note 5 - Fair Value Measurements

The Company follows GAAP guidance regarding fair value measurements. The valuation technique used to fair value the financial instruments is the market approach which uses prices and other relevant information generated by market transactions involving identical or comparable assets.
 
This guidance establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability. Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded, including during period of market disruption, and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy and those investments included in each are as follows:
 
Level 1—Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets. Included are those investments traded on an active exchange, such as the NASDAQ Global Select Market, U.S. Treasury securities and obligations of U.S. government agencies, together with municipal bonds, corporate debt securities that are generally investment grade.
 
Level 2—Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
 
Level 3—Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement. Material assumptions and factors considered in pricing investment securities and other assets may include appraisals, projected cash flows, market clearing activity or liquidity circumstances in the security or similar securities that may have occurred since the prior pricing period. Included in this valuation methodology are the real estate assets owned by the Company that are utilized in its operations.
 
 
13
 
 
The availability of observable inputs varies and is affected by a wide variety of factors. When the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires significantly more judgment. The degree of judgment exercised by management in determining fair value is greatest for investments categorized as Level 3. For investments in this category, the Company considers prices and inputs that are current as of the measurement date. In periods of market dislocation, as characterized by current market conditions, the observability of prices and inputs may be reduced for many instruments. This condition could cause a security to be reclassified between levels.
  
The Company’s investments are allocated among pricing input levels at March 31, 2010 and December 31, 2009 as follows:
 

   
March 31, 2010
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
   
(unaudited)
 
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporations
                       
 and agencies
  $ 3,565     $ -     $ -     $ 3,565  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    5,801       -       -       5,801  
                                 
 Corporate and
                               
 other bonds
    3,706       -       -       3,706  
                                 
 Total fixed maturities
    13,072       -       -       13,072  
 Equity investments
    2,053       -       -       2,053  
 Short term investments
    385       -       -       385  
 Total investments
  $ 15,510     $ -     $ -     $ 15,510  
 

   
December 31, 2009
 
 ($ in thousands)
 
Level 1
   
Level 2
   
Level 3
   
Total
 
                         
 Fixed-maturity investments
                       
 U.S. Treasury securities
                       
 and obligations of U.S.
                       
 government corporations
                       
 and agencies
  $ 3,564     $ -     $ -     $ 3,564  
                                 
 Political subdivisions of
                               
 States, Territories and
                               
 Possessions
    5,822       -       -       5,822  
                                 
 Corporate and
                               
 other bonds
    3,405       -       -       3,405  
                                 
 Total fixed maturities
    12,791       -       -       12,791  
 Equity investments
    2,187       -       -       2,187  
 Short term investments
    225       -       -       225  
 Total investments
  $ 15,203     $ -     $ -     $ 15,203  
 

 
14
 
 

Note 6 - Fair Value of Financial Instruments

GAAP requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value. The Company uses the following methods and assumptions in estimating its fair value disclosures for financial instruments:
 
Equity and fixed income investments:  Fair value disclosures for investments are included in “Note 4 - Investments.”

Cash and short-term investments: The carrying values of cash and cash equivalents, and short-term investments approximate their fair values because of the short maturity of these investments.

Premiums receivable, reinsurance receivables:  The carrying values reported in the accompanying balance sheets for these financial instruments approximate their fair values due to the short term nature of the assets.

Notes receivable: The carrying amount of notes receivable related to the sale of businesses approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.

Real Estate Assets: The fair value of the land and building included in property and equipment, which is used in the Company’s operations, was based on an appraisal dated August 31, 2009. The appraisal was prepared using the sales comparison approach.

Reinsurance balances payable:  The carrying value reported in the balance sheet for these financial instruments approximates fair value.

Long-term debt and mandatorily redeemable preferred stock: For fair value of long-term debt and mandatorily redeemable preferred stock for which there are no quoted market prices, we estimate that the carrying amount of notes payable and mandatorily redeemable preferred stock approximates fair value because of the recently negotiated interest rates based on term of the loan, risk and guaranty.
The estimated fair values of our financial instruments are as follows:
 

   
March 31, 2010
   
December 31, 2009
 
   
Carrying Value
   
Fair Value
   
Carrying Value
   
Fair Value
 
   
(unaudited)
             
 Cash and short-term investments
  $ 1,145,991     $ 1,145,991     $ 850,656     $ 850,656  
 Premiums receivable
    4,840,077       4,840,077       4,479,363       4,479,363  
 Receivables - reinsurance contracts
    962,376       962,376       564,408       564,408  
 Reinsurance receivables
    20,245,656       20,245,656       20,849,621       20,849,621  
 Notes receivable-sale of business
    1,051,596       1,051,596       1,119,365       1,119,365  
 Real estate, net of
                               
 accumulated depreciation
    1,460,530       1,510,000       1,547,629       1,510,000  
 Reinsurance balances payable
    1,897,031       1,897,031       1,918,169       1,918,169  
 Notes payable
    1,479,685       1,479,685       1,085,637       1,085,637  
 Mandatorily redeemable preferred stock
    1,299,231       1,299,231       1,299,231       1,299,231  

 
15
 
 
Note 7 – Loss and Loss Adjustment Expenses
 
The following table provides a reconciliation of the beginning and ending balances for unpaid losses and LAE for the three months ended March 31, 2010 (unaudited):
 

 Balance at January 1, 2010
  $ 16,513,318  
 Less reinsurance recoverables
    (10,512,203 )
  
    6,001,115  
         
 Incurred related to:
       
 Current year
    1,133,892  
 Prior years
    300,726  
 Total incurred
    1,434,618  
         
 Paid related to:
       
 Current year
    407,338  
 Prior years
    848,472  
 Total paid
    1,255,810  
  
       
 Net balance at end of period
    6,179,923  
 Add reinsurance recoverables
    10,356,897  
 Balance at March 31, 2010
  $ 16,536,820  
 
Incurred losses and LAE are net of reinsurance recoveries under reinsurance contracts of $2,640,562 for the three months ended March 31, 2010.

During the three months ended March 31, 2010, the Company recognized approximately $250,000 of pre-tax loss (net of estimated reinsurance recoverable of $751,000) on the Northeast U.S. Storm that occurred from March 13 to March 15, 2010. The after tax per share loss as a result of this storm was $.06 for the three months ended March 31, 2010. This loss added 11.3 percentage points to the first quarter 2010 loss ratio.

Prior year incurred loss and LAE development is based upon numerous estimates by line of business and accident year. The Company’s management continually monitors claims activity to assess the appropriateness of carried case and IBNR reserves, giving consideration to Company trends and current economic conditions.

For the three months ended March 31, 2010, the Company experienced favorable development of approximately $184,000 net of taxes on quota share ceding commissions from prior periods.
 
Loss and loss adjustment expense reserves

The reserving process for loss adjustment expense reserves provides for the Company’s best estimate at a particular point in time of the ultimate unpaid cost of all losses and loss adjustment expenses incurred, including settlement and administration of losses, and is based on facts and circumstances then known and including losses that have been incurred but not yet been reported. The process includes using actuarial methodologies to assist in establishing these estimates, judgments relative to estimates of future claims severity and frequency, the length of time before losses will develop to their ultimate level and the possible changes in the law and other external factors that are often beyond the Company’s control. The loss ratio projection method is used to estimate loss reserves. The process produces carried reserves set by management based upon the actuaries’ best estimate and is the result of numerous best estimates made by line of business, accident year, and loss and loss adjustment expense. The amount of loss and loss adjustment expense reserves for reported claims is based primarily upon a case-by-case evaluation of coverage, liability, injury severity, and any other information considered pertinent to estimating the exposure presented by the claim. The amounts of loss and loss adjustment expense reserves for unreported claims are determined using historical information by line of insurance as adjusted to current conditions. Since this process produces loss reserves set by management based upon the actuaries’ best estimate, there is no explicit or implicit provision for uncertainty in the carried loss reserves.
 
 
16
 
 
Due to the inherent uncertainty associated with the reserving process, the ultimate liability may differ, perhaps substantially, from the original estimate. Such estimates are regularly reviewed and updated and any resulting adjustments are included in the current year’s results. Reserves are closely monitored and are recomputed periodically using the most recent information on reported claims and a variety of statistical techniques. Specifically, on at least a quarterly basis, the Company reviews, by line of business, existing reserves, new claims, changes to existing case reserves and paid losses with respect to the current and prior years.
 
Note 8 - Long-Term Debt
 
Long-term debt and capital lease obligations consist of:
 
   
March 31, 2010
   
December 31, 2009
 
   
(unaudited)
                   
         
Less
               
Less
       
   
Total
   
Current
   
Long-Term
   
Total
   
Current
   
Long-Term
 
   
Debt
   
Maturities
   
Debt
   
Debt
   
Maturities
   
Debt
 
Capitalized lease
  $ 29,685     $ 25,029     $ 4,656     $ 35,637     $ 24,466     $ 11,171  
Notes payable
    1,450,000       -       1,450,000       1,050,000       -       1,050,000  
    $ 1,479,685     $ 25,029     $ 1,454,656     $ 1,085,637     $ 24,466     $ 1,061,171  
 
Notes Payable
 
As of December 31, 2008, the outstanding principal balance of Notes Payable was $1,500,000. On May 12, 2009, three of the holders of the notes exchanged an aggregate of $519,231 of note principal for Series E Preferred Stock having an aggregate redemption amount equal to such aggregate principal amount of notes (see Note 9). Concurrently, the Company paid $49,543 to the three holders, which amount represents all accrued and unpaid interest and incentive payments through the date of exchange. As part of the transaction, a retirement trust established for the benefit of Jack Seibald, one of the Company’s directors and principal stockholders, exchanged its note in the approximate principal amount of $288,000 for shares of Series E Preferred Stock.  In addition, a limited liability company of which Barry Goldstein, the Company’s Chief Executive Officer (and a director and a principal stockholder), is a minority member exchanged its note in the approximate principal amount of $115,000 for shares of Series E Preferred Stock.
 
On May 12, 2009, the Company prepaid $686,539 in principal of the Notes Payable to the remaining five note holders, together with $81,200, which amount represents accrued and unpaid interest and incentive payments on such prepayment.
 
On June 29, 2009, the Company prepaid the remaining $294,230 in principal of the Notes Payable to such remaining note holders, together with $19,400, which amount represents accrued and unpaid interest and incentive payments on such prepayment.
 
From June 2009 through December 2009, the Company borrowed $1,050,000 (including $585,000 from related parties as discussed below) and issued promissory notes in such aggregate principal amount (the “2009 Notes”).  The 2009 Notes provide for interest at the rate of 12.625% per annum through July 10, 2011, at which time the entire principal balance is due. The 2009 Notes are prepayable without premium or penalty; provided, however, that, under any circumstances, the holders of the 2009 Notes are entitled to receive an aggregate of six months interest from the issue date of the 2009 Notes with respect to the amount prepaid.
 
 
17
 
 
From January 2010 through March 2010, the Company borrowed an additional $400,000 under the terms provided for in the 2009 Notes, of which $200,000 was borrowed from related parties as discussed below.
 
Aggregate related party borrowings of $785,000 are as follows:

The IRA of Barry Goldstein purchased a 2009 Note in the principal amount of $150,000. A limited liability company owned by Mr. Goldstein, along with Sam Yedid and Steven Shapiro (who are both directors of KICO), purchased a 2009 Note in the principal amount of $120,000. Jay Haft, a director of the Company, purchased a 2009 Note in the principal amount of $50,000. A member of the family of Michael Feinsod, a director of the Company, purchased a 2009 Note in the principal amount of $100,000. Mr. Yedid and members of his family purchased 2009 Notes in the aggregate principal amount of $295,000. A member of the family of Floyd Tupper, a director of KICO, purchased a 2009 Note in the principal amount of $70,000. Interest expense on related party borrowings for the three months ended March 31, 2010 was approximately $23,000.
 
Long-term debt matures as follows:
 
 Years ended December 31,
     
   
(unaudited)
 
2010 (nine months)
  $ 18,515  
2011
    1,461,170  
    $ 1,479,685  
 
Note 9 - Exchange and Issuance of Preferred Stock
 
Effective April 16, 2008, AIA Acquisition Corp. (“AIA”), the holder of the Company’s Series B Preferred Stock exchanged such shares for an equal number of shares of Series C Preferred Stock, the terms of which were substantially identical to those of the shares of Series B Preferred Stock, except that the outside date for mandatory redemption was April 30, 2009 and the Series C Preferred Stock provided for dividends at the rate of 10% per annum.
 
Effective August 23, 2008, AIA exchanged the Series C Preferred Stock for an equal number of shares of Series D Preferred Stock, the terms of which were substantially identical to those of the shares of Series C Preferred Stock, except that the outside date for mandatory redemption was July 31, 2009.
Effective May 12, 2009, AIA exchanged the Series D Preferred Stock for an equal number of shares of Series E Preferred Stock.  The terms of the Series E Preferred Stock vary from those of the Series D Preferred Stock as follows: (i) the Series E Preferred Stock is mandatorily redeemable on July 31, 2011 (as compared to July 31, 2009 for the Series D Preferred Stock), (ii) the Series E Preferred Stock provides for dividends at the rate of 11.5% per annum (as compared to 10% per annum for the Series D Preferred Stock), (iii) the Series E Preferred Stock is convertible into Common Stock at a price of $2.00 per share (as compared to $2.50 per share for the Series D Preferred Stock), (iv) the Company’s obligation to redeem the Series E Preferred Stock is not accelerated based upon a sale of substantially all of its assets or certain of its subsidiaries (as compared to the Series D Preferred Stock which provided for such acceleration) and (v) the Company’s obligation to redeem the Series E Preferred Stock is not secured by the pledge of the outstanding stock of its subsidiary, AIA-DCAP Corp. (as compared to the Series D Preferred Stock which provided for such pledge).  The current aggregate redemption amount for the Series E Preferred Stock held by AIA is $780,000, plus accumulated and unpaid dividends.  Members of Mr. Goldstein’s family, Sam Yedid and Steven Shapiro are among the stockholders of AIA. Interest expense on related party preferred stock for the three months ended March 31, 2010 and 2009 was $32,637 and $19,500, respectively.

On May 12, 2009, three holders of the Company’s Notes Payable exchanged $519,231 of the principal balance of such notes for shares of Series E Preferred Stock having an aggregate redemption amount of $519,231 (see Note 8).

 
18
 
 
As of March 31, 2010, there were 1,299 shares outstanding of Series E Preferred Stock, convertible into 649,615 shares of Common Stock.

In accordance with GAAP guidance for accounting for certain financial instruments with characteristics of both liabilities and equity, the various series of Preferred Stock have been reported as a liability of $1,299,231 at March 31, 2010 and December 31, 2009. For the three months ended March 31, 2010 and 2009, the preferred dividends have been classified as interest expense of $37,353 and $19,500, respectively.
 
Note 10 – Equity Stock Compensation
 
Other Equity Compensation

Other equity compensation consists of 50,000 shares granted to the Company’s chief executive officer pursuant to an amended employment agreement dated March 24, 2010. The fair value of stock grant is $112,000.

Stock Options

In November 1998, the Company adopted the 1998 Stock Option Plan (the “1998 Plan”), which provided for the issuance of incentive stock options and non-statutory stock options. Under this plan, options to purchase not more than 400,000 shares of the Company’s Common Stock were permitted to be granted, at a price to be determined by our Board of Directors or the Stock Option Committee at the time of grant. During 2002, the Company increased the number of shares of Common Stock authorized to be issued pursuant to the 1998 Plan to 750,000. Incentive stock options granted under the 1998 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Stock Option Committee determined the expiration date with respect to non-statutory options granted under the 1998 Plan. The 1998 Plan terminated in November 2008.
 
In December 2005, the Company’s shareholders ratified the adoption of the 2005 Equity Participation Plan (the “2005 Plan” and together with the 1998 Plan, the “Plans”), which provides for the issuance of incentive stock options, non-statutory stock options and restricted stock. Under the 2005 Plan, a maximum of 300,000 shares of Common Stock were permitted to be issued pursuant to options granted and restricted stock issued. In March 2010, the Board of Directors of the Company increased the number of shares of Common Stock authorized to be issued pursuant to the 2005 Plan to 550,000, subject to stockholder approval. Incentive stock options granted under the 2005 Plan expire no later than ten years from date of grant (except no later than five years for a grant to a 10% stockholder). The Board of Directors or the Stock Option Committee will determine the expiration date with respect to non-statutory options, and the vesting provisions for restricted stock, granted under the 2005 Plan.
 
The results of operations for the three months ended March 31, 2010 and 2009 include share-based compensation expense related to stock options totaling approximately $89,000 and $7,000, respectively.  Such amounts have been included in the Condensed Consolidated Statements of Operations and Comprehensive Income within other operating expenses.
 
Stock option compensation expense in 2010 and 2009 is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The weighted average estimated fair value of stock options granted during the three months ended March 31, 2010 was $2.04 per share. The fair value of options at the grant date was estimated using the Black-Scholes pricing model. No stock options were granted during the three months ended March 31, 2009.
 
 
19
 
 
A summary of option activity under the Plans as of March 31, 2010, and changes during the three months then ended, is as follows:

Stock Options
 
Number of Shares
   
Weighted Average Exercise Price per Share
   
Weighted Average Remaining Contractual Term
   
Aggregate Intrinsic Value
 
                         
Outstanding at January 1, 2010
    225,000     $ 2.24       3.17     $ 67,550  
                                 
Granted
    188,865     $ 2.50       -     $ 94,433  
Exercised
    -     $ -       -     $ -  
Forfeited
    -     $ -       -     $ -  
                                 
Outstanding at March 31, 2010
    413,865     $ 2.36       3.87     $ 266,533  
                                 
Vested and Exercisable at March 31, 2010
    173,466     $ 2.31       3.03     $ 122,033