Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2010
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
----------------------------------------------------------
(Exact name of registrant as specified in its charter)
======================================== =====================================
DELAWARE 84-0922335
---------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
======================================== =====================================
300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 343-8171
--------------
Indicated by a 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 proceeding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [ X ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes[ ] No[X]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 214,089,012 shares of common
stock as of April 19, 2010.
PART I-- FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS
----------------------------
The following financial statements are included herein in response to Item 1:
Financial Statements (Unaudited) Page
--------------------
Consolidated Condensed Balance Sheets F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Comprehensive Income (Loss) F-3
Consolidated Condensed Statements of Cash Flows F-4
Consolidated Condensed Statement of Mandatorily Redeemable Preferred Stock and Stockholders Equity (Deficit) F-5 - F-8
Notes to Consolidated Condensed Financial Statements F-9
-2-
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
FEBRUARY 28, 2010 MAY 31, 2009
------------------- -----------------
ASSETS
INVESTMENTS AND CASH:
Bonds available for sale, at market value $ 828,010 $ 908,766
(amortized cost - 2/28/10 $812,509; 05/31/09 $866,855)
Mortgage-back securities held to maturity, at amortized costs 5,144,900 5,085,300
(market value - 2/28/10 $5,250,437; 05/31/09 $5,157,936)
Short-term investments, at cost (approximates market value) 552,175 387,753
Cash 146,023 80,038
------------------- -----------------
TOTAL INVESTMENTS AND CASH 6,671,109 6,461,857
Investment income due and accrued 29,630 28,124
Premiums and other accounts receivable 102,686 61,184
Prepaid reinsurance premium 157,706 87,114
Funds deposited with Reinsurers 120,289 -
Deferred policy acquisition costs 105,169 143,173
Furniture and equipment, net of accumulated depreciation of
$141,439 and $133,493, respectively 19,624 23,169
Other assets 33,272 43,517
Intangible assets 150,000 150,000
------------------- -----------------
TOTAL ASSETS $ 7,389,484 $ 6,998,138
=================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 571,726 $432,658
Reserve for unearned premiums 463,343 530,795
Accrued expenses and professional fees payable 549,189 470,099
Accounts payable 187,320 268,066
Related party payable 111,584 75,009
Demand note payable to related party 118,048 3,081
Notes payable 4,407,232 4,049,791
Accrued interest payable 478,199 303,914
Ceded reinsurance payable - 92,173
Series C dividends payable 2,471,344 -
Other liabilities 223,619 78,470
SERIES B PREFERRED STOCK, $.0001 PAR VALUE PER SHARE;
3,136.405 SHARES AUTHORIZED; 2,817.004 SHARES ISSUED AND OUTSTANDING
AT FEBRUARY 28, 2010 AND MAY 31, 2009; STATED LIQUIDATION VALUE
OF $1,000 PER SHARE 3,700,193 -
------------------- -----------------
TOTAL LIABILITIES 13,281,797 6,304,056
SERIES A PREFERRED STOCK, $.0001 PAR VALUE PER SHARE;
1 MILLION SHARES AUTHORIZED; 2,675 AND 2,665 SHARES ISSUED AND
OUTSTANDING AT FEBRUARY 28, 2010 AND MAY 31, 2009, RESPECTIVELY;
STATED LIQUIDATION VALUE OF $1,000 PER SHARE 2,970,772 2,860,670
SERIES B PREFERRED STOCK, $.0001 PAR VALUE PER SHARE;
3,136.405 SHARES AUTHORIZED; 2,817.004 SHARES ISSUED AND
OUTSTANDING AT FEBRUARY 28, 2010 AND MAY 31, 2009; STATED
LIQUIDATION VALUE OF $1,000 PER SHARE - 11,429,440
------------------- -----------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 2,970,772 14,290,110
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value per share;
490 million shares authorized; 207,533,087 and 179,682,912
shares issued and outstanding at February 28, 2010
and May 31, 2009, respectively 20,753 17,968
Additional paid in capital 3,361,946 2,626,236
Series C Preferred Stock, $.0001 par value per share;
10,000 shares authorized; 6,804.936 shares issued and
outstanding at February 28, 2010 and May 31, 2009, respectively 6,030,931 -
Accumulated deficit (18,292,216) (16,279,725)
Accumulated other comprehensive income (loss) 15,501 39,493
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (8,863,085) (13,596,028)
------------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,389,484 $ 6,998,138
=================== =================
See accompanying notes.
F-1
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28 FEBRUARY 28
------------------------------ -------------------------------
2010 2009 2010 2009
-------------- --------------- -------------- ---------------
REVENUES:
Investment advisory services $ 62,596 $ 56,101 $ 193,885 $ 173,662
Insurance premiums and commissions 175,032 166,897 597,881 485,934
Net investment income 58,435 76,608 201,938 218,451
Net realized investment gains (losses) 42,926 12,511 40,828 12,511
Other income 6,649 2,722 12,416 2,722
-------------- --------------- -------------- ---------------
TOTAL REVENUES 345,638 314,839 1,046,948 893,280
EXPENSES:
Incurred policy losses 41,382 48,013 139,068 141,046
Insurance policy acquisition costs 60,721 35,934 185,640 114,947
General and administrative 289,068 310,378 1,022,642 1,249,042
Mutual fund costs 125 11,088 75,038 84,428
Depreciation 2,501 3,231 7,946 9,726
-------------- --------------- -------------- ---------------
TOTAL EXPENSES 393,797 408,644 1,430,334 1,599,189
-------------- --------------- -------------- ---------------
NET INCOME (LOSS) FROM OPERATIONS (48,159) (93,805) (383,386) (705,909)
Gain on debt extinguishment 200,239 - 200,239 -
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (115,950) - (115,950) -
Interest expense (181,995) (117,022) (691,093) (352,031)
Interest and dividend income - 255 - 1,107
-------------- --------------- -------------- ---------------
NET INCOME (LOSS) (145,865) (210,572) (990,190) (1,056,833)
Accrued dividends on Series C Preferred Stock equity (175,720) - (175,720) -
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (34,028) (408,379) (846,580) (1,197,955)
-------------- --------------- -------------- ---------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (355,613) $ (618,951) $ (2,012,490) $ (2,254,788)
============== =============== ============== ===============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ - $ - $ (0.01) $ (0.01)
============== =============== ============== ===============
WEIGHTED-AVERAGE SHARES OUTSTANDING 207,452,531 174,077,272 195,657,796 172,093,454
============== =============== ============== ===============
See accompanying notes.
F-2
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28 FEBRUARY 28
--------------------------------- -----------------------------
2010 2009 2010 2009
-------------- ----------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $ (355,613) $ (618,951) $ (2,012,490) $ (2,254,788)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale
investments arising during period (11,585) 49,703 16,836 26,325
Reclassification adjustment for realized (gain) loss
included in net income (42,926) (12,511) (40,828) (12,511)
-------------- ----------------- -------------- --------------
Net unrealized gain (loss) attributable to available-for-
sale investments recognized in other comprehensive income (54,511) 37,192 (23,992) 13,814
-------------- ----------------- -------------- --------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (410,124) $ (581,759) $ (2,036,482) $ (2,240,974)
============== ================= ============== ==============
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED FEBRUARY 28, NINE MONTHS ENDED FEBRUARY 28,
------------------------------- --------------------------------
2010 2009 2010 2009
--------------- -------------- ---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (145,865) $ (210,572) $ (990,190) $ (1,056,833)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Unearned premium 21,988 97,211 (138,044) 74,020
Stock option expense 39,907 9,847 212,902 36,829
Stock issued (or to be issued) in connection with
financing arrangements 23,416 10,808 257,510 70,763
Accrual of Series B preferred stock dividends 72,866 - 72,866 -
Accretion of Series B preferred stock 43,084 - 43,084 -
Provision for loss reserves 41,382 48,013 139,068 141,046
Amortization of premium 22,631 9,072 54,236 28,216
Depreciation 2,501 3,231 7,945 9,726
Premium and other receivables (8,825) (9,716) (41,502) (23,040)
Accretion of discount - (4,878) (9,217) (8,552)
Investment income due and accrued 284 (619) 281 (7,359)
Realized (gain) loss on sale of securities (42,926) (12,511) (42,926) (12,511)
Gain on extinguishment of debt (200,239) - (200,239) -
Deferred policy acquisition costs (290) (13,607) 38,004 (3,108)
Change in operating assets and liabilities:
Other assets (3,984) (4,934) 12,663 157,012
Related party accounts payable 10,525 10,350 36,575 9,267
Accounts payable and cash overdraft 4,479 (1,222) 119,492 (21,419)
Accrued expenses and other liabilities 197,776 215,762 186,062 298,139
--------------- -------------- ---------------- ---------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 78,710 146,235 (241,430) (307,804)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments (187,105) (90,597) (164,422) 1,038,726
Costs of bonds acquired - - - (976,160)
Costs of mortgaged-backed securities acquired (958,003) (470,409) (1,578,090) (1,849,137)
Purchase of securities available for sale - 107,639
Redemption of bonds upon call or maturity - 20,000 - 20,000
Sale of securities available for sale 404,958 107,639 404,958 -
Repayment of mortgage-backed securities 482,471 220,703 1,163,998 659,739
Purchase of furniture and equipment (4,400) (261) (4,400) (6,563)
--------------- -------------- ---------------- ---------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (262,079) (212,925) (177,956) (1,005,756)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 268,773 51,612 525,305 358,112
Repayment of related party debt (153,854) (44,916) (410,338) (77,316)
Proceeds from borrowings 135,000 - 767,500 955,000
Repayment of borrowings (167,213) (9,520) (410,059) (146,459)
Proceeds from issuance of Series A preferred stock - 29,000 10,000 203,000
Proceeds from exercise of common stock warrants - - 2,963 -
--------------- -------------- ---------------- ---------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 82,706 26,176 485,371 1,292,337
NET INCREASE (DECREASE) IN CASH (100,663) (40,514) 65,985 (21,223)
CASH AT BEGINNING OF PERIOD 246,686 67,931 80,038 48,640
--------------- -------------- ---------------- ---------------
CASH AT END OF PERIOD $ 146,023 $ 27,417 $ 146,023 $ 27,417
=============== ============== ================ ===============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 11,302 $ 3,737 $ 278,380 $ 171,062
Income taxes paid - - - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 23,415 10,808 257,510 70,763
See accompanying notes.
F-4
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FEBRUARY 28, 2010
SERIES A SERIES B
MANDATORILY REDEEMABLE MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
------- ----------- --------- -----------
BALANCE, NOVEMBER 30, 2009 2,675 $ 2,936,744 2,817.004 $ 3,584,243
Issuance of Series A and
B Preferred Stock and
common stock - - - -
Exchange of Series C
Preferred Stock for Series B
Mandatorily Reedemable
Convertible Preferred Stock
Issuance of common stock
as additional consideration
or financing arrangements - - - -
Exercise of warrants
Accretion of Series A
mandatorily redeemable
convertible preferred stock - 4,500 - -
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 29,528 - -
Accrued dividends of
preferred stock equity - - - -
Reclassification of accrued
dividends on shares
exchanged for Series C to
liabilities
Reclassification of Series B
from temporary equity to
liabilities (2,817.004)(3,584,243)
Expense of common shares
to be issued in connecetion
with financing arrangements - - - -
Common stock option expense - - - -
Unrealized net gain (loss)
on available for sale securities - - - -
Net income (loss), three month period
ended February 28, 2010 - - - -
------- ----------- --------- -----------
BALANCE, FEBRUARY 28, 2010 2,675 $ 2,970,772 - $ -
======= =========== ========= ===========
(CONTINUED)
See accompanying notes
F-5
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FEBRUARY 28, 2010 (CONTINUED)
---------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------
COMMON STOCK SERIES C PREFERRED
------------ ------------------ ACCUMULATED
ADDITIONAL OTHER
PAID-IN AMOUNT ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT INCOME (LOSS) TOTAL
----------- ------- ---------- --------- ---------- ------------- ------- ------------
BALANCE, NOVEMBER 30, 2009 207,283,087 $ 20,728 $ 3,298,650 6,804.936 $6,030,931 $(17,936,604) $ 70,012 $(8,516,283)
Issuance of Series A and
B Preferred Stock and - - - - - -
common stock
Exchange of Series C
Preferred Stock for Series B
Mandatorily Reedemable -
Convertible Preferred Stock
Issuance of common stock
as additional consideration
or financing arrangements 250,000 25 2,728 2,753
Exercise of warrants -
Accretion of Series A
mandatorily redeemable
convertible preferred stock - - - (4,500) - (4,500)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - - - (29,528) - (29,528)
Accrued dividends of
preferred stock equity - - - (175,720) - (175,720)
Reclassification of accrued
dividends on shares
exchanged for Series C to
liabilities -
Reclassification of Series B
from temporary equity to
liabilities
Expense of common shares
to be issued in connecetion
with financing arrangements - - 20,662 - - 20,662
Common stock option expense - - 39,906 - - 39,906
Unrealized net gain (loss)
on available for sale securities - - - - (54,511) (54,511)
Net income (loss), three month
period ended February 28, 2010 - - - - - (145,864) - (145,864)
----------- ------- ---------- --------- ---------- ------------- ------- -----------
BALANCE, FEBRUARY 28, 2010 207,533,087 $20,753 $3,361,946 6,804.936 $6,030,931 $(18,292,216) $15,501 $(8,863,085)
=========== ======= ========== ========= ========== ============= ======= ===========
See accompanying notes.
F-6
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2010
SERIES A SERIES B
MANDATORILY REDEEMABLE MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
--------- ------------ ------------ -------------
BALANCE, MAY 31, 2009 2,665 $ 2,860,670 9,621.940 $ 11,429,440
Issuance of Series A and
B Preferred Stock and
common stock 10 10,000 - -
Exchange of Series C
Preferred Stock for Series B
Mandatorily Reedemable
Convertible Preferred Stock - - (6,804.936) (6,296,051)
Issuance of common stock
as additional consideration
or financing arrangements - - - -
Exercise of warrants - - - -
Accretion of mandatorily
redeemable convertible
preferred stock - 13,320 - 255,487
Accrued dividends of
mandatorily redeemable
convertible preferred stock - 86,782 - 490,991
Accrued dividends of
preferred stock equity
Reclassification of accrued
dividends on shares
exchanged for Series C to
liabilities - (2,295,624)
Reclassification of Series B
from temporary equity to
liabilities (2,817.004) (3,584,243)
Expense of common shares
to be issued in connecetion
with financing arrangements - - - -
Common stock option expense - - - -
Unrealized net gain (loss)
on available for sale securities - - - -
Net income (loss), six months ended
November 30, 2009 - - - -
--------- ------------ ------------ -------------
BALANCE, FEBRUARY 28, 2010 2,675 $ 2,970,772 - $ -
========= ============ ============ =============
(CONTINUED)
See accompanying notes
F-7
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2010 (CONTINUED)
---------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------------
COMMON STOCK SERIES C PREFERRED
------------ ------------------ ACCUMULATED
ADDITIONAL OTHER
PAID-IN AMOUNT ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT INCOME (LOSS) TOTAL
----------- ------- ---------- --------- ---------- ------------- ------- ------------
BALANCE, MAY 31, 2009 179,682,912 17,968 $ 2,626,236 - $ - $(16,279,725) $ 39,493 $(13,596,028)
Issuance of Series A
and B Preferred Stock
and common stock - - - - - - - -
Exchange of Series C
Preferred Stock for
Series B Mandatorily
Reedemable Convertible
Preferred Stock 13,609,872 1,361 263,759 6,804.936 6,030,931 - - 6,296,051
Issuance of common
stock as additional
consideration or
financing arrangements 750,000 75 21,753 - - - - 21,828
Exercise of warrants 2,963,668 297 2,668 - - - - 2,965
Accretion of mandatorily
redeemable convertible - - - - - (268,807) - (268,807)
preferred stock
Accrued dividends of
mandatorily redeemable
convertible - - - - - (577,773) - (577,773)
preferred stock
Accrued dividends of
preferred stock equity (175,720) - (175,720)
Reclassification
of accrued dividends on
shares exchanged for
Series C to liabilities - - - - - - - -
Reclassification of Series
B from temporary
equity to liabilities
Expense of common shares
to be issued in
connecetion with
financing arrangements 10,526,635 1,052 234,629 - - - - 235,681
Common stock option expense - - 212,901 - - - - 212,901
Unrealized net gain
(loss) on available
for sale securities - - - - - - (23,992) (23,992)
Net income (loss),
six months ended
November 30, 2009 - - - - - (990,191) - (990,191)
----------- ------- ---------- --------- ---------- ------------- ------- -----------
BALANCE,
FEBRUARY 28, 2010 207,533,087 $20,753 $3,361,946 6,804.936 $6,030,931 $(18,292,216) $15,501 $(8,863,085)
=========== ======= ========== ========= ========== ============= ======= ===========
See accompanying notes.
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited financial statements are of Jacobs Financial Group,
Inc. (the "Company" or "JFG"). These financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 8-03 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial condition for the periods presented have been included.
Such adjustments are of a normal recurring nature. The results of operations for
the three and nine month periods ended February 28, 2010, are not necessarily
indicative of the results of operations that can be expected for the fiscal year
ending May 31, 2010. For further information, refer to the Company's audited
financial statements and footnotes thereto included in Item 8. of Form 10-K
filed on September 14, 2009.
RECLASSIFICATIONS
Certain amounts have been reclassified in the presentation of the Consolidated
Financial Statements as of February 28, 2009 to be consistent with the
presentation in the Consolidated Financial Statements as of February 28, 2010.
This reclassification had no impact on previously reported net income, cash flow
from operations or changes in shareholder equity.
LIQUIDITY AND GOING CONCERN
These financial statements are presented on the basis that the Company is a
going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The Company incurred operating losses (after accretion of
mandatorily redeemable convertible preferred stock, including accrued dividends)
of approximately $3,058,000 and $3,333,000 for the years ended May 31, 2009 and
2008 and has incurred losses of approximately $356,000 and $2,012,000 for the
three and nine month periods ended February 28, 2010. Losses are expected to
continue until the Company's insurance company subsidiary, First Surety
Corporation ("FSC") develops a more substantial book of business. While
continued improvement is anticipated as the business plan is more fully
implemented, restrictions on the use of FSC's assets (See Management's
Discussion and Analysis), the Company's significant deficiency in working
capital and stockholders' equity raise substantial doubt about the Company's
ability to continue as a going concern.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to allow FSC to expand its market share and
to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component of fully
implementing the Company's business plan. Regulatory approval and licensing is
required for each state in which FSC seeks to conduct business. In fiscal 2009,
the Company was able to increase the capital of FSC and reactivate FSC's
insurance license in Ohio and obtain authority to issue surety bonds in that
state. However, management has found that entry into other states (as a surety)
has been difficult without the benefit of more substantial capital and reserves,
due to FSC's status as a new entry into this market, and based upon current
financial condition of the parent company. This is the case notwithstanding the
reinsurance agreement entered into by FSC with Lloyd's of London and the
F-9
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
resulting increase in bonding capacity. Management believes that if FSC's
capital and surplus reserves were significantly more substantial and the
financial condition of the Company was stabilized, entry into other states would
be less challenging. Accordingly, management continues to pursue avenues that
can provide additional capital to increase the capacity of its insurance
subsidiary and to fund continuing operations as the business is being fully
developed. In addition, as an alternative means of addressing access to markets,
management is seeking to establish a relationship with any one of several
possible sureties that are licensed in those states other than West Virginia and
Ohio that comprise significant markets for the bonding programs of FSC and could
issue surety bonds that are underwritten and reinsured by FSC. Under such a
"fronting" arrangement, the need for additional capital at the level of FSC to
facilitate entry to other state markets would become secondary, since the
payment of a fronting fee to the insurance company with active licenses would
provide access to the state market without formal entry.
During fiscal 2008 and the three month period ended August 31, 2008, the Company
completed two rounds of bridge financing totaling an aggregate of $3,500,000 in
order to pay expenses of operations and to pay fees and expenses incurred or
expected to be incurred in connection with a larger permanent financing. The
Company was not able to meet its December 2008 or March 2009 loan amortization
payments with respect to this financing and, thus, incurred payment defaults
with respect to these obligations. On June 5, 2009 the Company reached agreement
with the Holders to forbear from exercising their rights and remedies arising
from the Acknowledged Events of Default. The Holders agreed that the Company may
satisfy its obligation to make the Initial Amortization Payments by making
additional quarterly payments of $67,185 each, commencing September 10, 2009,
(See Note K), and continuing on the payment dates prescribed by the Amortization
Schedule for the Promissory Notes and ending on June 10, 2011 (collectively, the
"Payments"), it being understood that the Payments shall result in the payment
of the principal of and interest on the unpaid portion of the Initial
Amortization Payments at the rate of 15.00 % per annum from and after the
originally scheduled payment dates. (See Note E). The Company paid the June 10,
2009 Initial Amortization Payment of $224,510 as scheduled but has not met the
September 10, 2009, December 10, 2009 or March 10, 2010 payments of $291,702
each. The Company maintains regular contact with the Holders regarding the
unpaid payments and has agreed to increase the interest rate by 2.00% (to
17.00%) while payments remain unpaid.
Given current financial market conditions and the uncertainties as to when
stability will return to the financial markets, until permanent financing can be
secured, management will strive to reduce and then eliminate operating losses by
implementing further measures to control and reduce costs while maintaining and
growing the Company's current revenue base. Unless permanent financing can be
secured, future revenue growth can be expected to be achieved at a slower pace
than has been projected by the Company. Until such time that the Company's
operating costs can be serviced by the Company's revenue stream, management will
continue to seek to raise additional funds for operations through private
placements of stock, other long-term or permanent financing, or short-term
borrowings. However, the Company cannot be certain that it will be able to
continue to obtain adequate funding in order to reasonably predict whether it
will be able to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
In February 2010, the FASB issued Accounting Standards Update 2010-09,
"Subsequent Events: Amendments to Certain Recognition and Disclosure
Requirements." This FASB retracts the requirement to disclose the date through
which subsequent events have been evaluated and whether that date is the date
the financial statements were issued or were available to be issued. ASU 2010-09
is effective for interim and annual financial periods ending after February 24,
2010, and has been applied with no material impact on the Company's financial
statements.
In February 2010, the FASB issued Accounting Standards Update 2010-08,
"Technical Corrections to Various Topics." This FASB eliminates inconsistencies
and outdated provisions in GAAP and provides needed clarification on others. ASU
2010-08 is effective for interim and annual financial periods ending after
February 2010, and has been applied with no material impact on the Company's
financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06, "Fair
Value Measurements and Disclosures: Improving Disclosures About Fair Value
Measurements." This FASB requires additional disclosures about the fair value
measurements including transfers in and out of Levels 1 and 2 and a higher level
of disaggregation for the different types of financial instruments. For the
reconciliation of Level 3 fair value measurements, information about purchases,
sales, issuances and settlements should be presented separately. ASU 2010-06 is
effective for interim and annual financial periods beginning after December
2009, and is not expected to have a material impact on the Company's financial
statements.
In August 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update 2009-04, "Accounting for Redeemable Equity
Instruments - Amendment to Section 480-10-S99". This updates Section 480-10-S99,
"Distinguishing Liabilities from Equity", to reflect the SEC staff's views
regarding the application of Accounting Series Release No. 268, "Presentation in
Financial Statements of "Redeemable Preferred Stocks." The exchange for Series B
Preferred shares into Series C shares as elected by those shareholders utilizes
the view of the SEC in classifying the Series C Preferred shares as equity.
There is no stated maturity on the Series C Preferred shares and at the time of
redemption the Company will accrete changes in the redemption value at the
appropriate time. These amounts will be adjusted at the end of each reporting
period as applicable.
In August 2009, the FASB issued Accounting Standards Update 2009-05, "Fair Value
Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value".
This update includes amendments to Subtopic 820-10 "Fair Value Measurements and
Disclosures - Overall" for the fair value measurements of liabilities and
provides clarification that in circumstances in which quoted price in an active
market for the identical liability is not available, a reporting entity is
required to measure fair value using one or more of the techniques provided for
in this update. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after August 26, 2009. The
application of this update did not have a material impact on the Company's
results of operations or financial position.
In September 2009, the FASB issued Accounting Standards Update 2009-08,
"Earnings Per Share-Amendments to Section 260-10-S99". This update includes
technical corrections to Topic 260-10-S99, "Earnings Per Share", based on EITF
Topic D-53, "Computation of Earnings Per Share for a Period that Includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock"
and EITF Topic D-42, "The Effect of the Calculation of Earnings Per Share for
F-11
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
the Redemption or Induced Conversion of Preferred Stock". The application of
this update did not have an impact on the Company's results of operations,
therefore not requiring an additional earnings per share computation.
In December 2007, the FASB issued Statement No. 160 "Noncontrolling Interests in
Consolidated Financial Statements - An Amendment of ARB 51". This statement
improves the relevance, comparability, and transparency of financial information
for the reporting entity by establishing accounting and reporting standards
attributable to noncontrolling, or minority, interests in subsidiaries included
in the reporting entity's consolidated financial statements. This Statement
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements and requires consolidated net income to be
reported at amounts that include amounts attributable to both the parent and the
noncontrolling interest. The Statement also provides a single method for
accounting for changes in the parent's ownership interest in a subsidiary that
does not result in deconsolidation, as well as recognition of gain or loss when
a subsidiary is deconsolidated as a result of an ownership change in which the
parent ceases to have a controlling financial interest in the subsidiary, and
expanded disclosures to clearly identify and distinguish between the interests
of the parent's owners and the interests of the noncontrolling owners of a
subsidiary. This Statement is effective for fiscal years, and interim periods
within those fiscal years, beginning on or after December 15, 2008. Earlier
adoption is prohibited. This Statement shall be applied prospectively as of the
beginning of the fiscal year in which this Statement is initially applied,
except for the presentation and disclosure requirements, which shall be applied
retrospectively for all periods presented. The application of Statement No. 160
did not have a material impact on the Company's results of operations or
financial position.
In March 2008, the FASB issued Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133".
This Statement changes the disclosure requirements for derivative instruments
and hedging activities in order to provide improved transparency of financial
reporting with respect to derivative instruments and hedging activities. This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company does not currently employ the use of derivative
instruments or engage in hedging activities and thus the issuance of this
Statement did not have any impact on the Company's current financial statement
disclosure requirements.
In May 2008, the FASB issued Statement No. 163 "Accounting for Financial
Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60".
This Statement clarifies how Statement No. 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities. A financial guarantee
insurance contract within the scope of this Statement generally insures
investment securities in the form of municipal bonds or asset-backed securities.
FASB's intent in setting the scope of this Statement was to address the narrow
issue relating to those contracts for which diversity existed in the accounting
for claim losses. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and all interim periods
within those fiscal years, except for some disclosures about the insurance
enterprise's risk management activities, which are effective for the first
interim period after issuance to the Statement. Except for those disclosures,
earlier application is not permitted. The application of Statement No. 163 did
not have a material impact on the Company's results of operations or financial
position.
In June 2009, the FASB issued SFAS No. 168, "The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - A
Replacement of FASB Statement No. 162." This SFAS establishes the FASB
F-12
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Accounting Standards Codification as the single source of authoritative US
generally accepted accounting principles. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009 (interim period starting September 1, 2009 for the Company).
This SFAS did not have a material impact on the Company's results of operations
or financial position.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)." This statement 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. New disclosures will be required
regarding involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. SFAS No. 167 will be effective
for the start of the first fiscal year beginning after November 15, 2009 (June
1, 2010 for the Company). This SFAS is not expected to have a material impact on
the Company's financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets." This is a revision to SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
"qualifying special-purpose entity," and changes the requirements for
derecognizing financial assets, and requires additional disclosures. SFAS No.
166 will be effective for the start of the first fiscal year beginning after
November 15, 2009 (June 1, 2010 for the Company). This SFAS is not expected to
have a material impact on the Company's financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." This statement
establishes general standards of accounting for and disclosures of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS No. 165 is effective for interim and annual
financial periods ending after June 15, 2009, and has been applied with no
material impact on the Company's financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." This FSP provides additional clarification on the determination of
fair value, including illustrative examples. FSP FAS 157-4 is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. This FSP did not have a
material impact on the Company's financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments." This FSP provides guidance on
determining whether an impairment is other than temporary, provides examples to
be considered and identifies reporting requirements related to such impairments.
FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. This FSP did not have a material impact on the Company's
financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures
about Fair Value of Financial Instruments." This FSP requires disclosure about
the fair value of financial instruments whenever summarized financial
F-13
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
information for interim periods is issued, and requires disclosure of the fair
value of all financial instruments (where practicable) in the body or
accompanying notes of interim and annual financial statements. FSP FAS 107-1 and
APB 28-1 is effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. This FSP did not
have a material impact on the Company's financial statements.
In December 2008, the FASB issued FSP 132(R)-1, "Employers' Disclosure about
Postretirement Benefit Plan Assets." This FSP provides guidance on an employer's
disclosures regarding plan assets of a defined benefit pension or other
postretirement plan. The objectives of the disclosures required under this FSP
are to provide users of financial statements with an understanding of:
a) How investment allocation decisions are made;
b) The major categories of plan assets;
c) The inputs and valuation techniques used to measure the fair
value of plan assets;
d) The effect of fair value measurements using significant
unobservable inputs on changes in plan assets for the period; and
e) Significant concentrations of risk within plan assets.
The disclosures about plan assets required by this FSP are required for fiscal
years ending after December 15, 2009 (effective June 1, 2009 for the Company),
and earlier application is permitted. This FSP did not have a material impact on
the Company's financial statements.
In April 2008, the FASB issued FSP 142-3, "Determination of the Useful Life of
Intangible Assets." This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets." The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R), "Business Combinations," and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The application of this FSP does not have a material impact on the
Company's financial statements.
NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
The Company classifies a portion of investments as available-for-sale, and as
such, they are carried at fair value. The amortized cost of investments is
adjusted for amortization of premiums and accretion of discounts which are
included in net investment income. Changes in fair value are reported as a
component of other comprehensive income, exclusive of other-than-temporary
impairment losses, if any. For the three and nine month periods ended February
28, 2010, there have been no other-than-temporary impairments. The Company
intends and believes it has the ability to hold all investments in an unrealized
loss position until the expected recovery in value, which may be at maturity.
The following table sets forth the amortized cost and estimated market value of
bonds and equity securities available-for-sale and carried at market value on
February 28, 2010.
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 812,509 $ 18,574 $ 3,073 $ 828,010
mortgage-backed securities
------------------- -------------------- ------------------- --------------------
$ 812,509 $ 18,574 $ 3,073 $ 828,010
=================== ==================== =================== ====================
The following table sets forth the amortized cost and estimated market value of
bonds and equity securities available-for-sale and carried at market value on
May 31, 2009.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 514,039 $ 13,342 $ - $ 527,381
mortgage-backed securities
State and municipal securities(2) 352,816 28,570 - 381,386
Equity securities(1) 10,280 - 2,418 7,862
------------------- -------------------- ------------------- --------------------
$ 877,135 $ 41,912 $ 2,418 $ 916,629
=================== ==================== =================== ====================
(1)Equity securities consist of an investment in the original amount of $25,000
made in the Jacobs & Company Mutual Fund ("the Fund") by its investment advisor,
Jacobs & Company, and is recorded in other assets at market value. Dividends
paid by the Fund at calendar year-end 2007 and 2008 were reinvested. A partial
withdrawal of $11,000 was made on March 25, 2009 and the remainder of $8,182 was
withdrawn on November 25, 2009. Total amounts withdrawn reflect loss in market
value.
(2)All state and municipal securities, totaling $362,033 were sold in December
2009 for a gain of $42,926.
The Company's short-term investments at February 28, 2010 of $552,175 consisted
of money-market investment funds.
The Company held the following investments, by security type, with the positive
intent and ability to hold to maturity as of February 28, 2010, and as such,
they are carried at amortized cost. For the three and nine month periods ended
February 28, 2010, there have been no other-than-temporary impairments.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S government agency $ 5,144,900 $ 116,131 $ 10,594 $ 5,250,437
mortgage-backed securities
=================== ==================== =================== ====================
The Company held the following investments, by security type, with the positive
intent and ability to hold to maturity as of May 31, 2009, and as such, they are
carried at amortized cost.
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S government agency $ 5,085,300 $ 79,739 $ 7,103 $ 5,157,936
mortgage-backed securities
=================== ==================== =================== ====================
Invested assets are exposed to various risks, such as interest rate, market and
credit risks. Due to the level of risk associated with certain of these invested
assets and the level of uncertainty related to changes in the value of these
assets, it is possible that changes in risks in the near term may significantly
affect the amounts reported in the Consolidated Condensed Balance Sheets and
Statements of Income.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The Company uses the following fair value hierarchy in
selecting inputs, with the highest priority given to Level 1, as these are the
most transparent or reliable:
O Level 1 - Quoted prices for identical instruments in active markets.
O Level 2 - Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations in which all significant
inputs are observable in active markets.
O Level 3 - Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
Fair market values are provided by the Company's independent investment
custodians that utilize third-party quotation services for the valuation of the
fixed-income investment securities and money-market funds held. The Company's
investment custodians are large money-center banks. The Company's equity
investments were valued using quoted market prices.
The following section describes the valuation methodologies used to measure
different financial instruments at fair value, including an indication of the
level in the fair value hierarchy in which the instrument is generally
classified.
FIXED INCOME SECURITIES
Securities valued using Level 1 inputs include highly liquid government bonds
for which quoted market prices are available. Securities using Level 2 inputs
are valued using pricing for similar securities, recently executed transactions,
cash flow models with yield curves and other pricing models utilizing observable
inputs. Most fixed income securities are valued using Level 2 inputs. Level 2
includes corporate bonds, municipal bonds, asset-backed securities and mortgage
pass-through securities.
EQUITY SECURITIES
Level 1 includes publicly traded securities valued using quoted market prices.
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
SHORT-TERM INVESTMENTS
The valuation of securities that are actively traded or have quoted prices are
classified as Level 1. These securities include money market funds and U.S.
Treasury bills. Level 2 includes commercial paper, for which all significant
inputs are observable.
Assets measured at fair value on a recurring basis are summarized below:
February 28, 2010
---------------------------------------------------------------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
----------------- ---------------- ----------------- ----------------
Assets:
Fixed income securities at fair value $ - $ 828,010 $ - $ 828,010
Short-term investments at fair value 552,172 - - 552,175
----------------- ---------------- ----------------- ----------------
Total Assets $ 552,175 $ 828,010 $ - $ 1,380,185
May 31, 2009
---------------------------------------------------- ----------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
----------------- ---------------- ----------------- ----------------
Assets:
Fixed income securities at fair value $ - $ 908,766 $ - $ 908,766
Equity securities at fair value 7,862 - - 7,862
Short-term investments at fair value 387,753 - - 387,753
----------------- ---------------- ----------------- ----------------
Total Assets $ 395,615 $ 908,766 $ - $ 1,304,381
The Company had no assets or liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) at either May 31, 2009 or
at February 28, 2010.
There were no gross realized gains and losses on held-to-maturity securities
sold or redeemed by the issuer, pursuant to call features, in the three and nine
month periods ended February 28, 2010. On November 25, 2009, the
available-for-sale equity investment was sold for $8,182 resulting in a loss of
$2,098 for the three month period ending November 30, 2009. In December 2009,
all state and municipal securities were sold for $404,958, resulting in a gain
of $42,926 and $40,828 for the three and nine month periods ending February 28,
2010, respectively. There were no other gross realized gains or losses on
available-for-sale securities for the three and nine month periods ending
February 28, 2010.
Gross realized gains and losses on available for sale securities for the three
and nine month periods ending February 28, 2009 amounted to $12,511. There were
no gross realized gains and losses on held-to-maturity securities, sold or
redeemed by the issuer, pursuant to call features, for the three and nine month
periods ending February 28, 2009.
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D - OTHER ASSETS
As of February 28, 2010 and May 31, 2009 such balances are comprised of the
following:
November 30, May 31,
2009 2009
-------------- --------------
Advance deposits for professional fees $ 1,311 $ 1,311
Mutual fund investment at market - 7,862
Prepaid expense and other deposits 31,961 34,344
-------------- --------------
Total $ 33,272 $ 43,517
============== ==============
NOTE E - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
The Company had the following unsecured notes payable to individuals and a
commercial bank as of February 28, 2010 and May 31, 2009 respectively:
February 28, May 31,
2010 2009
-------------- --------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00% $ 482,000 $ 380,000
Term note payable; interest rate fixed @ 10.00% 250,000 -
maturing May 31, 2010
Term note payable; interest rate fixed @ 10.00% 75,000 -
maturing May 26, 2010
Unsecured note(s) payable to individual(s) under
a bridge-financing arrangement described below 3,500,000 3,500,000
Unsecured short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12.00% 118,048 3,081
Unsecured term note payable to commercial
bank in the original amount of $250,000 and
payable in equal monthly payments of $5,738;
interest rate fixed @ 13.25% maturing
January 31, 2012 100,232 169,791
-------------- --------------
Notes payable $ 4,525,280 $ 4,052,872
============== ==============
In accordance with the terms of the first round bridge-financing of $2.5
million, on March 10, 2008, the holders of such notes were paid accrued
interest-to-date and issued 5.00% of the Company's common shares. Holders of the
F-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
second round of bridge-financing notes of $1.0 million received 2.00% of the
Company's common shares (see Note F). Upon retirement of the notes upon
consummation of a qualified equity offering, the Company shall issue to the
holders of the bridge financing notes additional Company common stock that, when
added to the stock initially issued to the holders of the notes, will equal the
noteholder's pro rata share of the applicable percentage of the outstanding
common stock of the Company as follows: If the qualified financing consists of
$50 million or more, the holders of such notes will receive 28% of the common
stock of the Company that would otherwise be retained by the holders of the
Company's common shares immediately prior to the financing; if the qualified
financing is for an amount less than $50 million, the percentage will be reduced
on a sliding scale to a fraction of 28% of the amount retained by the holders of
the Company's common shares (where the numerator is the amount of financing and
the denominator is $50 million).
Beginning September 10, 2008, because a qualified financing had not been
completed, the Company became required under the terms of the bridge financing
to issue 2.80% of the Company's outstanding common shares and shall issue 2.80%
of the Company's outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. On September 10, 2008, March 10, 2009 and
September 10, 2009, 4,870,449, 5,010,640, and 5,354,642 common shares,
respectively, were issued to those noteholders.
Pursuant to the terms of the Promissory Notes, the first two of 20 equal
quarterly installments of principal and interest payable thereunder were to have
been paid on December 10, 2008 and March 10, 2009 (the "INITIAL AMORTIZATION
PAYMENTS"). As the result of upheavals and dislocations in the capital markets,
the Company was unable to either refinance the indebtedness evidenced by the
Promissory Notes or make the Initial Amortization Payments to the Holders when
due; and an Event of Default (as defined in the Promissory Notes) occurred under
the Promissory Notes as a result of the Company's failure to pay the Initial
Amortization Payments within 14 days after same became due and payable.
On June 5, 2009 the Company entered into an agreement with the bridge lenders to
forbear from exercising their rights and remedies arising from the Acknowledged
Events of Default. As consideration for the forbearance, the Company issued
5,171,993 shares of Common stock, and pledged the stock of the Company's
subsidiary, Crystal Mountain Water (CMW), as security for repayment of the
loans. The Holders agreed that the Company may satisfy its obligation to make
the Initial Amortization Payments by making additional quarterly payments of
$67,185 each, commencing September 10, 2009, (See Note K) , and continuing on
the payment dates prescribed by the Amortization Schedule for the Promissory
Notes (collectively, the "PAYMENTS"), it being understood that the Payments
shall result in the payment of the principal of and interest on the unpaid
portion of the Initial Amortization Payments at the rate of 17% per annum from
and after the originally scheduled payment dates. The Payments shall be
allocated among and paid to the Holders in accordance with the balances due to
each. The Company may at any time prepay the balance remaining due with respect
to the principal of the Initial Amortization Payments by paying the amount
thereof, together with interest accrued through the date of such prepayment.
During the three and nine months ended February 28, 2010 and the year ended May
31, 2009, a company owned by a board member provided consulting services. This
company provided services totaling $15,525 and $46,575 in the three and nine
month periods ended February 28, 2010 and $15,525 and $46,575 in the three and
nine month periods ended February 28, 2009. Amounts owed to this company are
treated as related party payables in the amounts $111,584 and $75,009 at
February 28, 2010 and May 31, 2009.
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Advances have been made to the Company by its principal shareholder and chief
executive officer to fund ongoing operations under a pre-approved unsecured
financing arrangement bearing interest at the rate of 12.00%. The following
table summarizes the activity under such arrangement for the three and nine
month periods ended February 28, 2010.
Three month Nine month
period ended period ended
February, February,
2010 2010
----------------- ------------------
Balance owed, beginning of period $ 3,129 $ 3,081
Proceeds from borrowings 268,773 525,305
Repayments (153,854) (410,338)
----------------- ------------------
Balance owed, end of period $ 118,048 $ 118,048
================= ==================
Scheduled maturities and principal payments for each of the next five years
ending February 28 are as follows:
2011 (including demand notes) $ 4,481,793
2012 43,487
-----------------
$ 4,525,280
=================
NOTE F-STOCKHOLDERS EQUITY
In the three month period ended August 31, 2009, the Company issued 5,171,993
shares of the Company's common stock in connection with the June 5th agreement
with the Holders of the bridge financing arrangement. The shares were valued at
approximately $.0365 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction and
totaled $188,778.
In the three month period ending August 31, 2009, warrants totaling 1,795,273
were exercised for cash and issuance of 1,795,273 common shares of the Company.
In the three month period ending August 31, 2009, the Company issued 500,000
shares of the Company's common stock in connection with short term and demand
borrowing arrangements totaling $250,000. The shares were valued at
approximately $.03815 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction and
totaled $19,075.
In the three month period ending November 30, 2009, warrants totaling 1,168,395
were exercised for cash and issuance of 1,168,395 common shares of the Company.
In the three month period ended November 30, 2009, the Company issued 5,354,624
shares of the Company's common stock (See Note E) in connection with the bridge
financing arrangement. The shares were valued at approximately $.0146 per share
based on the average quoted closing price of the Company's stock for the 20-day
period proceeding the date of the transaction and totaled $78,177. Such costs
have been expensed over the six month period prior to the issuance of the common
shares.
F-20
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
In the three month period ending February 28, 2010, the Company issued 250,000
shares of the Company's common stock in connection with an existing short term
borrowing arrangements totaling $250,000. The shares were valued at
approximately $.01101 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction and
totaled $2,753.
As a means of alleviating obligations associated with the Company's Series B
Preferred Stock, which by its terms matures at the end of 2010, management
proposed a recapitalization to assist in stabilizing the financial position of
the Company. The Company's Certificate of Incorporation provides for two classes
of capital stock, known as common stock, $0.0001 par value per share (the
"COMMON STOCK"), and preferred stock, $0.0001 par value per share (the
"PREFERRED STOCK"). The Company's Board is authorized by the Certificate of
Incorporation to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in such series and to fix the designations, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. Board deemed it advisable to designate a Series C Preferred Stock and
fixed and determined the preferences, rights, qualifications, limitations and
restrictions relating to the Series C Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock are
designated "Series C Preferred Stock" (referred to herein as the
"SERIES C STOCK"). The date on which the first share of Series C Stock
is issued shall hereinafter be referred to as the "ORIGINAL ISSUE
DATE".
2. Authorized Number. The number of shares constituting the Series C
Stock are 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon
Liquidation senior and prior to the Common Stock and all other equity
securities to which the Series C ranks prior, with respect to
dividends and upon Liquidation (collectively, "JUNIOR SECURITIES"),
(b) pari passu with the Corporation's Series A Preferred Stock, par
value $0.0001 per share (the "SERIES A STOCK"), the Corporation's
Series B Stock, and any other series of Preferred Stock subsequently
established by the Board with equal ranking (any such other series of
Preferred Stock, together with the Series C Stock, the Series B Stock
and Series A Stock are collectively referred to as the "EQUAL RANKING
PREFERRED") and (c) junior to any other series of Preferred Stock
subsequently established by the Board with senior ranking.
4. Dividends.
(a) Dividend Accrual and Payment. The holders of the Series C Stock
shall be entitled to receive, in preference to the holders of
Junior Securities, dividends ("DIVIDENDS") on each outstanding
share of Series C Stock at the rate of 8% per annum of the sum of
(i) the Series C Face Amount plus (ii) an amount equal to any
accrued, but unpaid, dividends on such Series C Stock, including
for this purpose the exchanged Series B Amount outstanding with
respect to such Series C Stock. For purposes hereof, the "SERIES
B AMOUNT" means an amount equal to the dividend that would have
accrued on such Series C Stock held by such holder from and after
the Series B Original Issue Date applicable to such share of
Series C Stock, through the Original Issue Date as if such Series
C Stock had been issued on such Series B Original Issue Date,
less all amounts thereof distributed by the Corporation with
respect to such Series C Stock. Dividends shall be payable
quarterly in arrears on each January 1, April 1, July 1 and
October 1 following the Original Issue Date, or, if any such date
is a Saturday, Sunday or legal holiday, then on the next day
which is not a Saturday, Sunday or legal holiday (each a
"DIVIDEND PAYMENT DATE"), as declared by the Board and, if not
paid on the Dividend Payment Date, shall accrue. Amounts
available for payment of Dividends (including for this purpose
the Series B Amount) shall be allocated and paid with respect to
F-21
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
the shares of Series C Preferred and any other Equal Ranking
Preferred, FIRST, among the shares of Equal Ranking Preferred pro
rata in accordance with the amounts of dividends accruing with
respect to such shares at the current Dividend Payment Date, and,
THEN, any additional amounts available for distribution in
accordance with the accrued, but unpaid, dividends (and the
Series B Amount then outstanding) at each prior Dividend Payment
Date, in reverse chronological order, with respect to all shares
of the Equal Ranking Preferred then outstanding in accordance
with amounts accrued, but unpaid. For purposes hereof, the term
"SERIES B ORIGINAL ISSUE DATE" shall mean, with respect to any
share of Series C Stock issued by the Corporation in exchange for
a share of Series B Stock, the date on which the Corporation
originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a
combination of Series C Shares and Common Stock. For each Series B Share, the
participating holder received (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock (for no additional consideration).
The Series B Shares have an 8.0% per annum compounding dividend preference, are
convertible into Common Shares of JFG at the option of the holders at a
conversion price of $1.00 per Share (as adjusted for dilution) and, to the
extent not converted, must be redeemed by the Corporation at any time after
December 31, 2010 at the option of the holder. Any such redemption is subject to
legal constraints, such as the availability of capital or surplus out of which
to pay the redemption, and to a determination by our Board of Directors that the
redemption will not impair the operations of First Surety.
The Series C Shares issued in the Recapitalization have the same 8.0% per annum
compounding dividend preference and carry over from the Series B Shares the same
accrued but unpaid dividends. The accrued dividends associated with the Series C
exchange amounted to $2,295,624 and were separated from the Series B accrued
dividends on the face of the balance sheet. The Series C Shares are pari passu
with the Corporation's Series A Preferred Stock and Series B Shares (to the
extent any remain outstanding following the Recapitalization) and no dividends
or other distributions will be paid upon Common Shares or any other class of
Shares that is junior in priority to the Series C Preferred while dividends are
in arrears. In addition, the Series C Shares are convertible into Common Shares
of JFG at the option of the holders at a conversion price of $0.10 per Share.
The Series C Shares may be redeemed by the Corporation, at its option, when it
is in a financial position to do so.
For the period ending November 30, 2009, 6,804.936 shares of Series B Stock were
surrendered and exchanged for 6,804.936 shares of Series C Stock. This exchange
amounted to $6,269,051 of carrying value of Series B stock being exchanged for
Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the
Series C Stock holders at the rate of 2,000 Common shares for each exchanged
Series B Stock, with the related cost associated with the Common issuance
offsetting the Series C carrying value by $265,120. The shares were valued at
approximately $.01948 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction.
Series C stock may be redeemed by the Company but does not have a fixed maturity
date and, thus, is classified as permanent equity. Holders of over 70% of the
outstanding Series B Preferred Shares elected to participate in the
F-22
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
recapitalization. Those Series B Preferred Shareholders that chose not to
convert at this time are listed in the Liabilities section of the Balance Sheet,
and therefore the accretion and dividends associated with the Series B stock
after November 30, 2009 are deductions from net income. Accretion and dividends
on Series B mandatorily redeemable preferred stock deducted from net income
amounted to $43,084 and $72,866 for the three-month period ended February 28,
2010. The remaining Series B shares are continuing to be accreted from carrying
value to the face amount for the 5 year period from the date of issuance. Series
C stock has no accretion. There were no shares of Series B Stock surrendered or
exchanged in the 3 month period ending February 28, 2010.
At February 28, 2010, the Company had issued and outstanding warrants to
purchase 10,107,896 shares of common stock.
On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares
of common stock in connection with the Series A and B Preferred Stock private
placements of which 10,107,896 remain outstanding. The exercise price of the
warrants is one-tenth of one cent ($.001) per share. The warrants expire on
December 30, 2010. The warrants were valued using the Black-Scholes pricing
model. The warrants issued in connection with the Series A Preferred Stock were
valued at $.08 per share or $83,043. The warrants issued in connection with the
Series B Preferred Stock were valued at $.01 per share or $449,972.
NOTE G - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
On February 8, 2008, the Company entered into an agreement (the "Merger
Agreement") with Reclamation Surety Holding Company, Inc. ("RSH") to acquire by
merger (the "Merger") all of the business and assets of RSH, including the stock
of RSH's subsidiaries, Cumberland Surety, Inc. ("Cumberland") and NewBridge
Services, Inc. ("NewBridge") for a purchase price of $3,400,000, less certain
indebtedness of RSH (the "Merger Consideration"). Upon execution of the Merger
Agreement, the Company made a nonrefundable deposit in the amount of $50,000 for
the benefit of the RSH shareholders, such amount to be applied towards the
Merger Consideration at closing. On June 24, 2008, the Company amended its
Merger Agreement with Reclamation Surety Holding Company, Inc. releasing the
deposit to the sellers and extending the date for closing until October 31, 2008
after which time either party may terminate the Merger Agreement. Discussions
continue with RSH, and the Merger Agreement has not been terminated. Among other
conditions, closing was subject to the closing by the Company of an equity
financing.
On August 20, 2008, the Company entered into a definitive Stock Purchase
Agreement (the "Agreement") with National Indemnity Company ("NICO"), pursuant
to which the Company agreed to acquire 100% of the outstanding stock of Unione
Italiana Reinsurance Company of America ("Unione"). Such agreement was amended
on November 13, 2008 to clarify certain definitions and calculation of the
purchase price, in addition to extending until December 31, 2008 the date by
which the Company must satisfy the financing condition prior to closing and
which after time either party may terminate the Agreement. The Company was
unable to provide certification to NICO that the Company had cash available or
had existing or committed borrowing facilities ("Financing Certificate") which
together were sufficient to enable it to consummate the acquisition of Unione by
December 31, 2008. Under the terms of the Agreement, as amended, NICO had the
right to terminate the Agreement at its discretion and retain the good faith
deposit of $75,000. By letter dated January 15, 2010, NICO exercised this right
of termination.
During fiscal year 2009 and 2010, the Company sold shares of Series A Preferred
Stock in conjunction with the sale of surety bonds. Pursuant to the terms of the
Consent Order dated December 23, 2005 (Consent Order) and the Amended Consent
Order dated June 8, 2007 (Amended Consent Order), each with the West Virginia
F-23
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Insurance Commissioner (Commissioner) , all money received from the sale of
Series A Preferred Stock shall be placed into the surplus accounts of FSC. The
monies received from transactions totaling $186,000 were not immediately placed
with FSC but were retained by the Company. This action is viewed by the
Commissioner to be a violation of the Consent Order and Amended Consent Order.
Under the terms of the Amended Consent Order any knowing or intentional
violation of the conditions of the Order shall constitute grounds for the
Commissioner to issue a Confidential Order immediately suspending FSC from doing
business in West Virginia. FSC advised the Commissioner of this violation and no
disciplinary action has been taken by the Commissioner although it is still
under review. The Company has submitted a plan to correct this violation as
expeditiously as possible, and the Commissioner has agreed with this plan.
During the nine month period ended February 28, 2010, all unremitted funds have
been contributed to FSC by reducing the amounts due to affiliates from FSC.
With respect to the failure by the Company to contribute the proceeds of Series
A stock sales to First Surety Corporation in a timely manner, the West Virginia
Insurance Commission has proposed and the Company has accepted a penalty
assessment of $10,000 payable to the West Virginia Insurance Commission and
payment was made on March 12, 2010. Interest of $11,370 payable to First Surety
Corporation was remitted as of February 28, 2010 and no further obligation
exists in relation to this matter.
In the three-month period ending February 28, 2010, the Company, upon advice of
legal counsel, removed certain dormant accounts payable in the aggregate amount
of $200,239, based upon the conclusion that none of accounts represented an
obligation that is legally enforceable against the Company. Such removal was
recorded as a gain on debt extinguishment.
As of February 28, 2010, the Company had accrued and withheld approximately
$160,000 in Federal payroll taxes and approximately $23,000 in West Virginia
payroll withholdings. These amounts have not been remitted and are still payable
at April 19, 2010, as well as penalties and interest of approximately $20,000.
These amounts are reflected in the accompanying financial statements as accrued
expenses, and management intends to pay this obligation as soon as possible.
NOTE H - SEGMENT REPORTING
The Company has two reportable segments, investment advisory services and surety
insurance products and services. The following table presents revenue and other
financial information by industry segment.
F-24
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTH PERIOD ENDED
---------------------------------------------
INDUSTRY SEGMENT FEBRUARY 28, 2010 FEBRUARY 28, 2009
---------------- --------------------- -----------------------
REVENUES:
Investment advisory $ 69,245 $ 59,078
Surety insurance 276,393 256,016
Corporate - -
--------------------- -----------------------
Total revenues $ 345,638 $ 315,094
===================== =======================
NET INCOME (LOSS):
Investment advisory $ 115,007 $ (9,134)
Surety insurance 224,616 91,928
Corporate (485,488) (293,366)
--------------------- -----------------------
Total net income (loss) $ (145,865) $ (210,572)
===================== =======================
NINE MONTH PERIOD ENDED
---------------------------------------------
INDUSTRY SEGMENT FEBRUARY 28, 2010 FEBRUARY 28, 2009
---------------- --------------------- -----------------------
REVENUES:
Investment advisory $ 204,203 $ 176,640
Surety insurance 842,745 716,896
Corporate - 851
--------------------- -----------------------
Total revenues $ 1,046,948 $ 894,387
===================== =======================
NET INCOME (LOSS):
Investment advisory $ 81,586 $ (108,960)
Surety insurance 428,390 177,645
Corporate (1,500,166) (1,125,518)
--------------------- -----------------------
Total net income (loss) $ (990,190) $ (1,056,833)
===================== =======================
F-25
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE I - REINSURANCE
On March 23, 2009, the Company announced that FSC has entered into a reinsurance
agreement with Lloyd's of London ("Reinsurer") for its coal reclamation surety
bonding programs that took effect April 1, 2009. The reinsurance agreement is an
excess of loss contract which protects the Company against losses up to certain
limits over stipulated amounts, has an initial term of 39 months and can be
terminated by either party by written notice of at least 90 days prior to any
April 1. The contract calls for a minimum premium to be paid to the Reinsurer of
$490,000 in the first 15 months. At February 28, 2010, the Company had prepaid
reinsurance premiums of $157,706 and ceded reinsurance deposited with Reinsurers
of $120,289. Additional premiums of approximately $457,000 will be needed in
order to generate the approximately $160,000 in ceded premium needed to meet the
minimum required to be paid to the Reinsurer. This can be accomplished by
writing surety bonds of approximately $16,000,000 before July 1, 2010.
Management feels that the minimum premiums will be written and the ceded
premiums collected will exceed the minimum required by the Reinsurer.
The Company limits the maximum net loss that can arise from large risks by
reinsuring (ceding) certain levels of such risk with reinsurers. The Company's
reinsurer is comprised of five syndicates. Ceded reinsurance is treated as the
risk and liability of the assuming companies. The Company cedes insurance to
other companies and these reinsurance contracts do not relieve the Company from
its obligations to policyholders.
The effects of reinsurance on premium written and earned for the three month
period ended February 28, 2010 are as follows;
3 months ended February 3 months ended February
28, 2010 - 28, 2010 -
Written Earned
-------------------------- --------------------------
Direct $ 311,773 $ 253,700
-------------------------- --------------------------
Ceded $ 108,752 $ 72,667
-------------------------- --------------------------
Net $ 203,021 $ 181,033
The effects of reinsurance on premium written and earned for the nine month
period ended February 28, 2010 are as follows;
9 months ended February 9 months ended February
28, 2010 - 28, 2010 -
Written Earned
-------------------------- --------------------------
Direct $ 691,676 $ 759,127
-------------------------- --------------------------
Ceded $ 237,538 $ 166,946
-------------------------- --------------------------
Net $ 454,138 $ 592,181
There was no reinsurance effect on premium written for the three month and nine
month periods ended February 28, 2009 due to the reinsurance agreement not being
in effect until April 1, 2009. There were no ceded losses for the three month
and nine month periods ended February 28, 2010 and 2009.
F-26
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J-STOCK-BASED COMPENSATION
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 of incentive stock options to acquire common shares at an exercise
price of four cents ($.04) per share, of which 4,700,000 shares vested
immediately and the remaining 5,300,000 options vesting over the next three
years ending in June 2011. The term of the options is five years and expires in
June 2014.
NOTE K - SUBSEQUENT EVENTS
Subsequent to February 28, 2010, the Company obtained borrowings of $150,000
from individuals to fund ongoing operations and made no repayments. Such
borrowings were obtained under demand or 30-day notes bearing interest at the
rate of 10.00% and included the issuance of 300,000 shares of common stock of
the Company as additional consideration. Additionally, the Company obtained
borrowings of $78,275 from its principal shareholder and chief executive officer
under its pre-approved financing arrangement bearing interest at the rate of
12.00% and made repayments totaling $123,250.
On September 10, 2009, December 10, 2009, and March 10, 2010, the Company became
obligated to make principal and interest payments to the holders of the
bridge-financing notes of approximately $291,700 each. The Company is currently
in default with respect to each payment. Under the terms of such
bridge-financing agreements, upon the occurrence of any Event of Default, the
holders of said bridge-financing notes have the right to declare, upon written
notice to the Company, that the entire principal amount and interest be due and
payable immediately.
On March 10, 2010, in accordance with the bridge financing arrangement, the
Company issued 6,005,925 shares of common stock to the holders of such notes.
On March 31, 2010, the Company elected to continue to defer payment of dividends
on its Series A Preferred stock, Series B Preferred stock, and Series C
Preferred stock with such accrued and unpaid quarterly dividends amounting to
29,041, $71,540 and $172,648, respectively. As of March 31, 2010, the
accumulated accrued and unpaid dividend on the Series A Preferred stock, Series
B Preferred stock, and Series C Preferred stock amounted to $340,261, $1,107,718
and $2,643,993 respectively.
F-27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
During fiscal 2009 and the nine-month period ended February 28, 2010, the
Company has focused its primary efforts on the development and marketing of its
surety business in West Virginia and Ohio, arranging for reinsurance and other
potential strategic relationships that will accelerate the progression of the
Company's business plan, and raising additional capital to increase the capital
base of its insurance subsidiary, First Surety Corporation ("FSC"), to
facilitate entry into other state markets.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED FEBRUARY 28, 2010
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) for the three-month period ended
February 28, 2010 of $355,613 as compared with a loss of $618,951 for the
corresponding period ended February 28, 2009.
REVENUES
Revenues from operations for the three-month period ended February 28, 2010 were
$345,638 as compared with $314,839 for the corresponding period ended February
28, 2009. The overall increase in revenues is attributable to the continued
growth of the surety business of FSC, as well as the sale of securities for a
gain.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $62,596 for the three-month
period ended February 28, 2010 as compared with $56,101 for the corresponding
period ended February 28, 2009. As investment advisory fees are based on the
market value of assets under management, some fluctuation will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively constant from quarter to quarter with any large fluctuations being
attributable to the growth or decline of assets under management. The increase
in revenues is attributable to the growth in individually managed accounts as
summarized below:
THREE-MONTH PERIOD ENDED
FEBRUARY 28,
2010 2009
-------------- ---------------
Individually managed accounts $ 62,582 $ 50,372
Mutual fund 14 5,729
-------------- ---------------
Total $ 62,596 $ 56,101
============== ===============
THE JACOBS & COMPANY MUTUAL FUND WAS CLOSED AND LIQUIDATED EFFECTIVE NOVEMBER
30, 2009. SEE "EXPENSES, MUTUAL FUND COSTS," BELOW.
-3-
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $276,393 for the three-month
period ended February 28, 2010 as compared with $243,505 for the corresponding
period ended February 28, 2009. Revenues attributable to premium earned, net
investment income, net realized investment gains, and commissions earned are as
follows:
THREE-MONTH PERIOD ENDED
FEBRUARY 28,
2010 2009
-------------- ---------------
Premium earned $ 181,034 $ 166,422
Net investment income 58,435 76,608
Net realized investment gains 42,926 -
Commissions earned (6,002) 475
-------------- --------------
Total $ 276,393 $ 243,505
============== ==============
Revenues for this segment of the business are somewhat more seasonable from
quarter-to-quarter as commission revenue is dependent on the timing of issuance
or renewal of bonds placed by the Company, whereas premium revenue is recognized
ratably over the term of the policy period and thus is more stable from period
to period. Fluctuations in premium revenue for comparable periods largely
reflect the overall growth or loss of business. The increase in premium revenue
for the three-month period ended February 28, 2010 in comparison to the
corresponding period from the prior year is a result of the addition of new
clients to FSC's surety business and increased business from existing clients.
Investment income should remain relatively consistent, but can fluctuate based
on interest rates and market conditions as well as the average assets held for
investment. The decrease in corresponding periods reflects growth in average
assets held for investment in FSC's investment portfolio from approximately
$6.061 million for the three-month period ended February 28, 2009 to
approximately $6.61 million for the three-month period ended February 28, 2010,
offset by a decrease in investment yield from approximately 5.16% for the
three-month period ended February 28, 2009 to approximately 3.95% for the
three-month period ended February 28, 2010. Due to releases on coal reclamation
bonds written and timing difference in the recording of these transactions,
commissions earned resulted in a negative $6,002 for the quarter ended February
28, 2010.
In the three-month period ending February 28, 2010, the Company sold certain
available for sale zero-coupon bond municipal securities for $404,958, resulting
in a realized gain of $42,926.
GAIN FROM EXTINGUISHMENT OF DEBT
In the three-month period ending February 28, 2010, the Company, upon advice of
legal counsel, removed certain dormant accounts payable in the aggregate amount
of $200,239, based upon the conclusion that none of accounts represented an
obligation that is legally enforceable against the Company. Such removal was
recorded as a gain on debt extinguishment.
-4-
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of February 28, 2010.
However, "incurred but not reported" (IBNR) policy losses for the three-month
period ended February 28, 2010 and 2009 amounted to $41,382 and $48,013
respectively. Such amounts represent the provision for loss and loss adjustment
expense attributable to surety bonds issued by FSC. Such estimates are based on
industry averages adjusted for factors that are unique to the FSC's underwriting
approach and are constantly reviewed for adequacy based on current market
conditions and other factors unique to FSC's business. For each of these
periods, IBNR policy losses were approximately 23% and 29% of earned premium,
respectively. The decrease in policy losses and policy losses as a percentage of
earned premiums are due to the reserve rate lowering on partially and fully
collateralized bonds written after May 2009. These loss ratios have been
established with the assistance of consulting actuaries and are continually
reviewed and updated based on both industry and Company historical experience.
POLICY ACQUISITION COSTS-
Insurance policy acquisition costs of $60,721 and $35,934 for the three-month
periods ended February 28, 2010 and 2009, respectively, represent charges to
operations for policy acquisition expense and premium tax attributable to surety
polices issued by FSC and are recognized ratably over the period in which
premiums are earned. Such cost as a percentage of earned premium was
approximately 33% and 22% for the periods ended February 28, 2010 and 2009
respectively. This percentage increased due to a higher expense percentage on
agent commissions for new premium written, which increased for the quarter,
versus renewal premiums.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended February
28, 2010 and 2009 were $289,068 and $310,378 respectively, representing a
decrease of $21,310, and were comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 155,015 $ 159,804 $ (4,789)
General office expense 28,823 22,298 6,525
Legal and other professional fees and costs 34,334 46,981 (12,647)
Audit, accounting and related services 33,237 33,349 (112)
Travel, meals and entertainment 8,331 10,489 (2,158)
Other general and administrative 29,328 37,457 (8,129)
------------------ ------------------ -------------------
Total general and administrative $ 289,068 $ 310,378 $ (21,310)
================== ================== ===================
-5-
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $4,800 and are comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 128,021 $ 147,667 $ $ (19,646)
Commissions 16,995 16,717 278
Stock option expense 39,906 9,847 30,059
Fringe benefits 12,379 13,816 (1,437)
Key-man insurance 12,587 12,224 363
Deferred payroll costs (54,873) (40,467) (14,406)
------------------ ------------------ -------------------
Total salaries and related costs $ 155,015 $ 159,804 $ (4,789)
================== ================== ===================
The decrease in salaries and taxes for the three-month period ended February 28,
2010 as compared to the same period of the previous year was the result of the
decrease of two staff positions. The increase in stock option expense is
attributable to the award of stock options on June 30, 2009.
Legal and other professional fees and costs were comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Coal reclamation consulting $ 4,500 $ - $ 4,500
General corporate services 27,321 20,710 6,611
Expansion of surety license to other states - 2,000 (2,000)
Acquisition and financing related costs 2,513 24,271 (21,758)
------------------ ------------------ -------------------
Total legal and other professional fees $ 34,334 $ 46,981 $ (12,647)
================== ================== ===================
The increase in general corporate services results primarily from increased
review and assistance provided in connection with the filing of the Company's
annual report with the Securities and Exchange Commission. In the three-month
period ended February 28, 2009, the Company incurred expense of $2,000 relating
to expansion of FSC's surety license to the State of Ohio and other license
expansion related services. Legal and other professional services and costs
related to the Company's pending acquisitions and on-going efforts to obtain
financing necessary to expand the Company's business and penetrate new markets
amounted to $2,513 and $24,271 for the three-month periods ended February 28,
2010 and 2009, respectively. This decrease correlates to a decrease in this area
of professional service required.
-6-
The decrease in travel, meals and entertainment expense for the three-month
period ended February 28, 2010 as compared to the corresponding 2009 period
related primarily to additional efforts made by management to reduce expense.
The increase in general office expense for the three-month period ended February
28, 2010 as compared to the corresponding 2009 period related primarily to an
increase in taxes recorded in December 2009.
Other general and administrative expense decreased approximately $8,129 for the
three-month period ended February 28, 2010 as compared to the corresponding 2009
period. This decrease in general and administrative expense is result
management's efforts to curtail its operating costs, as well as the reduction of
certain accrued consulting expenses.
MUTUAL FUND COSTS
J&C was the investment advisor to the Jacobs & Company Mutual Fund (the "Fund")
until its liquidation and distribution to its shareholders on December 1, 2009.
While the Fund was responsible for its own operating expenses, J&C, as the
investment advisor, had agreed to limit the Fund's aggregate annual operating
expenses to 2% of the average net assets. The cumulative reimbursement due the
Fund by J&C as of February 28, 2010 was $54,866.
J&C had no revenue and minimal expenses attributable to the Fund for the period
ending February 28, 2010; it had absorbed $11,088 of the Fund's operating
expenses during the corresponding period from the previous year.
INTEREST EXPENSE
Interest expense for the three-month period ended February 28, 2010 was $181,995
as compared with $117,022 for the corresponding period ended February 28, 2009.
Components of interest expense are comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Interest expense on bridge-financing $ 129,452 $ 90,166 $ 39,286
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 25,354 10,808 14,546
Interest expense on demand and term notes 25,833 15,600 10,233
Other finance charges 1,356 448 908
------------------ ------------------ -------------------
Total interest expense $ 181,995 $ 117,022 $ 64,973
================== ================== ===================
The increase in interest expense on bridge financing is due to an increase in
the interest rate on the bridge loans from 10% to 17% as of September 10, 2009.
Interest expense of common shares issued in connection with financing
arrangements increased due to the rising number of shares to accrue for bridge
loan holders and more stock issued in current quarter than in the corresponding
-7-
previous year. Interest expense on demand and term notes increased due to
increased borrowings.
Accretion and dividends on Series B mandatorily redeemable preferred stock
amounted to $43,084 and $72,866 for the quarter ended February 28, 2010. This
class of stock is treated as a liability as of November 30, 2009 when the
majority was exchanged for Series C equity stock, and therefore the accretion
and dividends associated with the Series B after that date are deductions from
net income.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended February 28, 2010
and 2009 are as follows:
Three-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Accretion of discount $ 4,500 $ 143,179 $ (138,679)
Accrued dividends on mandatorily redeemable
preferred stock 29,528 265,200 (235,672)
Accrued dividends on equity stock 175,720 - 175,720
------------------ ------------------ -------------------
Total accretion and dividends $ 209,748 $ 408,379 $ (198,631)
================== ================== ===================
As noted above, the Series B class of stock is treated as a liability as of
November 30, 2009 when the majority was exchanged for Series C equity stock, and
therefore the accretion and dividends associated with the Series B after that
date are deductions from net income and not included in the table above. The
decrease in the accretion of discount results from this exclusion of Series B
for the quarter as well as the application of the interest or constant yield
method to the initial discount recorded with respect to the mandatorily
redeemable preferred stock over a period of five years from the date of issuance
of the stock. Series C equity stock accrues dividends at the same rate as the
Series B it was exchanged for, however it is separated in the table above due to
Series C not being mandatorily redeemable.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED FEBRUARY 28, 2010
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) for the nine-month period ended
February 28, 2010 of $2,012,490 as compared with a loss of $2,254,788 for the
corresponding period ended February 28, 2009.
-8-
REVENUES
Revenues from operations for the nine-month period ended February 28, 2010 were
$1,046,948 as compared with $893,280 for the corresponding period ended February
28, 2009. The overall increase in revenues is attributable to the continued
growth of the surety business of FSC.
INVESTMENT ADVISORY REVENUE
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $193,885 for the nine-month
period ended February 28, 2010 as compared with $173,662 for the corresponding
period ended February 28, 2009. As investment advisory fees are based on the
market value of assets under management, some fluctuation will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively constant from quarter to quarter with any large fluctuations being
attributable to the growth or loss of assets under management. The increase in
revenues is attributable to the growth in individually managed accounts as
summarized below:
Nine-month Period Ended
February 28,
2010 2009
---------------- -----------------
Individually managed accounts $ 182,100 $ 154,912
Mutual fund 11,785 18,750
---------------- -----------------
Total $ 193,885 $ 173,662
================ =================
INSURANCE AND INVESTMENT REVENUE
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $842,745 for the nine-month
period ended February 28, 2010 as compared with $704,384 for the corresponding
period ended February 28, 2009. Revenues attributable to premium earned, net
investment income, net realized investment gains, and commissions earned are as
follows:
Nine-month Period Ended
February 28,
2010 2009
---------------- ----------------
Premium earned $ 592,181 $ 474,183
Net investment income 201,938 218,451
Net realized investment gain 42,926 -
Commissions earned 5,700 11,750
----------------- ----------------
Total $ 842,745 $ 704,384
================= ================
Revenues for this segment of the business are expected to be somewhat more
"seasonable" from quarter-to-quarter as commission revenue is dependent on the
timing of issuance or renewal of bonds placed by the Company, whereas premium
revenue is recognized ratably over the term of the policy period and thus is
more stable from period to period. Fluctuations in premium revenue for
comparable periods largely reflect the overall growth or loss of business. The
increase in premium revenue for the nine-month period ended February 28, 2010 in
-9-
comparison to the corresponding period from the prior year is a result of the
addition of new clients to FSC's surety business and increased business from
existing clients. Investment income should remain relatively consistent, but can
fluctuate based on interest rates and market conditions. The decrease in
corresponding periods reflects growth in average assets held for investment in
FSC's investment portfolio from approximately $5.885 million for the nine-month
period ended February 28, 2009 to approximately $ 6.500 million for the
nine-month period ended February 28, 2010, offset by a decrease in investment
yield from approximately 5.01% for the nine-month period ended February 28, 2009
to approximately 4.48% for the nine-month period ended February 28, 2010.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of February 28, 2010.
However, "incurred but not reported" (IBNR) policy losses for the nine-month
period ended February 28, 2010 and 2009 amounted to $139,068 and $141,046
respectively. Such amounts represent the provision for loss and loss adjustment
expense attributable to surety bonds issued by FSC. Such estimates are based on
industry averages adjusted for factors that are unique to the FSC's underwriting
approach and are constantly reviewed for adequacy based on current market
conditions and other factors unique to FSC's business. IBNR policy losses were
approximately 23% and 30% of earned premium for the nine-month periods ending
February 28, 2010 and 2009, respectively. The decrease in policy losses and
policy losses as a percentage of earned premiums are due to the reserve rate
lowering on partially and fully collateralized bonds written after May 2009.
These loss ratios have been established with the assistance of consulting
actuaries and are continually reviewed and updated based on both industry and
Company historical experience.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $185,640 and $114,947 for the nine-month
periods ended February 28, 2010 and 2009, respectively, represent charges to
operations for policy acquisition expense and premium tax attributable to surety
polices issued by FSC and are recognized ratably over the period in which
premiums are earned. Such cost as a percentage of earned premium was
approximately 31% and 24% for the periods ended February 28, 2010 and 2009
respectively. This percentage increased due to a higher expense percentage on
agent commissions for new premium written, which increased for the nine-month
period, versus renewal premiums.
GENERAL AND ADMINISTRATIVE COSTS
General and administrative expenses for the nine-month periods ended February
28, 2010 and 2009 were $1,022,642 and $1,249,042 respectively, representing a
decrease of $266,400, and were comprised of the following:
-10-
Nine-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 572,888 $ 498,797 $ 74,091
General office expense 86,230 80,686 5,544
Legal and other professional fees and costs 137,445 413,806 (276,361)
Audit, accounting and related services 81,763 83,204 (1,441)
Travel, meals and entertainment 36,539 44,868 (8,329)
Other general and administrative 107,777 127,681 (19,904)
------------------ ------------------ -------------------
Total general and administrative $ 1,022,642 $ 1,249,042 $ (226,400)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
increased approximately $74,000 and are comprised of the following:
Nine-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 380,158 $ 443,828 $ (63,670)
Commissions 32,264 23,403 8,861
Stock option expense 212,901 36,829 176,072
Fringe benefits 39,765 47,936 (8,171)
Key-man life insurance 42,844 42,576 268
Deferred policy acquisition costs (135,044) (95,775) (39,269)
------------------ ------------------ -------------------
Total salaries and related costs $ 572,888 $ 498,797 $ 74,091
================== ================== ===================
Decreases in salaries and taxes paid for the nine-month period ended February
28, 2010 as compared to the same period the previous year was a result in the
decrease of two staff positions. The increase in commissions is attributable to
the increase in insurance business written in the nine-month period ended
February 28, 2010. The increase in stock option expense is attributable to the
award of stock options on June 30, 2009.
Legal and other professional fees and costs were comprised of the following:
Nine-month Period Ended
February 28,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Coal reclamation consulting $ 9,750 $ - $ 9,750
General corporate services 64,486 44,417 20,069
Expansion of surety license to other states 344 61,982 (61,638)
Acquisition and financing related costs 62,862 307,407 (244,542)
------------------ ------------------ -------------------
Total legal and other professional fees $ 137,445 $ 413,806 $ (276,361)
================== ================== ===================
-11-
The increase in general corporate services results primarily from increased
review and assistance provided in connection with the filing of the Company's
annual report with the Securities and Exchange Commission. In the nine-month
period ended February 28, 2009, the Company incurred expense of $61,982 relating
to expansion of FSC's surety license to the State of Ohio and other license
expansion related services. Legal and other professional services and costs
related to the Company's pending acquisitions and on-going efforts to obtain
financing necessary to expand the Company's business and penetrate new markets
amounted to $62,862 and $307,407 for the nine-month periods ended February 28,
2010 and 2009, respectively. This decrease correlates to a decrease in this area
of professional service required.
MUTUAL FUND COSTS
J&C was the investment advisor to the Jacobs & Company Mutual Fund (the "Fund").
The Fund was initially established by J&C to provide the ability to manage
smaller accounts in a more efficient and diversified manner and provide an
investment vehicle that would fit within the Company's broader business plan of
issuing smaller bonds under its collateralized surety programs. The delays
incurred by the Company in accomplishing a financing that would make possible
the full implementation of the Company's business plan coupled with the Fund's
lackluster performance during the interim period contributed to a gradual
decline in assets and the fixed cost maintenance of the Fund was a significant
expense to the Company. The Fund's independent Board of Trustees had determined
that unless the Fund experienced a significant growth in assets it would be
necessary to liquidate the Fund. Growth in assets was not accomplished. As a
result, the Board of Trustees directed the liquidation of the Fund's assets in
November and the distribution of the proceeds to the Fund's shareholders on
December 1, 2009.
While the Fund was responsible for its own operating expenses, J&C, as the
investment advisor, had agreed to limit the Fund's aggregate annual operating
expenses to 2% of the average net assets. Under this expense limitation
agreement, J&C absorbed $75,037 of the Fund's operating expenses during the
nine-month period ended February 28, 2010 as compared to $84,428 for
corresponding period from the previous year. Due to the Fund's liquidation,
there was no revenues and minimal expenses attributable to the fund subsequent
to December 1, 2009. The cumulative reimbursement due the Fund by J&C as of
February 28, 2010 was $54,866.
INTEREST EXPENSE
Interest expense for the nine-month period ended February 28, 2010 was $691,093
as compared with $352,031 for the corresponding period ended February 28, 2009.
Components of interest expense are comprised of the following:
-12-
Nine-month Period Ended
February 28,
-----------------------------------
2010 2009 Difference
----------------- ----------------- -----------------
Interest expense on bridge financing $ 355,663 $ 266,186 $ 89,477
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 263,546 42,637 220,909
Interest expense on demand and term notes 66,891 39,404 27,486
Other finance charges 4,994 3,804 1,190
----------------- ----------------- -----------------
Total interest expense $ 691,093 $ 352,031 $ 339,062
================= ================= =================
The increase in interest expense on bridge financing is due to an increase in
the interest rate on the bridge loans from 10% to 17% as of September 10, 2009.
The increase in the expense of common shares issued (or to be issued) for the
nine-month period ended February 28, 2010 as compared to the corresponding
period of the previous year was largely attributable to the issuance of common
stock on June 5, 2009 in relation to the agreement with the bridge loan holders.
Interest expense demand and term notes increased due to increased borrowings.
Accretion and dividends on Series B mandatorily redeemable preferred stock
deducted from net income amounted to $43,084 and $72,866 for the nine-month
period ended February 28, 2010. This class of stock is treated as a liability as
of November 30, 2009 when the majority was exchanged for Series C equity stock,
and therefore the accretion and dividends associated with the Series B after
that date are deductions from net income.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for nine-month periods ended February 28, 2010
and 2009 are as follows:
Nine-month Period Ended
February 28,
-----------------------------------
2010 2009 Difference
----------------- ----------------- -----------------
Accretion of discount $ 268,808 $ 422,095 $ (153,287)
Accrued dividends on mandatorily redeemable
preferred stock 577,772 775,860 (198,088)
Accrued dividends on equity stock 175,720 - 175,720
----------------- ----------------- -----------------
Total accretion and dividends $ 1,022,300 $ 1,197,955 $ (175,655)
================= ================= =================
As noted above, the Series B class of stock is treated as a liability as of
November 30, 2009 when the majority was exchanged for Series C equity stock, and
therefore the accretion and dividends associated with the Series B after that
date are deductions from net income and not included in the table above. The
decrease in the accretion of discount results from this exclusion of Series B
for the quarter as well as the application of the interest or constant yield
-13-
method to the initial discount recorded with respect to the mandatorily
redeemable preferred stock over a period of five years from the date of issuance
of the stock. Series C equity stock accrues dividends at the same rate as the
Series B it was exchanged for, however it is separated in the table above due to
Series C not being mandatorily redeemable.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the multi-line property and casualty
licenses of FSC in the states of West Virginia, Ohio and Indiana. Such licenses
have indefinite lives and are evaluated annually for recoverability and
impairment loss. Impairment loss, if any, is measured by estimating future cash
flows attributable to such assets based on forecasts and projections and
comparing such discounted cash flow amounts to the carrying value of the asset.
Should actual results differ from such forecasts and projections, such assets
may be subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of February 28, 2010.
FSC is licensed to write surety in West Virginia and Ohio and has focused its
efforts primarily on coal permit bonds. Reclamation of land that has been
disturbed by mining operations is highly regulated by federal and state
jurisdictions, and surety bonds posted to assure that reclamation is
accomplished are generally long-term in nature, with mining operations and
reclamation work conducted in unison as the property is mined. Additionally, no
two principals or properties are alike due to varied company structures and
unique geography and geology of each site.
In underwriting coal reclamation bonds, management obtains estimates, prepared
by independent outside professionals experienced in this field of work, of costs
to reclaim the relevant properties in accordance with the specifications of the
mining permit. The estimates are periodically updated and compared with the
value of marketable securities held in an account in which FSC has a collateral
security interest, significantly mitigating its exposure to loss. Should the
principal default in its obligation to reclaim the property as specified in the
mining permit, FSC can use the funds held in the collateral account either to
reclaim the property or as credit towards forfeiting the face amount of the
surety bond. Losses can occur if the costs of reclamation exceed the estimates
at the time the bond was underwritten, or upon subsequent re-evaluations, and
sufficient collateral is not obtained or if the collateral has experienced
significant deterioration in value.
-14-
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided in
conjunction with the periodic monitoring and inspections performed, the value of
the collateral accounts held for the benefit of FSC, along with industry
averages and historical experience. At the inception of surety operations,
management estimated such losses based on industry experience, adjusted for
factors that are unique to the Company's approach, and in consultation with
consulting actuaries experienced in the surety field.
ANALYSIS OF LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION AND
RECENT DEVELOPMENTS AND FUTURE DIRECTION OF COMPANY
The Company has experienced significant losses (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) of
approximately $3,058,000 and $3,333,000 for the fiscal years ended May 31, 2009
and 2008, respectively, and a loss of approximately $356,000 for the three-month
period ended February 28, 2010. The Company continues to face significant
working capital deficiencies and cash flow concerns. The Company netted
approximately $79,000 in cash flow from operating activities for the three-month
period ended February 28, 2010. Gain on debt extinguishment had no impact on
increased cash flow from operations. Despite increased revenue and the continued
decline of operating expenses, the Company still has not been able to pay
certain amounts due to professionals and others and continues to be unable to
pay its preferred stock dividend obligation, certain payroll taxes and
withholdings from 2009, and to cure its defaults in certain quarterly payments
due its bridge-financing lenders (see Note E in the accompanying unaudited
consolidated condensed financial statements). A substantial portion of the
Company's cash flow is generated by its insurance subsidiary and is subject to
certain withdrawal restrictions. While management expects revenue growth and
profitability and cash flow to increase significantly as its business plan is
fully implemented, it is anticipated that the Company will continue to be cash
constrained until FSC is able to develop a more substantial book of business.
The Company is restricted in its ability to withdraw monies from FSC without the
prior approval of the Insurance Commissioner. Of the Company's investments and
cash of $6,671,108 as of February 28, 2010, $6,615,056 is restricted to FSC.
Furthermore, additional capital raised pursuant to the sale of Series A
preferred stock of the Company in connection with the issuance of partially
collateralized surety bonds must be contributed by the Company into the surplus
accounts of FSC.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to allow FSC to expand its market share and
to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. In fiscal 2009, the Company was able
to increase the capital of FSC, reactivate FSC's insurance license in Ohio, and
obtain authority to issue surety bonds in that state. However, management has
found that entry into other states (as a surety) has been difficult without the
benefit of more substantial capital and reserves due to FSC's status as a recent
-15-
entry into this market and the financial condition of the Company. This is the
case notwithstanding the reinsurance agreement entered into by FSC with Lloyd's
of London and the resulting increase in bonding capacity. Management believes
that if FSC's capital and surplus reserves were significantly more substantial
and the financial condition of the Company was stabilized, entry into other
states would be less challenging. Accordingly, management continues to pursue
avenues that can provide additional capital to increase the capacity of its
insurance subsidiary and to fund continuing operations as the business becomes
fully developed. In addition, as an alternative means of addressing access to
markets, management is seeking to establish a relationship with any one of
several possible sureties licensed in states other than West Virginia and Ohio
that comprise significant markets for the bonding programs of FSC and could
issue surety bonds that are underwritten and reinsured by FSC. Under such a
"fronting" arrangement, the need for additional capital at the level of FSC to
facilitate entry to other state markets would become secondary, since the
payment of a fronting fee to the insurance company with active licenses would
provide access to the state market without formal entry.
As a means of alleviating obligations associated with the Company's Series B
Preferred Stock, which by its terms matures at the end of 2010, management
proposed a recapitalization to assist in stabilizing the financial position of
the Company. Holders of the Series B Preferred Stock were offered the
opportunity to exchange their Series B Shares for an equal number of shares of a
new series of JFG preferred stock designated as Series C Preferred Stock plus
2,000 shares of JFG Common Stock. Series C Preferred Stock is equal in priority
to the Series B Preferred Stock, is entitled to dividends at the same rate as
Series B Preferred Stock, is entitled to convert to common stock of the Company
at a conversion rate of $.10 per common share (in contrast to $1.00 per share
for Series B Preferred) and may be redeemed by the Company but does not have a
fixed maturity date and, thus, is classified as permanent equity. Holders of
over 70% of the outstanding Series B Preferred Shares elected to participate in
the recapitalization. Management believes the recapitalization will improve the
Company's prospects for engaging in a larger financing, will assist FSC as it
applies to enter other state markets, and will be an impetus to the growth of
the Company's business.
Through the sharing of resources (primarily personnel) to minimize operating
costs, the Company and its subsidiaries attempt to minimize operating expenses
and preserve resources. Although FSC is cash flow positive, the use of its
assets and profits have continued to be restricted to its stand-alone operation
by the regulatory authority. And while growth of the FSC business continues to
provide additional cash flow to the Company's other subsidiaries, J&C and
Triangle Surety, it is anticipated that working capital deficiencies will
continue and will need to be met either through the raising of additional
capital or borrowings. However, there can be no assurance that additional
capital (or debt financing) will be available when and to the extent required
or, if available, on terms acceptable to the Company. Accordingly, concerns as
to the Company's ability to continue as a going concern are substantial. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Until such time that the Company's operating costs can be serviced by the
Company's revenue stream, management will continue to seek to raise additional
funds for operations through private placements of stock, other long-term or
permanent financing, or short-term borrowings. However, the Company cannot be
-16-
certain that it will be able to continue to obtain adequate funding in order to
reasonably predict whether it will be able to continue as a going concern. The
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
The Company's exposure to the subprime mortgage risk is minimal due to its
investment in mortgage-backed securities having been limited to only those
securities backed by the United States government (i.e. Government National
Mortgage Association or GNMA securities). Prior to December 2009, the Company
also held municipal obligations that have been fully defeased through the
purchase of Resolution Funding Corporation ("REFCORP") strips that have been
placed in escrow and provide the means for the bond repayment. REFCORP was
created by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") to provide funds to the Resolution Trust Corporation ("RTC") in
order to help resolve the Savings and Loan failures. REFCORP operates as a
United States Treasury agency under the direction of the RTC Oversight Board,
whose chair is the secretary of the United States Treasury, and its obligations
are ultimately backed by the United States government.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 4T. CONTROLS AND PROCEDURES
--------------------------------
We maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Our management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as of May 31, 2009. As previously reported in our Annual Report on Form
10-K for the year ended May 31, 2009, control deficiencies were identified that
constitute a material weakness in internal control over financial reporting.
Such control deficiencies relate to inadequate segregation of duties, lack of
effective board of directors oversight, use of internally developed
non-integrated accounting systems, lack of internal review of account
reconciliations, and lack of internal review of general journal entries,
elimination entries and the financial statement consolidation process. Based
upon their evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures, as of May 31,
2009, were ineffective.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness
previously identified. Additionally, management identified steps at both
management and the board of directors' level to increase the effectiveness of
review as it relates to the financial reporting process. Such changes have been
-17-
implemented during the first fiscal quarter of the Company's 2008-2009 fiscal
year. While management believes that the changes implemented have strengthened
the overall control over financial reporting, such changes were not sufficient
to conclude that the Company's disclosure and control procedures, as of February
28, 2010, were effective. Accordingly, the Chief Executive Officer/Chief
Financial Officer concluded that the Company's disclosure controls and
procedures, as of February 28, 2010, were ineffective. Management continues to
monitor changes made in fiscal 2008 and 2009 and will continue to implement
improvements. Other changes will be considered as additional financial resources
and accounting staff become available.
Notwithstanding the above, management believes the unaudited consolidated
condensed financial statements in this Quarterly Report on Form 10-Q fairly
present, in all material respects, the Company's financial condition as of
February 28, 2010 and May 31, 2009 and the results of its operations and cash
flows for the three month period ended February 28, 2010 and 2009 in conformity
with U.S. generally accepted accounting principals (GAAP).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
None.
ITEM 1A. RISK FACTORS
---------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
-----------------------------------------------
In June 2009, 10 shares of Series A Preferred Stock were issued pursuant to
ongoing bonding programs of FSC in exchange for cash of $10,000.
Certificates of Designations, Powers, Preferences and Rights of Series A
Preferred Stock adopted by the Board of Directors of the Company on December 22,
2005 is set forth as Exhibit 4.1.
In the three-month period ending November 30, 2009, warrants totaling 1,168,395
were exercised for cash and issuance of 1,168,395 common shares of the Company.
In the three month period ended November 30, 2009, the Company issued 5,354,624
shares of the Company's common stock (See Note E) in connection with the bridge
financing arrangement. The shares were valued at approximately $.0146 per share
based on the average quoted closing price of the Company's stock for the 20-day
period proceeding the date of the transaction and totaled $78,177. Such costs
have been expensed over the nine-month period prior to the issuance of the
common shares.
-18-
On November 20, 2009, one share of Series C Preferred Stock and 2000 shares of
common stock were issued in exchange for each share of Series B Preferred Stock
that was tendered to the corporation for cancellation pursuant to a proposed
recapitalization of the corporation. As the result of the recapitalization
6,804.936 shares of Series C Preferred Stock were issued, 13,609,872 common
shares were issued, and 6,804.936 shares of Series B Preferred Stock were
tendered to the corporation and cancelled in exchange therefore.
The Certificate of Designations, Powers, Preferences and Rights of Series C
Preferred Stock adopted by the Board of Directors of the Company on December 8,
2009, is set forth as Exhibit 4.3; and the Certificate of Designations, Powers,
Preferences and Rights of Series B Preferred Stock adopted by the Board of
Directors of the Company on December 22, 2005, is set forth as Exhibit 4.2.
The issuance of the aforementioned securities is exempt from registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), by
reason of the provision of Section 4(2) of the Securities Act, as transactions
not involving any public offering, in reliance upon, among other things, the
representations made by the investors, including representations regarding their
status as accredited investors (as such term is defined under Rule 501
promulgated under the Securities Act), and their acquisition of the securities
for investment and not with a current view to distribution thereof. The
securities contain a legend to the effect that such securities are not
registered under the Securities Act pursuant to an exemption from such
registration. The issuance of the securities was not underwritten.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
The Company has incurred an event of default with respect to quarterly interest
and principal payments under its bridge-financing arrangement. As of the date of
filing this report, the amount required to cure the default is $875,106.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-------------------------
None.
-19-
ITEM 6. EXHIBITS
----------------
3.1 Company's Articles of Incorporation (1)
3.2 Company's By-laws (1)
3.3 Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
3.4 Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
4.1 Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
4.2 Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
4.3 Certificate of the Designations, Powers, Preferences and Rights of Series C Preferred Stock of Jacobs Financial Group (7)
10.1 Agreement to acquire by merger Reclamation Surety Holding Company, Inc. (2) (4)
10.2 Stock Purchase Agreement with National Indemnity Company to purchase Unione Italiana Insurance Company of America dated
August 20, 2008 (5) (6)
31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-146.1 promulgated under
the Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.1 Form of Subscription Agreement and Promissory Note (Bridge-financing) (3)
-------------
(1) Incorporated by reference to the Company's Current Report on form
8-K dated December 29, 2005.
(2) Incorporated by reference to the Company's Current Report on form
8-K dated February 8, 2008.
(3) Incorporated by reference to the Company's Current Report on form
8-K dated June 6, 2008
(4) Incorporated by reference to the Company's Current Report on form
8-K dated June 24, 2008
(5) Incorporated by reference to the Company's Current Report on form
8-K dated August 20, 2008
(6) Incorporated by reference to the Company's Current Report on form
8-K dated November 13, 2008
(7) Incorporated by reference to the Company's Current Report on form
8-K dated December 14, 2009
-20-
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: April 19, 2010 JACOBS FINANCIAL GROUP, INC.
--------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
--------------------------------------------
John M. Jacobs, President
-21
