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 November 30, 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
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(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: 233,487,622 shares of common
stock as of January 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 F-5 and
Preferred Stock and Stockholders Equity (Deficit) F-6
Notes to Consolidated Condensed Financial Statements F-7
-2-
JACOBS FINANCIAL GROUP, INC.
Consolidated Condensed Balance Sheets (Unaudited)
November 30, 2010 May 31, 2010
----------------- ------------------
ASSETS
INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at market value $ 6,987,603 $ 6,618,472
(amortized cost - 11/30/10 $6,766,540; 05/31/10 $6,413,857)
Short-term investments, at cost (approximates market value) 258,662 264,079
Cash 45,558 74,571
----------------- ------------------
TOTAL INVESTMENTS AND CASH 7,291,823 6,957,122
Investment income due and accrued 45,640 31,833
Premiums and other accounts receivable 117,552 147,466
Prepaid reinsurance premium 185,165 214,385
Funds deposited with Reinsurers 18,735 122,568
Deferred policy acquisition costs 121,442 128,453
Furniture, Automobile, and equipment, net of accumulated depreciation of
$150,435 and $144,102, respectively 36,066 18,380
Other assets 21,079 27,832
Intangible assets 150,000 150,000
----------------- ------------------
TOTAL ASSETS $ 7,987,502 $ 7,798,039
================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 703,901 $ 611,190
Reserve for unearned premiums 539,257 618,095
Accrued expenses and professional fees payable 606,703 613,301
Accounts payable 173,125 150,673
Related party payable 98,209 96,160
Term note payable to related party 360,000 360,000
Demand notes payable to related party 217,159 82,104
Notes payable 4,337,694 4,159,119
Accrued interest payable 863,227 651,983
Accrued interest payable to related party 105,925 71,481
Other liabilities 196,504 212,995
Mandatorily Redeemable Series B Preferred Stock, $.0001 Par Value Per Share;
3,136.405 Shares Authorized; 2,817.004 Shares Issued and Outstanding At November
30, 2010 and May 31, 2010; Stated Liquidation Value of $1,000 Per Share 4,076,377 3,826,882
----------------- ------------------
TOTAL LIABILITIES 12,278,081 11,453,983
----------------- ------------------
Series a Preferred Stock, $.0001 Par Value Per Share; 1 Million Shares
Authorized; 2,675 Shares Issued and Outstanding At November 30, 2010 and May 31,
2010, Respectively; Stated Liquidation Value of $1,000 Per Share 3,075,370 3,005,266
----------------- ------------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 3,075,370 3,005,266
----------------- ------------------
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Series C Preferred Stock, $.0001 par value per share; 10,000 shares authorized;
6,804.936 shares issued and outstanding at November 30, 2010 and May 31, 2010,
respectively; includes $3,054,144 and $2,670,286 accrued Series C dividends,
respectively 9,085,075 8,701,217
Common stock, $.0001 par value per share; 490 million shares authorized;
226,747,282 and 214,464,012 shares issued and outstanding at November 30, 2010
and May 31, 2010, respectively 22,675 21,446
Additional paid in capital 3,480,767 3,404,431
Accumulated deficit (20,175,529) (18,992,919)
Accumulated other comprehensive income (loss) 221,063 204,615
----------------- ------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (7,365,949) (6,661,210)
----------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ (7,987,502) $ 7,798,039
================= ==================
See accompanying notes.
F-1
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30, SIX MONTHS ENDED NOVEMBER 30,
------------------------------ ----------------------------
2010 2009 2010 2009
-------------- ------------ ------------ ------------
REVENUES:
Investment advisory services $ 64,427 $ 66,963 $ 118,597 $ 131,288
Insurance premiums and commissions 239,793 208,517 438,783 422,850
Net investment income 67,184 71,260 100,435 143,503
Net realized investment gains (losses) 12,689 (2,098) 63,707 (2,098)
Other income 6,188 945 7,821 5,767
-------------- ------------ ------------ ------------
TOTAL REVENUES 390,281 345,587 729,343 701,310
OPERATING EXPENSES:
Incurred policy losses 50,384 49,501 92,711 97,686
Insurance policy acquisition costs 77,353 67,567 137,334 130,168
General and administrative 314,204 327,712 569,601 728,325
Mutual fund costs - 36,587 - 74,913
Depreciation 4,115 2,649 7,507 5,445
-------------- ------------ ------------ ------------
TOTAL OPERATING EXPENSES 446,056 484,016 807,153 1,036,537
-------------- ------------ ------------ ------------
NET INCOME (LOSS) FROM OPERATIONS (55,775) (138,429) (77,810) (335,227)
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (126,366) - (249,495) -
Interest expense (196,890) (181,815) (401,258) (509,099)
-------------- ------------ ------------ ------------
NET INCOME (LOSS) (379,031) (320,244) (728,563) (844,326)
Accrued dividends on Series C Preferred Stock equity (194,873) - (383,858) -
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (35,399) (393,693) (70,104) (812,553)
-------------- ------------ ------------ ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (609,303) $ (713,937) $(1,182,525) $(1,656,879)
============== ============ ============ ============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ - $ - $ (0.01) $ (0.01)
============== ============ ============ ============
WEIGHTED-AVERAGE SHARES OUTSTANDING 223,993,563 198,663,501 219,453,898 189,857,107
============== ============ ============ ============
See accompanying notes.
F-2
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30 NOVEMBER 30
----------------------- -------------------------
2010 2009 2010 2009
---------- ----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $(609,303) $(713,937) $(1,182,525) $(1,656,879)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale
investments arising during period 27,111 23,000 57,843 28,421
Reclassification adjustment for realized (gain) loss
included in net income (4,551) 2,098 (41,395) 2,098
---------- ----------- ------------ ------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized in other comprehensive income 22,560 25,098 16,448 30,519
---------- ----------- ------------ ------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKOLDERS $(586,743) $(688,839) $(1,166,077) $(1,626,360)
========== =========== ============ ============
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30 SIX MONTHS ENDED NOVEMBER 30
------------------------------ ----------------------------
2010 2009 2010 2009
-------------- ------------- -------------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (379,031) $ (320,244) $ (728,563) $ (844,326)
Adjustments to reconcile net income
(loss) to net cash provided by (used in)
operating activities:
Unearned premium (162,498) (160,985) (49,618) (160,032)
Stock option expense 1,110 34,105 14,562 172,995
Stock issued (or to be issued) in connection
with financing arrangements 37,546 10,208 60,053 234,094
Accrual of Series B preferred stock dividends and accretion 126,366 - 249,495 -
Provision for loss reserves 50,385 49,501 92,711 97,686
Amortization of premium 24,276 16,732 81,734 31,605
Depreciation 4,115 2,649 7,507 5,444
Accretion of discount (578) (4,638) (744) (9,217)
Realized (gain) loss on sale of securities (12,689) - (63,707) -
Loss on disposal of equipment - - 336 -
Change in operating assets and liabilities:
Other assets 1,212 9,448 6,753 16,647
Premium and other receivables 69,324 (28,118) 29,914 (32,677)
Investment income due and accrued (12,732) 814 (11,472) (3)
Deferred policy acquisition costs 53,826 53,855 7,011 38,294
Related party accounts payable 2,025 10,525 2,050 26,050
Accounts payable and cash overdraft 7,949 57,097 22,452 115,014
Accrued expenses and other liabilities 36,264 94,384 326,432 (11,714)
-------------- ------------- -------------- -----------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (153,130) (174,667) 46,906 (320,140)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments (86,024) (52,825) 5,417 22,683
Costs of bonds acquired (504,993) - (1,797,178) -
Costs of mortgaged-backed securities acquired (97,311) (223,744) (740,330) (620,087)
Sale of securities available for sale 203,072 - 1,043,756 -
Repayment of mortgage-backed securities 366,739 357,206 1,121,452 681,527
Purchase of furniture and equipment (2,361) - (25,529) -
-------------- ------------- -------------- -----------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (120,878) 80,637 (392,412) 84,123
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 505,649 149,935 840,519 256,532
Repayment of related party debt (385,157) (153,969) (705,465) (256,484)
Proceeds from borrowings 583,000 315,000 887,500 632,500
Repayment of borrowings (512,213) (156,450) (708,925) (242,846)
Proceeds from issuance of Series A preferred stock - - - 10,000
Proceeds from exercise of common stock warrants 2,864 1,168 2,864 2,963
-------------- ------------- -------------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 194,143 155,684 316,493 402,665
NET INCREASE (DECREASE) IN CASH (79,865) 61,654 (29,013) 166,648
CASH AT BEGINNING OF PERIOD 125,423 185,032 74,571 80,038
-------------- ------------- -------------- -----------
CASH AT END OF PERIOD $ 45,558 $ 246,686 $ 45,558 $ 246,686
============== ============= ============== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 45,686 $ 9,607 $ 91,984 $ 267,078
Income taxes paid - - - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 37,546 10,208 60,057 234,094
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 NOVEMBER 30, 2010
STOCKHOLDERS' EQUITY (DEFICIT)
----------------- -------------------------------------------------------------------------------------------
SERIES A
MANDATORILY REDEEMABLE COMMON STOCK SERIES C PREFERRED
------------------------------- -------------------- ACCUMULATED
ADDITIONAL OTHER
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT INCOME (LOSS) TOTAL
------ ---------- ----------- ------- ---------- --------- ---------- ------------- -------- ------------
BALANCE,
AUGUST 31, 2010 2,675 $3,039,971 215,859,012 $21,586 $3,440,332 6,804.936 $8,890,202 $(19,566,223) $ 198,503 $ (7,015,600)
Issuance of common
stock as compensation
for services - - - - - - - -
Issuance of common
stock as additional
consideration for
financing arrangements - - 8,024,284 803 11,290 - - 12,093
Exercise of warrants - - 2,863,986 286 2,578 - - 2,864
Accretion of Series A
mandatorily redeemable
convertible preferred
stock - 4,686 - - (4,686) - (4,686)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 30,713 - - - (30,716) - (30,716)
Accrued dividends of
Series C equity
preferred stock - - - - - - 194,873 (194,873) - -
Increase (Decrease)
in accrual of common
shares to be issued
in connection with
financing arrangements 25,457 25,457
Common stock option
expense - - - - 1,110 - - 1,110
Unrealized net gain
on available
for sale securities - - - - - - 22,560 22,560
Net income (loss),
three month period
ended November 30,
2010 - - - - - - - (379,031) - (379,031)
------ ---------- ----------- ------- ---------- --------- ---------- ------------- -------- ------------
BALANCE,
NOVEMBER 30, 2010 2,675 $3,075,370 226,747,282 $22,675 $3,480,767 6,804.936 $9,085,075 $(20,175,529) $221,063 $(7,365,949)
====== ========== =========== ======= ========== ========= ========== ============= ======== ============
----------------- -------------------------------------------------------------------------------------------
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE SIX MONTH PERIOD ENDED NOVEMBER 30, 2010
STOCKHOLDERS' EQUITY (DEFICIT)
----------------- ---------------------------------------------------------------------------------------
SERIES A ACCUMULATED
MANDATORILY REDEEMABLE COMMON STOCK SERIES C PREFERRED OTHER
------------------------------- -------------------- COMPREHEN-
ADDITIONAL SIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
------ ---------- ----------- ------- --------- --------- ---------- ------------- -------- ------------
BALANCE,
MAY 31, 2010 2,675 $3,005,266 214,464,012 21,446 $3,404,431 6,804.936 $8,701,217 $(18,992,919) $204,615 $(6,661,210)
Issuance of
common stock
as compensation
for services - - 500,000 50 1,998 - - - - 2,048
Issuance of common
stock as additional
consideration for
financing arrangements - - 8,919,284 893 15,059 - - - - 15,952
Exercise of warrants - - 2,863,986 286 2,578 - - - - 2,864
Accretion of Series
A mandatorily
redeemable
convertible
preferred stock - 9,312 - - - - - (9,312) - (9,312)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 60,792 - - - - - (60,877) - (60,877)
Accrued dividends of
Series C equity
preferred stock - - - - - - 383,858 (383,858) - -
Increase (Decrease)
in accrual of common
shares to be issued
in connection with
financing arrangements - - - - 42,139 - - - - 42,139
Common stock option
expense - - - - 14,562 - - - - 14,562
Unrealized net gain
(loss) on available
for sale securities - - - - - - - - 16,448 16,448
Net income (loss),
six months ended
November 30, 2010 - - - - - - - (728,563) - (728,563)
------ ---------- ----------- ------- --------- --------- ---------- ------------- -------- ------------
BALANCE,
NOVEMBER 30, 2010 2,675 $3,075,370 226,747,282 $22,675 $3,480,767 6,804.936 $9,085,075 $(20,175,529) $221,063 $(7,365,949)
====== ========== =========== ======= ========= ========= ========== ============= ======== ============
----------------- ---------------------------------------------------------------------------------------
See accompanying notes.
F-6
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 six month periods ended November 30, 2010, are not necessarily
indicative of the results of operations that can be expected for the fiscal year
ending May 31, 2011. 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, 2010.
RECLASSIFICATIONS
Certain amounts have been reclassified in the presentation of the Consolidated
Financial Statements as of November 30, 2009 to be consistent with the
presentation in the Consolidated Financial Statements as of November 30, 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 $2,713,000 and $3,058,000 for the years ended May 31, 2010 and
2009 and has incurred losses of approximately $609,000 and $1,183,000 for the
three and six month periods ended November 30, 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
improvement is anticipated as the business plan is 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.
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, 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 the current financial
condition of the parent company. This is the case notwithstanding the
reinsurance agreement entered into by FSC with Lloyd's of London in April 2009,
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 is being fully
F-7
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 in addition to 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 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.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009,
the Company obtained two rounds of bridge financing totaling an aggregate of
$3,500,000. The financing paid expenses of operations, fees and expenses
incurred in connection with a larger permanent financing which was ultimately
cancelled and, in addition, to increase the capital surplus of FSC, making
possible the reactivation of FSC's surety license in the state of Ohio. The
terms of the bridge-financing arrangement provided for payment in full upon
consummation by the Company of a qualified equity offering providing net
proceeds of at least $15 million on or before September 10, 2013; and because
such a qualified equity offering was not consummated by September 10, 2008,
accrued interest-to-date was payable, and quarterly installments of principal
and interest became payable over five years commencing in December 2008. The
interest rates on such notes were fixed at 10.00%. Payments due December 2008
and March 2009 were not made by the Company as scheduled but a forbearance
agreement was subsequently entered into with the bridge lenders on June 5, 2009,
modifying payment terms to cure the default (including increasing the interest
rate on the loans to 17%), issuing additional common stock to the loan holders
and pledging the stock of the Company's subsidiary, CMW, as security for
repayment of the loans. The modification required the Company to pay interest of
$224,515 on June 10, 2009 and increase the quarterly payments by $67,185 (to a
total of $291,700) for eight consecutive quarters beginning September 10, 2009
to satisfy the arrearage. Although the Company has failed to make the payment
that was due September 10, 2009 and the payments that were due in the ensuing
quarters, management has remained in close contact with the bridge lenders,
providing reports regarding its efforts to refinance or otherwise repay the
bridge loans. To date, none of the bridge lenders has elected to pursue legal
remedies.
Certain equity inducements in the form of common stock of the Company have been
provided under the terms of the bridge loan documents. Upon issuance of the
bridge notes, an aggregate of 7% of the outstanding common stock of the Company
was issued to the bridge lenders. Upon retirement of the notes upon consummation
of a qualified equity offering, the Company will issue to the bridge lenders a
percentage of the outstanding common stock of the Company which, when added to
the stock initially issued, may equal as much as 28% of the common stock of the
Company that would otherwise have been retained by the holders of the Company's
common shares immediately prior to the financing. Additionally, because a
qualified financing was not completed by September 10, 2008, the Company was
required to issue to the bridge lenders under the terms of the loan documents a
total of 2.8% of the Company's outstanding common shares at such date with an
additional 2.8% of the Company's outstanding common shares issued upon each
six-month anniversary date thereof until retirement of the notes. (See Note D).
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 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
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 this uncertainty.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In October 2010, the FASB issued Accounting Standards Update 2010-26, "Financial
Services - Insurance: Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts." This FASB is intended to specify costs incurred in the
acquisition of new and renewal contracts that should be capitalized as deferred
acquisition costs and amortized over time using amortization methods dependent
upon the nature of the underlying insurance contract. This update is effective
for interim and annual reporting periods ending on or after December 15, 2010.
Management does not expect this update to have a material effect on the
Company's financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20, "Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses." This FASB is intended to provide additional information to assist
financial statement users in assessing an entity's credit risk exposure and
evaluating the adequacy of its allowance for credit losses. This update affects
all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
This update is effective for interim and annual reporting periods ending on or
after December 15, 2010. Management does not expect this update to have a
material effect on the Company's financial statements.
In August 2010, the FASB issued Accounting Standards Update 2010-21, "Accounting
for Technical Amendments to Various SEC Rules and Schedules". This Accounting
Standards Update amends various SEC paragraphs pursuant to the issuance of
Release No. 33-9026; Technical Amendments to Rules, Forms, Schedules and
Codifications of Financial Reporting Policies. Management does not expect this
update to have a material effect on the Company's financial statements.
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.
F-9
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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
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 additional earnings per share computation.
NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
-----------------------------------------------
The Company classifies its 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 six month periods ended November 30, 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.
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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
November 30, 2010.
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 4,969,830 $ 251,912 $ 3,805 $ $ 5,217,937
mortgage-backed securities
State and municipal securities 1,475,058 2,241 35,196 1,442,103
Foreign obligations 321,652 5,911 - 327,563
------------------- -------------------- ------------------- --------------------
$ 6,766,540 $ 260,064 $ 39,001 $ 6,987,603
=================== ==================== =================== ====================
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, 2010.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 6,413,856 $ 208,315 $ 3,700 $ 6,618,472
mortgage-backed securities
------------------- -------------------- ------------------- --------------------
$ 6,413,856 $ 208,315 $ 3,700 $ 6,618,472
=================== ==================== =================== ====================
The Company's short-term investments of $258,662 and $264,079 at November 30,
2010 and May 31, 2010 consisted of money-market investment funds.
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during fiscal year 2010, the Company determined
it may dispose of securities prior to their scheduled maturity due to changes in
interest rates, prepayments, tax and credit considerations, liquidity or
regulatory capital requirements, or other similar factors. As a result, the
Company reclassified all of its fixed income securities (bonds) and equity
securities as available-for-sale. These securities are reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reported in
stockholders' equity as a separate component of accumulated other comprehensive
income. Cost of these investments totaled $5,647,133 and market value at
transfer was $5,822,613 for an unrealized gain of $175,480.
There are no securities classified as held to maturity at May 31, 2010 or
November 30, 2010.
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:
F-11
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 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.
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:
November 30, 2010
---------------------------------------------------------------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,987,603 $ - $ 6,987,603
Short-term investments at fair value 258,662 - - 258,662
---------------- ----------------- ---------------- -----------------
Total Assets $ 258,662 $ 6,987,603 $ - $ 7,246,265
F-12
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
May 31, 2010
---------------------------------------------------------------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,618,472 $ - $ 6,618,472
Short-term investments at fair value 264,079 - - 264,079
---------------- ----------------- ---------------- -----------------
Total Assets $ 264,079 $ 6,618,472 $ - $ 6,882,551
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, 2010 or
at November 30, 20010.
During the three and six months ended November 30, 2010, the company recognized
gross realized gains on the sale of securities classified as available-for-sale.
For the three month period ending November 30, 2010, the sale consisted of a
U.S. Government agency mortgage backed security with an amortized cost basis of
$190,384, which was sold for a gain of $12,689. For the six months period ending
November 30, 2010, the sales consisted of U.S. Government agency mortgage backed
securities with an amortized cost basis of $980,050, which were sold for a gain
of $63,707.
NOTE D - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
------------------------------------------------------
The Company had the following unsecured notes payable to individuals and a
commercial bank as of November 30, 2010 and May 31, 2010 respectively:
November 30, May 31,
2010 2010
-------------------- -----------------------
Unsecured demand notes payable to individuals and others; interest rate
fixed @ 10.00% ($75,000 to related party) $ 1,217,000 $ 1,057,000
Unsecured demand notes payable to individuals and others 53,000 -
Unsecured note(s) payable to individual(s) under a bridge-financing
arrangement described below ($360,000 to related party) 3,500,000 3,500,000
Unsecured short-term advances from principal shareholder and chief
executive officer; interest rate fixed @ 12.00% 142,159 7,104
Unsecured term note payable to commercial bank in the original
amount of $250,000 and payable in equal monthly payments of $5,738;
maturing January 31, 2011 2,694 37,119
-------------------- -----------------------
Notes payable $ 4,914,853 $ 4,601,223
==================== =======================
F-13
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 second round of
bridge-financing notes of $1.0 million received 2.00% of the Company's common
shares. Upon retirement of the notes subsequent to 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 noteholders' 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 has issued 2.80%
of the Company's outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. The following table summarizes the common
shares issued to those note holders.
Date of Issuance Shares Issued
------------------ ----------------
September 10, 2008 4,870,449
March 10, 2009 5,010,640
September 10, 2009 5,354,642
March 10, 2010 6,005,925
September 10, 2010 6,213,285
----------------
27,454,941
================
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 original repayment schedule called for quarterly payments of
$224,515. The Holders agreed that under the forbearance the Company may satisfy
its obligation by increasing the quarterly payments by $67,185, (to a total of
$291,700) for eight consecutive quarters beginning September 10, 2009 to satisfy
the arrearage. In addition, the interest rate was increased to 17.00%. Although
the Company has failed to make the payment that was due September 10, 2009 and
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
the payments that were due in the ensuing quarters, management has remained in
close contact with the bridge lenders, providing reports regarding its efforts
to refinance or otherwise repay the bridge loans. To date, none of the bridge
lenders has elected to pursue legal remedies.
During the three and six months ended November 30, 2010 and the year ended May
31, 2010, a company owned by a board member provided consulting services. This
company provided services totaling $15,525 and $31,050 in the three and six
months ended November 30, 2010 and $15,525 and $31,050 in the three and six
months ended November 30, 2009. Amounts owed to this company are treated as
related party payables in the amounts $98,209 and $96,160 at November 30, 2010
and May 31, 2010.
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%. During the three
months ended November 30, 2010, the principal shareholder personally assumed
debt that was payable by the Company in the amount of $344,951, of which $19,951
was interest and $325,000 was principal. During the six months ended November
30, 2010, the principal shareholder personally assumed debt that was payable by
the Company in the amount of $514,131, of which $39,131 was interest and
$475,000 was principal. The following table summarizes the activity under such
arrangement for the three and six month periods ended November 30, 2010.
Three month Six month
period ended period ended
November 30, November 30,
2010 2010
------------------ ------------------
Balance owed, beginning of period $ 21,666 $ 7,104
Proceeds from borrowings 132,806 255,181
Assumption of company debt 344,951 514,131
Accrued payroll offsetting repayments 27,893 71,208
Repayments (385,157) (705,465)
------------------ ------------------
Balance owed, end of period $ 142,159 $ 142,159
================== ==================
Scheduled maturities and principal payments for each of the next five years
ending November 30 are as follows:
2011 (including demand notes) $ 4,914,853
2012 - 2015 -
-----------------
$ 4,914,853
=================
NOTE E-STOCKHOLDERS EQUITY
--------------------------
In the three month period ending November 30, 2010, the Company issued 1,810,999
shares of the Company's common stock in connection with new and continued
borrowings totaling $1,208,000. The shares were valued at approximately $.007539
per share based on the average quoted closing price of the Company's stock for
the 20-day period preceding the date of the transactions and totaled $13,653.
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
In the three month period ending November 30, 2010, warrants totaling 2,863,986
were exercised for cash and 2,863,986 common shares of the Company were issued
at a price of $.001 per share.
In the three month period ending November 30, 2010, the Company issued 6,213,285
shares of the Company's common stock in connection with the semi-annual issuance
of shares under terms of the bridge-financing arrangement. The shares were
valued at approximately $.00607 per share based on the average quoted closing
price of the Company's stock for the 20-day period preceding the date of the
transaction and totaled $37,715.
In the three month period ending August 31, 2010, the Company issued 895,000
shares of the Company's common stock in connection with new and continued
borrowings totaling $895,000. The shares were valued at approximately $.004312
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 $3,859.
In the three month period ending August 31, 2010, the Company awarded 500,000
shares to an individual as compensation for services instrumental to advancing
the Company's business plan, including introductions and negotiations with
reinsurers, investors and insurers with the potential to provide license
authority in additional states. The shares were valued at approximately $.004095
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 $2,048.
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. The 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.
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 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 (see Note J).
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. While dividends had never been declared on the
Series B shares, they had been accrued, increasing the dividend preference and
the redemption price and liquidity preference of such shares and increasing the
liability represented thereby based upon the Series B Shares fixed maturity
date. The accrued (but undeclared) dividends associated with the Series C
exchange amounted to $2,295,624 and are included in the total amount exchanged
for Series C Shares. Unlike the Series B Shares with their fixed maturity date,
the Series C Shares are permanent equity, with accruing dividends only
increasing the preference amount that must be satisfied before junior securities
may participate in dividends or on liquidation. Accordingly, the effect of the
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
accrual of dividends with respect to the Series C Shares on the Company's
balance sheet is to increase the aggregate claim of the Series C Shares on the
equity of the corporation and to increase the deficit in common equity, while
having no effect on the net equity of the corporation as a whole. The
entitlement of the Series C Shares to a priority in relation to junior
securities with respect to dividends and on liquidation does not create an
obligation by the Company and therefore no liability is recorded until the
dividends are declared by the Board of the Company. 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 year ending May 31, 2010, 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
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. As the redemption date
on the Series B shares got closer (See Note J), it became apparent that it was
unlikely that the shares would be converted to common at $1.00, and thus the
classification was changed. Accretion and dividends on Series B mandatorily
redeemable preferred stock deducted from net income amounted to $45,415 and
$80,951 for the three-month period ended November 30, 2010 and $90,039 and
$159,456 for the six month period ending November 30, 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 or six month periods ending November 30, 2010.
NOTE F - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
------------------------------------------------------------
As of November 30, 2010, the Company had accrued and withheld approximately
$136,000 in Federal payroll taxes and approximately $33,000 in West Virginia
payroll withholdings, as well as penalties and interest of approximately
$34,000. These amounts are reflected in the accompanying financial statements as
accrued expenses.
NOTE G - 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-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
THREE MONTH PERIOD ENDED
NOVEMBER 30, NOVEMBER 30,
INDUSTRY SEGMENT 2010 2009
---------------- ----------------- --------------
REVENUES:
Investment advisory $ 70,615 $ 65,810
Surety insurance 319,666 279,777
Corporate - -
----------------- --------------
Total revenues $ 390,281 $ 345,587
================= ==============
NET INCOME (LOSS):
Investment advisory $ (14,352) $ (22,379)
Surety insurance 107,066 73,844
Corporate (474,745) (371,709)
----------------- --------------
Total net income (loss) $ (379,031) $ (320,244)
================= ==============
SIX MONTH PERIOD ENDED
INDUSTRY SEGMENT NOVEMBER 30, NOVEMBER 30,
---------------- 2010 2009
----------------- --------------
REVENUES:
Investment advisory $ 126,418 $ 134,958
Surety insurance 602,925 566,352
Corporate - -
----------------- --------------
Total revenues $ 729,343 $ 701,310
================= ==============
NET INCOME (LOSS):
Investment advisory $ (2,455) $ (33,421)
Surety insurance 227,387 203,774
Corporate (953,495) (1,014,679)
----------------- --------------
Total net income (loss) $ (728,563) $ (844,326)
================= ==============
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - REINSURANCE
--------------------
The Company limits the maximum net loss that can arise from large risks by
reinsuring (ceding) certain levels of such risk with reinsurers. 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.
Effective April 1, 2009, FSC entered into a reinsurance agreement with various
syndicates at Lloyd's of London and one Bermuda based reinsurer ("Reinsurer")
for its coal reclamation surety bonding programs. 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
July 1. The contract called for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first Agreement Year,
June 1, 2010, at a rate of 35% of gross written premium, subject to a minimum
premium $490,000. Year 2 of the contract is 12 months in duration, with premium
due within 30 days of the end of the second Agreement Year, June 1, 2011, at a
rate of 35% of gross written premium, subject to a minimum premium $490,000. At
November 30, 2010 and May 31, 2010, the Company had prepaid reinsurance premiums
of $185,165 and $214,385. At November 30 2010 and May 31, 2010, the Company had
ceded reinsurance deposited with the Reinsurer in excess of ceded premium
written resulting in net deposits of $18,735 and $122,568.
There were no ceded losses or loss adjustment expenses for the three and six
months ended November 30, 2010 or 2009.
The effects of reinsurance on premium written and earned for the three and six
month periods ending November 30, 2010 and 2009 are as follows;
THREE MONTH THREE MONTH THREE MONTH THREE MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING PERIOD ENDING
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2010 - 2010 - 2009 - 2009 -
WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- ---------
DIRECT $ 99,366 $ 340,421 $ 66,304 $ 255,394
CEDED $ 26,005 $ 104,563 $ 23,034 $ 51,138
--------- --------- --------- ---------
NET $ 73,361 $ 235,858 $ 43,270 $ 204,256
========= ========= ========= =========
SIX MONTH SIX MONTH SIX MONTH SIX MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING PERIOD ENDING
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
2010 - 2010 - 2009 - 2009 -
WRITTEN EARNED WRITTEN EARNED
--------- --------- --------- ---------
DIRECT $ 548,290 $ 627,127 $ 379,902 $ 505,427
CEDED $ 178,293 $ 207,513 $ 128,786 $ 94,279
---------- --------- --------- ---------
NET $ 369,997 $ 419,614 $ 251,116 $ 411,148
========== ========= ========= =========
F-20
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE I - STOCK-BASED COMPENSATION
---------------------------------
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 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 J - SUBSEQUENT EVENTS
--------------------------
Subsequent to November 30, 2010, the Company obtained borrowings of $69,000 from
individuals and business' to fund ongoing operations and made repayments of
$173,000. Such borrowings were obtained under demand or short term notes bearing
interest at the rate of 10.00%. These borrowings, and the renewal of previous
borrowings, included the issuance of 1,245,000 shares of its common stock as
additional consideration. Additionally, the Company obtained borrowings of
$5,550 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 $145,850.
Subsequent to November 30, 2010 and prior to their December 30, 2010 expiration,
6,257,244 warrants were exercised for conversion into Common stock. Of these,
1,990,578 were exercised by payment of cash at the warrant price of $.001 per
share and 4,266,666 (gross) were exercised under the cashless exercise option,
resulting in 761,904 warrants surrendered at the market price of $.0056 to
effect those holders' purchase of 3,504,762 net shares. Subsequent to November
30, 2010, 986,667 warrants expired unexercised on the fifth anniversary of their
issuance and the company no longer has any warrants outstanding.
On December 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
$31,022, $82,583 and $198,802, respectively. As of December 31, 2010, the
accumulated accrued and unpaid dividend amounted to $432,967, $1,361,058, and
$3,252,946, respectively
Subsequent to November 30, 2010, the Company entered into a repayment plan with
the West Virginia State Tax Department. Monthly installment payments of $2,874,
including interest and penalties, are to be made through November 2011 to
satisfy the payroll tax withholding obligation.
Subsequent to November 30, 2010, the Company has remitted $92,000 in Federal
payroll taxes and is in the process of establishing a monthly installment plan
to satisfy the remaining obligation.
The company's Series B Preferred stock matured on December 30, 2010. Under its
terms, the Company's Board was required to make a good faith determination
regarding (A) whether the funds of the Corporation legally available for
redemption of shares of Series B Stock are sufficient to redeem the total number
of shares of Series B Stock to be redeemed on such date and (B) whether the
amounts otherwise legally available for redemption would, if used to effect the
redemption, not result in an impairment of the operations of the Insurance
F-21
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Subsidiary. If the Board determines that there is a sufficiency of legally
available funds to accomplish the redemption and that the use of such funds to
effect the redemption will not result in an impairment of the operations of the
Insurance Subsidiary, then the redemption shall occur on the Redemption Date.
If, however, the Board determines either that there are not sufficient funds
legally available to accomplish the redemption or that the use of such funds to
effect the redemption will result in an impairment of the operations of the
Insurance Subsidiary, then (X) the Corporation shall notify the holders of
shares that would otherwise have been redeemed of such fact and the consequences
as provided in this paragraph, (Y) the Corporation will use those funds which
are legally available therefor and which would not result in an impairment of
the operations of the Insurance Subsidiary to redeem the maximum possible number
of shares of Series B Stock for which Redemption Notices have been received
ratably among the holders of such shares to be redeemed based upon their
holdings of such shares, and (Z) thereafter, until such shares are redeemed in
full, the dividends accruing and payable on such shares of Series B Stock to be
redeemed shall be increased by 2% of the Series B Face Amount, with the amount
of such increase (I.E., 2% of the Series B Face Amount) to be satisfied by
distributions on each Dividend Payment Date of shares of Common Stock having a
value (determined by reference to the average closing price of such Common Stock
over the preceding 20 trading days) equal to the amount of such increase. The
shares of Series B Stock not redeemed shall remain outstanding and entitled to
all the rights and preferences provided herein. At any time thereafter when
additional funds of the Corporation are legally available for the redemption of
shares of Series B Stock and such redemption will not result in an impairment of
operations of the Insurance Subsidiary, such funds will immediately be used to
redeem the balance of the shares of Series B Stock to be redeemed. No dividends
or other distributions shall be declared or paid on, nor shall the Corporation
redeem, purchase or acquire any shares of, the Common Stock or any other class
or series of Junior Securities or Equal Ranking Preferred of the Corporation
unless the Redemption Price per share of all shares for which Redemption Notices
have been given shall have been paid in full, provided that the redemption price
of any Equal Ranking Preferred subject of redemption shall be paid on a pari
passu basis with the Redemption Price of the Series B Stock subject of
redemption in accordance herewith. Until the Redemption Price for each share of
Series B Stock elected to be redeemed shall have been paid in full, such share
of Series B Stock shall remain outstanding for all purposes and entitle the
holder thereof to all the rights and privileges provided herein, and Dividends
shall continue to accrue and, if unpaid prior to the date such shares are
redeemed, shall be included as part of the Redemption Price.,.
The Company's Board of Directors met on December 30, 2010 and determined there
were insufficient funds available for the redemption of Series B Stock.
As of this report, the Company has received requests for redemption of 2,141.341
shares of Series B Preferred.
F-22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
During fiscal 2010 and the six-month period ended November 30, 2010, the Company
focused its primary efforts on the development and marketing of its surety
business in West Virginia and Ohio, arranging for potential strategic
relationships to 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 NOVEMBER 30, 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
November 30, 2010 of $609,303 as compared with a loss of $713,937 for the
corresponding period ended November 30, 2009.
REVENUES
Revenues from operations for the three-month period ended November 30, 2010 were
$390,281 as compared with $345,587 for the corresponding period ended November
30, 2009. The overall increase in revenues is attributable to an increase in
written premium by FSC, as well as the gain recognized on the sale of
investments held by the company.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $64,427 for the three-month
period ended November 30, 2010 as compared with $66,963 for the corresponding
period ended November 30, 2009. Investment advisory fees are based on the market
value of assets under management therefore 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.
-3-
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $319,666 for the three-month
period ended November 30, 2010 as compared with $279,777 for the corresponding
period ended November 30, 2009. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
Three-month Period Ended
November 30,
----------------------------------
2010 2009
----------------- ----------------
Premium earned $ 235,858 $ 204,255
Net investment income 79,873 71,260
Commissions earned 3,935 4,262
----------------- ----------------
Total $ 319,666 $ 279,777
================= ================
Premium revenue is recognized ratably over the term of the policy period and
thus is relatively stable from period to period with fluctuations for comparable
periods generally reflecting the overall growth or loss of business. Whereas
commission revenue, which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations for comparable periods largely reflecting the overall growth or
loss of business. The increase in premiums earned for the three-month period
ended November 30, 2010 in comparison to the corresponding period from the prior
year is a result of increased premiums written for new and existing clients
despite having 12 months covered by reinsurance and thus reduced by 12 months of
ceded premiums, versus only 8 months of reinsurance in the prior year.
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 increase in corresponding periods reflects growth in average
assets held for investment in FSC's investment portfolio from $6.430 million for
the three-month period ended November 30, 2009 to $7.058 million for the
three-month period ended November 30, 2010, offset by a decline in investment
yield from approximately 4.68% for the three-month period ended November 30,
2009 to approximately 3.29% for the three-month period ended November 30, 2010.
In addition, the sale of investments resulted in a realized gain.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of November 30, 2010.
However, "incurred but not reported" (IBNR) policy losses for the three-month
period ended November 30, 2010 and 2009 amounted to $50,384 and $49,501
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 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 21% and 24% of earned premium,
respectively.
-4-
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $77,353 and $67,567 for the three-month
periods ended November 30, 20010 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 33% for the periods ended November 30, 2010 and 2009
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended November
30, 2010 and 2009 were $314,204 and $327,712 respectively, representing a
decrease of $13,508, and were comprised of the following:
Three-month Period Ended
November 30,
------------------ ------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 154,118 $ 184,627 $ (30,509)
General office expense 31,914 29,566 2,348
Legal and other professional fees and costs 43,035 30,786 12,249
Audit, accounting and related services 31,812 24,508 7,304
Travel, meals and entertainment 15,356 12,617 2,739
Other general and administrative 37,969 45,608 (7,639)
------------------ ------------------ -------------------
Total general and administrative $ 314,204 $ 327,712 $ (13,508)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $31,000 and are comprised of the following:
Three-month Period Ended
November 30,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 129,685 $ 125,377 $ 4,308
Commissions 27,714 3,937 23,777
Stock option expense 1,110 34,105 (32,995)
Fringe benefits 18,538 14,824 3,714
Key-man insurance 19,832 19,038 794
Deferred payroll costs (42,761) (12,654) (30,107)
------------------ ------------------ -------------------
Total salaries and related costs $ 154,118 $ 184,627 $ (30,509)
================== ================== ===================
The decrease in stock option expense is attributable to the award of stock
options on June 30, 2009. The increase in commissions is attributable to the
Company's commission structure that pays a larger commission on the origination
of a policy but reduced for subsequent policy renewals.
-5-
Legal and other professional fees and costs were comprised of the following:
Three-month Period Ended
November 30,
--------------------------------------
2010 2009 Difference
-------------------- ----------------- ----------------
General corporate services $ 919 $ 18,060 $ (17,141)
SEC related costs 29,594 - 29,594
Coal reclamation consulting 5,463 344 5,119
Acquisition and financing related costs 7,059 12,382 (5,323)
-------------------- ----------------- ----------------
Total legal and other professional fees $ 43,035 $ 30,786 $ 12,249
==================== ================= ================
In the three month period ending November 30, 2010, the Company incurred costs
in response to a triennial SEC examination of its investment advisory
subsidiary. The decrease in general corporate services results primarily from
legal fees incurred in the recapitalization and exchange of Series B Preferred
shares for Series C Preferred shares, as well as timing differences related to
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 November 30, 2010, the Company incurred expense of $5,463 related
to a coal reclamation consulting services agreement between FSC and an unrelated
individual. 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
$7,059 and $12,382 for the three-month periods ended November 30, 2010 and 2009,
respectively.
The increase in travel, meals and entertainment expense for the three-month
period ended November 30, 2010 as compared to the corresponding 2009 period
related primarily to additional efforts made by management to pursue financing
and strategic partnerships.
Other general and administrative expense decreased approximately $7,500 for the
three-month period ended November 30, 2010 as compared to the corresponding 2009
period.
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 November 30, 2010 was $54,866.
J&C had no revenue or expenses attributable to the Fund for the three month
period ending November 30, 2010; it had absorbed $36,587 of the Fund's operating
expenses during the corresponding period from the previous year.
-6-
INTEREST EXPENSE
Interest expense for the three-month period ended November 30, 2010 was $196,890
as compared with $181,815 for the corresponding period ended November 30, 2009.
Components of interest expense are comprised of the following:
Three-month Period Ended
November 30,
-----------------------------------
2010 2009 Difference
----------------- ----------------- -----------------
Interest expense on bridge-financing $ 148,343 $ 142,301 $ 6,042
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 39,228 12,222 27,006
Interest expense on demand and term notes 4,747 24,858 (20,111)
Other finance charges 4,572 2,434 2,138
----------------- ----------------- -----------------
Total interest expense $ 196,890 $ 181,815 $ 15,075
================= ================= =================
The increase in the expense of common shares issued (or to be issued) for the
three-month period ended November 30, 2010 as compared to the corresponding
period of the previous year was attributable to the increase in borrowings.
Interest expense on bridge financing increased due to increasing the interest
rate to 17% as part of the forbearance agreement terms. Interest expense on
demand and term notes decreased despite increased borrowings, due to an
adjustment of accrued interest on a line of credit.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended November 30, 2010
and 2009 are as follows:
Three-month Period Ended
November 30,
--------------------------------------
2010 2009 Difference
-------------------- ----------------- -----------------
Accretion of discount $ 4,686 $ 116,007 $ (111,321)
Accrued dividends - mandatorily redeemable preferred
stock 30,713 277,686 (246,973)
Accrued dividends - equity preferred stock 194,873 - 194,873
-------------------- ----------------- -----------------
Total accretion and dividends $ 230,272 $ 393,693 $ (163,521)
==================== ================= =================
The Series B class of stock is treated as a liability as of November 30, 2009
after the majority was exchanged for Series C equity stock. Therefore, accretion
of $45,415 and dividends of $80,951 associated with the Series B remaining after
that date are deductions from net income and not included in the table above.
The decrease in the accretion of discount and the accrued dividends on
mandatorily redeemable preferred stock results from this exclusion of Series B
subsequent to November 30, 2009, as well as the application of the interest or
constant yield method to the initial discount recorded with respect to the
-7-
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. Series C does not
accrete.
RESULTS OF OPERATIONS FOR THE SIX-MONTH PERIOD ENDED NOVEMBER 30, 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 six-month period ended
November 30, 2010 of $1,182,525 as compared with a loss of $1,656,879 for the
corresponding period ended November 30, 2009.
REVENUES
Revenues from operations for the six-month period ended November 30, 2010 were
$729,343 as compared with $701,310 for the corresponding period ended November
30, 2009. Overall revenue increased due to the continued growth of the surety
business of FSC and the recognition of gains on the sale of investments held by
the company. However, investment advisory services and net investment income
decreased due to the removal of mutual fund fees upon the liquidation of the
Jacobs & Company Mutual Fund, and the receipt of large principal payments on
mortgage backed securities, which resulted in large amortization of premiums
recognized in the six-month period.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $118,597 for the six-month
period ended November 30, 2010 as compared with $131,288 for the corresponding
period ended November 30, 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 decrease in
revenues is attributable to the liquidation of the Jacobs & Company Mutual Fund
in November 2009, as summarized below. (See "Expenses, Mutual Fund Costs,")
Six-month Period Ended
November 30,
2010 2009
----------------- ----------------
Individually managed accounts $ 118,597 $ 119,517
Mutual fund - 11,771
----------------- ----------------
Total $ 118,597 $ 131,288
================= ================
-8-
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $602,925 for the six-month
period ended November 30, 2010 as compared with $566,353 for the corresponding
period ended November 30, 2009. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
Six-month Period Ended
November 30,
2010 2009
----------------- ----------------
Premium earned $ 419,614 $ 411,148
Net investment income 164,142 143,503
Commissions earned 19,169 11,702
----------------- ----------------
Total $ 602,925 $ 566,353
================= ================
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 earned for the six-month period ended November 30, 2010 in
comparison to the corresponding period from the prior year is a result of
increased premiums written for new and existing clients despite having 12 months
covered by reinsurance, and thus reduced by 12 months of ceded premiums versus
only 8 months of reinsurance in the prior year. Investment income should remain
relatively consistent, but can fluctuate based on interest rates and market
conditions. The increase in corresponding periods reflects growth in average
assets held for investment in FSC's investment portfolio from approximately
$6.441 million for the six-month period ended November 30, 2009 to approximately
$ 7.016 million for the six-month period ended November 30, 2010, offset by a
decrease in investment yield from approximately 4.75% for the six-month period
ended November 30, 2009 to approximately 3.50% for the six-month period ended
November 30, 2010. In addition, the sale of investments resulted in a realized
gain, which was offset by the amortization of premium for larger than usual
principal payments on mortgage backed securities.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of November 30, 2010.
However, "incurred but not reported" (IBNR) policy losses for the six-month
period ended November 30, 2010 and 2009 amounted to $92,711 and $97,686
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
-9-
conditions and other factors unique to FSC's business. IBNR policy losses were
approximately 22% and 24% of earned premium for the six-month periods ending
November 30, 2010 and 2009, respectively.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $137,334 and $130,168 for the six-month
periods ended November 30, 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 32.73% and 31.66% for the periods ended November 30, 2010 and 2009
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the six-month periods ended November 30,
2010 and 2009 were $569,601 and $728,325 respectively, representing a decrease
of $158,724, and were comprised of the following:
Six-month Period Ended
November 30,
-------------------------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 264,576 $ 417,845 $ (153,269)
General office expense 60,292 57,407 2,885
Legal and other professional fees and costs 68,361 97,861 (29,500)
Audit, accounting and related services 57,355 48,526 8,829
Travel, meals and entertainment 27,106 28,236 (1,130)
Other general and administrative 91,911 78,450 13,461
------------------ ------------------ -------------------
Total general and administrative $ 569,601 $ 728,325 $ (158,724)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $153,000 and are comprised of the following:
Six-month Period Ended
November 30,
--------------------------------------
2010 2009 Difference
------------------- ----------------- ------------------
Salaries and taxes $ 258,232 $ 252,137 $ 6,095
Commissions 35,345 15,269 20,076
Stock option expense 14,562 172,995 (158,433)
Fringe benefits 32,400 27,386 5,414
Key-man life insurance 30,820 30,257 563
Deferred policy acquisition costs (107,183) (80,199) (26,984)
------------------- ----------------- ------------------
Total salaries and related costs $ 264,576 $ 417,845 $ (153,269)
=================== ================= ==================
The increase in commissions is attributable to the Company's commission
structure that pays a larger commission on the origination of a policy but
reduced for subsequent policy renewals. The decrease in stock option expense is
attributable to the award of stock options on June 30, 2009.
-10-
Legal and other professional fees and costs were comprised of the following:
Six-month Period Ended
November 30,
--------------------------------------
2010 2009 Difference
--------------------- ---------------- -----------------
General corporate services $ 9,508 $ 37,165 $ (27,657)
SEC related costs 29,594 - 29,594
Coal reclamation consulting 11,883 344 11,539
Acquisition and financing related costs 17,376 60,352 (42,976)
--------------------- ---------------- -----------------
Total legal and other professional fees $ 68,361 $ 97,861 $ (29,500)
===================== ================ =================
In the six month period ending November 30, 2010, the Company incurred costs in
response to a triennial SEC examination of its investment advisor subsidiary.
The decrease in general corporate services results primarily from legal fees
incurred in the recapitalization and exchange of Series B Preferred shares for
Series C Preferred shares, as well as timing differences related to review and
assistance provided in connection with the filing of the Company's annual report
with the Securities and Exchange Commission. In the six-month period ended
November 30, 2010, the Company incurred expense of $11,883 related to a coal
reclamation consulting services agreement between FSC and an unrelated
individual. 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
$17,376 and $60,352 for the six-month periods ended November 30, 2010 and 2009,
respectively.
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 November 30, 2010 was $54,866.
J&C had no revenue or expenses attributable to the Fund for the six month period
ending November 30, 2010; it had absorbed $74,913 of the Fund's operating
expenses during the corresponding period from the previous year.
-11-
INTEREST EXPENSE
Interest expense for the six-month period ended November 30, 2010 was $401,258
as compared with $509,099 for the corresponding period ended November 30, 2009.
Components of interest expense are comprised of the following:
Six-month Period Ended
November 30,
-----------------------------------
2010 2009 Difference
----------------- ----------------- -----------------
Interest expense on bridge financing $ 298,316 $ 226,212 $ 72,104
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 63,586 238,192 (174,606)
Interest expense on demand and term notes 33,195 41,057 (7,862)
Other finance charges 6,161 3,638 2,523
----------------- ----------------- -----------------
Total interest expense $ 401,258 $ 509,099 $ (107,841)
================= ================= =================
The increase in interest expense on bridge financing is due to increasing the
interest rate on the bridge loans from 10% to 17% as of September 10, 2009. The
decrease in the expense of common shares issued (or to be issued) for the
six-month period ended November 30, 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 on demand and term notes decreased despite increased borrowings, due to
an adjustment of accrued interest on a line of credit.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for six-month periods ended November 30, 2010 and
2009 are as follows:
Six-month Period Ended
November 30,
--------------------------------------
2010 2009 Difference
--------------------- ----------------- ----------------
Accretion of discount $ 9,312 $ 264,308 $ (254,996)
Accrued dividends - mandatorily redeemable preferred
stock 60,792 548,245 (487,453)
Accrued dividends - equity preferred stock 383,858 - 383,858
--------------------- ----------------- ----------------
Total accretion and dividends $ 453,962 $ 812,553 $ (358,591)
===================== ================= ================
The Series B class of stock is treated as a liability as of November 30, 2009
after the majority was exchanged for Series C equity stock. Therefore, accretion
of $90,390 and dividends of $159,456 associated with the remaining Series B are
deductions from net income and not included in the table above. The decrease in
the accretion of discount and the accrued dividends on mandatorily redeemable
preferred stock results from this exclusion of Series B subsequent to November
30, 2009 as well as the application of the interest or constant yield method to
the initial discount recorded over a period of five years from the date of
-12-
issuance of the stock. Series C equity stock accrues dividends at the same rate
as the Series B for which it was exchanged; however, it is separated in the
table above due to Series C not being mandatorily redeemable. Series C does not
accrete.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the 2005 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 November 30, 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 the 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 being 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 of costs to
reclaim the relevant properties in accordance with the specifications of the
mining permit prepared by independent outside professionals experienced in this
field of work. Such estimates are then periodically updated and compared with
marketable securities pledged by the principal and held in an account in which
FSC has a security interest as collateral for the surety bond to mitigate FSC's
exposure to loss. Should the principal default in its obligation to reclaim the
property as specified in the mining permit, FSC would then use the funds in the
collateral account to reclaim the property or as an offset in forfeiting the
face amount of the surety bond. Losses can occur if the costs of reclamation
exceed the estimates obtained at the time the bond was underwritten or upon
subsequent re-evaluations unless sufficient collateral is obtained, or if the
collateral has experienced significant deterioration in value and FSC is not
otherwise able to recover under its contractual rights to indemnification.
-13-
Miscellaneous fixed-liability surety bonds generally are fully collateralized by
the principal's cash investment into a collateral account managed by the
Company's investment advisory subsidiary (Jacobs & Co.) that mitigates FSC's
exposure to loss. Losses can occur should the principal default on the
performance required by the bond and the collateral held in the investment
account experiences deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided after
periodic monitoring and inspections, along with industry averages and historical
experience. Management has estimated such losses based on industry experience,
adjusted for factors that are unique to the Company's approach, and in
consultation with 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 and accrued dividends on mandatorily
redeemable preferred stock and equity preferred stock) of approximately
$2,713,000 and $3,058,000 for the fiscal years ended May 31, 2010 and 2009,
respectively, and a loss of approximately $1,183,000 for the six-month period
ended November 30, 2010. The Company had positive cash flow of approximately
$47,000 from operating activities for the six-month period ended November 30,
2010. A substantial portion of the Company's cash flow is generated by its
insurance subsidiary and is subject to certain withdrawal restrictions. Despite
the continued reduction of operating expenses, the Company has not been able to
pay certain amounts due to professionals and others, continues to be unable to
pay its preferred stock dividend obligation, certain payroll taxes and
withholdings from 2009 or to cure its default in certain quarterly payments due
its bridge-financing lenders. While management expects revenue growth and cash
flow to increase significantly as its business plan is fully implemented, it is
anticipated that losses will continue and the Company will be cash constrained
until FSC is able to develop a 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 $7,291,823 as of November 30, 2010, $7,290,601 is restricted to FSC.
Furthermore, 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 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.
The reinsurance agreement was renewed effective July 1, 2010 for an additional
one year period.
-14-
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 has been difficult without the benefit of
more substantial capital and reserves due to FSC's status as a comparatively
recent 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 became stabilized, entry
into other states would be less challenging. Accordingly, management continues
to pursue avenues that can provide additional capital to its insurance
subsidiary and to fund continuing operations as the business fully develops. 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 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 matured 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 are restricted to its stand-alone operation by regulatory
authority until its capital and surplus reserves reach levels that are more
substantial. While growth of the FSC business continues to provide additional
cash flow to the Company's other subsidiaries, Jacobs 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 this uncertainty.
-15-
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). The Company also holds municipal
obligations that have been fully defeased through the purchase of Resolution
Funding Corporation ("REFCORP") strips that were 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 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 November 30, 2010. As previously reported
in our Annual Report on Form 10-K for the year ended May 31, 2010, control
deficiencies were identified that constitute a material weakness in internal
control over financial reporting. Such control deficiencies relate to the 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
November 30, 2010, were ineffective. 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
November 30, 2010 and May 31, 2010 and the results of its operations and cash
flows for the three and six month periods ended November 30, 2010 and 2009 in
conformity with U.S. generally accepted accounting principals (GAAP).
-16-
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
-----------------------------------------------
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 six months ended November 30, 2010, 3,205,999 common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings, 2,863,986 common shares were issued to holders exercising
the company's warrants, and 6,213,285 common shares were issued to the Bridge
lenders. Subsequent to November 30, 2010, 1,245,000 common shares were issued in
private placements to various individuals pursuant to short term borrowings and
5,495,340 common shares were issued to holders exercising the company's
warrants.
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 $1,750,212.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-------------------------
None.
-17-
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)
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
-18-
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: January 19, 2011 JACOBS FINANCIAL GROUP, INC.
------------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
------------------------------------------------
John M. Jacobs, President
-19
