Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2011
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(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
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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: 241,369,804 shares of common
stock as of April 19, 2011.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
The following financial statements are included herein in response to Item 1:
Financial Statements (Unaudited) Page
--------
Consolidated Condensed Balance Sheets F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Comprehensive Income (Loss) F-3
Consolidated Condensed Statements of Cash Flows F-4
Consolidated Condensed Statement of Mandatorily Redeemable Preferred F-5 and
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)
FEBRUARY 28, 2011 MAY 31, 2010
------------------- ---------------
ASSETS
INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at market value $ 6,232,810 $ 6,618,472
(amortized cost - 02/28/11 $6,107,349; 05/31/10 $6,413,857)
Short-term investments, at cost (approximates market value) 1,149,231 264,079
Cash 99,295 74,571
------------------- ---------------
TOTAL INVESTMENTS AND CASH 7,481,336 6,957,122
Investment income due and accrued 24,558 31,833
Premiums and other accounts receivable 115,272 147,466
Prepaid reinsurance premium 247,041 214,385
Funds deposited with Reinsurers - 122,568
Deferred policy acquisition costs 168,299 128,453
Furniture, Automobile, and equipment, net of accumulated depreciation
of $154,483 and $144,102, respectively 35,685 18,380
Other assets 26,932 27,832
Intangible assets 150,000 150,000
------------------- ---------------
TOTAL ASSETS $ 8,249,123 $ 7,798,039
=================== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 759,191 $ 611,190
Reserve for unearned premiums 715,447 618,095
Accrued expenses and professional fees payable 631,970 613,301
Accounts payable 258,820 150,673
Ceded reinsurance payable 51,962 -
Related party payable 99,234 96,160
Term note payable to related party 360,000 360,000
Demand notes payable to related party 82,430 82,104
Notes payable 4,545,000 4,159,119
Accrued interest payable 1,024,735 651,983
Accrued interest payable to related party 122,865 71,481
Other liabilities 121,254 212,995
MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK, $.0001 PAR VALUE PER SHARE;
3,136.405 SHARES AUTHORIZED; 2,817.004 SHARES ISSUED AND OUTSTANDING AT
FEBRUARY 28, 2011 AND MAY 31, 2010; STATED LIQUIDATION VALUE OF $1,000 PER SHARE 4,174,987 3,826,882
------------------- ---------------
TOTAL LIABILITIES 12,947,895 11,453,983
SERIES A PREFERRED STOCK, $.0001 PAR VALUE PER SHARE; 1 MILLION SHARES AUTHORIZED;
2,675 SHARES ISSUED AND OUTSTANDING AT FEBRUARY 28, 2011 AND MAY 31, 2010,
RESPECTIVELY; STATED LIQUIDATION VALUE OF $1,000 PER SHARE 3,107,969 3,005,266
------------------- ---------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 3,107,969 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 February 28, 2011 and May 31, 2010,
respectively; includes $3,252,946 and $2,670,286 accrued
Series C dividends, respectively 9,283,877 8,701,217
Common stock, $.0001 par value per share; 490 million shares authorized;
234,077,622 and 214,464,012 shares issued and outstanding at February 28, 2011 and
May 31, 2010, respectively 23,408 21,446
Additional paid in capital 3,512,144 3,404,431
Accumulated deficit (20,751,631) (18,992,919)
Accumulated other comprehensive income (loss) 125,461 204,615
------------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (7,806,741) (6,661,210)
------------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,249,123 $ 7,798,039
=================== ===============
See accompanying notes.
F-1
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------- -----------------------------
2011 2010 2011 2010
------------ ------------ -------------- ------------
REVENUES:
Investment advisory services $ 69,670 $ 62,596 $ 188,268 $ 193,885
Insurance premiums and commissions 242,377 175,032 681,160 597,881
Net investment income 69,012 58,435 169,446 201,938
Net realized investment gains (losses) 26,994 42,926 90,701 40,828
Other income 6,208 6,649 14,029 12,416
------------ ------------ -------------- ------------
TOTAL REVENUES 414,261 345,638 1,143,604 1,046,948
OPERATING EXPENSES:
Incurred policy losses 55,290 41,382 148,002 139,068
Insurance policy acquisition costs 87,135 60,721 224,468 185,640
General and administrative 253,797 289,068 823,400 1,022,642
Mutual fund costs - 125 - 75,038
Depreciation 4,048 2,501 11,555 7,946
------------ ------------ -------------- ------------
TOTAL OPERATING EXPENSES 400,270 393,797 1,207,425 1,430,334
------------ ------------ -------------- ------------
NET INCOME (LOSS) FROM OPERATIONS 13,991 (48,159) (63,821) (383,386)
Gain on debt extinguishment - 200,239 - 200,239
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (98,610) (115,950) (348,104) (115,950)
Interest expense (260,082) (181,995) (661,341) (691,093)
------------ ------------ -------------- ------------
NET INCOME (LOSS) (344,701) (145,865) (1,073,266) (990,190)
Accrued dividends on Series C Preferred Stock equity (198,802) (175,720) (582,660) (175,720)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (32,599) (34,028) (102,703) (846,580)
------------ ------------ -------------- ------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (576,102) $ (355,613) $ (1,758,629) $(2,012,490)
============ ============ ============== ============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ - $ - $ (0.01) $ (0.01)
============ ============ ============== ============
WEIGHTED-AVERAGE SHARES OUTSTANDING 231,494,905 207,452,531 223,423,461 195,657,796
============ ============ ============== ============
See accompanying notes.
F-2
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
----------------------------- ------------------------------
2011 2010 2011 2010
------------- ------------ -------------- -------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $ (576,102) $ (355,613) $ (1,758,629) $(2,012,490)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale
investments arising during period (76,047) (11,585) (18,204) 16,836
Reclassification adjustment for realized (gain)
loss included in net income (19,555) (42,926) (60,950) (40,828)
------------- ------------ -------------- -------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized in other comprehensive income (95,602) (54,511) (79,154) (23,992)
------------- ------------ -------------- -------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS $ (671,704) $ (410,124) $ (1,837,783) $(2,036,482)
============= ============ ============== =============
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
FEBRUARY 28, FEBRUARY 28,
-------------------------- -------------------------
2011 2010 2011 2010
----------- ----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (344,699) $ (145,865) $(1,073,262) $ (990,190)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Unearned premium 114,314 21,988 64,696 (138,044)
Stock option expense 1,110 39,907 15,672 212,902
Stock issued (or to be issued) in connection with
financing arrangements 29,009 23,416 89,062 257,510
Accrual of Series B preferred stock dividends and accretion 98,610 115,950 348,105 115,950
Provision for loss reserves 55,290 41,382 148,001 139,068
Amortization of premium 19,730 22,631 101,464 54,236
Depreciation 4,048 2,501 11,555 7,945
Accretion of discount (7,810) - (8,554) (9,217)
Realized (gain) loss on sale of securities (26,994) (42,926) (90,701) (42,926)
Gain on extinguishment of debt - (200,239) - (200,239)
Loss on disposal of equipment - - 336 -
Change in operating assets and liabilities:
Other assets (5,853) (3,984) 900 12,663
Premium and other receivables 2,280 (8,825) 32,194 (41,502)
Investment income due and accrued 18,321 284 6,849 281
Deferred policy acquisition costs (46,857) (290) (39,846) 38,004
Related party accounts payable 1,025 10,525 3,075 36,575
Accounts payable and cash overdraft 85,695 4,479 108,147 119,492
Accrued expenses and other liabilities 199,162 197,776 525,594 186,062
----------- ----------- ----------- -----------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 196,381 78,710 243,287 (241,430)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments (890,569) (187,105) (885,152) (164,422)
Costs of bonds acquired (826,741) - (2,623,919) -
Costs of mortgaged-backed securities acquired 2,761 (958,003) (737,569) (1,578,090)
Sale of securities available for sale 1,236,761 404,958 2,280,517 404,958
Repayment of mortgage-backed securities 264,243 482,471 1,385,695 1,163,998
Purchase of furniture and equipment (3,667) (4,400) (29,196) (4,400)
----------- ----------- ----------- -----------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (217,212) (262,079) (609,624) (177,956)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 74,033 268,773 914,552 525,305
Repayment of related party debt (208,762) (153,854) (914,227) (410,338)
Proceeds from borrowings 470,000 135,000 1,357,500 767,500
Repayment of borrowings (262,694) (167,213) (971,619) (410,059)
Proceeds from issuance of Series A preferred stock - - - 10,000
Proceeds from exercise of common stock warrants 1,991 - 4,855 2,963
----------- ----------- ----------- -----------
NET CASH FLOWS FROM FINANCING ACTIVITIES 74,568 82,706 391,061 485,371
NET INCREASE (DECREASE) IN CASH 53,737 (100,663) 24,724 65,985
CASH AT BEGINNING OF PERIOD 45,558 246,686 74,571 80,038
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 99,295 $ 146,023 $ 99,295 $ 146,023
=========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURES
Interest paid $ 51,046 $ 11,302 $ 143,030 $ 278,380
Income taxes paid - - - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 29,009 23,415 89,066 257,510
See accompanying notes.
F-4
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED FEBRUARY 28, 2011
-----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
------------------ -----------------------------------------------------------------------------------------
SERIES A COMMON STOCK SERIES C PREFERRED ACCUMULATED
MANDATORILY ------------------------------ --------------------- OTHER
REDEEMABLE ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
------ ----------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
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)
Issuance of common
stock as compensation
for services - - - - - - - -
Issuance of common
stock as additional
consideration for
financing arrangements - - 1,835,000 183 11,055 - - 11,238
Exercise of warrants 5,495,340 550 1,441 1,991
Accretion of Series A
mandatorily redeemable
convertible preferred
stock - 1,577 - - - (1,577) - (1,577)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 31,022 - - - (31,022) - (31,022)
Accrued dividends of
Series C equity
preferred stock 198,802 (198,802) -
Increase (Decrease) in
accural of common
shares to be issued in
connection with financing
arrangements - - - - 17,771 - - 17,771
Common stock option
expense - - - - 1,110 - - 1,110
Unrealized net gain
(loss) on available for
sale securities - - - - - - (95,602) (95,602)
Net income (loss), three
month period ended
February 28, 2011 - - - - - - - (344,701) - (344,701)
------ ----------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE,
FEBRUARY 28, 2011 2,675 $ 3,107,969 234,077,622 $23,408 $3,512,144 6,804.936 $9,283,877 $(20,751,631) $125,461 $(7,806,741)
====== =========== =========== ======= ========== ========= =========== ============= ======== ============
------------------ ------------------------------------------------------------------------------------------
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE NINE MONTH PERIOD ENDED FEBRUARY 28, 2011
------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------- ------------------------------------------------------------------------------------------
SERIES A COMMON STOCK SERIES C PREFERRED ACCUMULATED
MANDATORILY -------------------------------- -------------------- OTHER
REEDEMABLE ADDITIONAL COMPREHENSIVE
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 compensa-
tion for services - - 500,000 50 1,998 - - - - 2,048
Issuance of common
stock as additional
consideration for
financing arrangements - - 10,754,284 1,076 26,114 - - - - 27,190
Exercise of warrants - - 8,359,326 836 4,019 - - - - 4,855
Accretion of Series A
mandatorily redeemable
convertible preferred
stock - 10,889 - - - - - (10,889) - (10,889)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 91,814 - - - - - (91,897) - ( 91,897)
Accrued dividends of
Series C equity
preferred stock - - - - - - 582,660 (582,660) - -
Increase (Decrease)
in accrual of common
shares to be issued
in connection with - - - - 59,910 - - - - 59,910
financing arrangements
Common stock option
expense - - - - 15,672 - - - - 15,672
Unrealized net gain
(loss) on available
for sale securities - - - - - - - - (79,154) (79,154)
Net income (loss),
nine months ended
February 28, 2011 - - - - - - - (1,073,266) - (1,073,266)
------ ---------- ----------- -------- ---------- --------- ---------- ------------- -------- ------------
BALANCE,
FEBRUARY 28, 2011 2,675 $3,107,969 234,077,622 $ 23,408 $3,512,144 6,804.936 $9,283,877 $(20,751,631) $125,461 $(7,806,741)
====== ========== =========== ======== ========== ========= ========== ============= ======== ============
----------------- ------------------------------------------------------------------------------------------
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 nine month periods ended February 28, 2011, 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 February 28, 2010 to be consistent with the
presentation in the Consolidated Financial Statements as of February 28, 2011.
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 $576,000 and $1,759,000 for the
three and nine month periods ended February 28, 2011. 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
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
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 annual reporting periods beginning on or after December 15, 2011 and interim
periods within that fiscal year. 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. This update has no 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.
The effective date of this update is deferred by ASU-2011-01, "Deferral of the
Effective Date of Disclosures about Troubled Debt Restructuring". It is now
effective for interim and annual reporting periods beginning on or after June
15, 2011. 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 nine month periods ended February 28, 2011, there have
been no other-than-temporary impairments. The Company intends and believes it
has the ability to hold all investments in an unrealized loss position until the
expected recovery in value, which may be at maturity.
The following table sets forth the amortized cost and estimated market value of
bonds and equity securities available-for-sale and carried at market value on
February 28, 2011.
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 3,799,189 $ 181,238 $ 4,923 $ 3,975,504
mortgage-backed securities
State and municipal securities 1,980,683 3,864 53,850 1,930,697
Foreign obligations 327,477 - 868 326,609
------------------- -------------------- ------------------- --------------------
$ 6,107,349 $ 185,102 $ 59,641 $ 6,232,810
=================== ==================== =================== ====================
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.
Gross Unrealized Gross Unrealized Fair Market Value
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
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 $1,149,231 and $264,079 at February 28,
2011 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
February 28, 2011.
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:
February 28, 2011
---------------------------------------------------------------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,232,810 $ - $ 6,232,810
Short-term investments at fair value 1,149,231 - - 1,149,231
---------------- ----------------- ---------------- -----------------
Total Assets $ 1,149,231 $ 6,232,810 $ - $ 7,382,041
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 28, 2011.
During the three and nine months ended February 28, 2011, the company recognized
gross realized gains on the sale of securities classified as available-for-sale.
For the three month period ending February 28, 2011, the sales consisted of U.S.
Government agency mortgage backed securities with an amortized cost basis of
$888,066, which were sold for a gain of $20,310, and a foreign obligation with
accreted cost basis of $321,702, sold for a gain of $6,684. For the nine months
period ending February 28, 2011, the sales consisted of U.S. Government agency
mortgage backed securities with an amortized cost basis of $1,868,116, which
were sold for a gain of $84,017, and a foreign obligation with accreted cost
basis of $321,702, sold for a gain of $6,684.
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 February 28, 2011 and May 31, 2010 respectively:
February 28, May 31,
2011 2010
------------- ------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party) $ 1,332,000 $ 1,057,000
Unsecured demand notes payable to individuals
and others 103,000 -
Secured demand note payable to individuals;
interest rate fixed @ 14%; secured
by accounts receivable for investment advisory fees
for the quarter ending June 30, 2011 45,000 -
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% 7,430 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 - 37,119
------------- ------------
Notes payable $ 4,987,430 $ 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
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.
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
During the three and nine months ended February 28, 2011 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 $46,575 in the three and nine
months ended February 28, 2011 and $15,525 and $46,575 in the three and nine
months ended February 28, 2010. Amounts owed to this company are treated as
related party payables in the amounts $99,234 and $96,160 at February 28, 2011
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 nine
months ended February 28, 2011, 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 nine month periods ended
February 28, 2011.
Three month Nine month
period ended period ended
February 28, 2011 February 28, 2011
------------------ ------------------
Balance owed, beginning of period $ 142,159 $ 7,104
Proceeds from borrowings 46,739 301,921
Assumption of company debt - 514,131
Accrued payroll offsetting repayments 27,293 98,501
Repayments (208,761) (914,227)
------------------ ------------------
Balance owed, end of period $ 7,430 $ 7,430
================== ==================
Scheduled maturities and principal payments for each of the next five years
ending February 28 are as follows:
2011 (including demand notes) $ 4,987,430
2012 - 2015 -
-----------------
$ 4,987,430
=================
NOTE E-STOCKHOLDERS EQUITY
--------------------------
In the three month period ending February 28, 2011, the Company issued 1,835,000
shares of the Company's common stock in connection with new and continued
borrowings totaling $1,875,000. The shares were valued at approximately $.006125
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 $11,239.
In the three month period ending February 28, 2011, warrants totaling 1,990,578
were exercised for cash and 1,990,578 common shares of the Company were issued
at a price of $.001 per share. In addition, warrants totaling 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 common shares. The remaining 986,667 warrants expired unexercised
on the fifth anniversary of their issuance and the company no longer has any
warrants outstanding.
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.
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.
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 matured 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 Company's Series A Preferred Stock, par value
$0.0001 per share (the "SERIES A STOCK"), the Company's Series B
Stock, and any other series of Preferred Stock subsequently
established by the Board with equal ranking (any such other series of
Preferred Stock, together with the Series C Stock, the Series B Stock
and Series A Stock are collectively referred to as the "EQUAL RANKING
PREFERRED") and (c) junior to any other series of Preferred Stock
subsequently established by the Board with senior ranking.
4. Dividends.
(a) DIVIDEND ACCRUAL AND PAYMENT. The holders of the Series C Stock
shall be entitled to receive, in preference to the holders of
Junior Securities, dividends ("DIVIDENDS") on each outstanding
share of Series C Stock at the rate of 8% per annum of the sum of
(i) the Series C Face Amount plus (ii) an amount equal to any
accrued, but unpaid, dividends on such Series C Stock, including
for this purpose the exchanged Series B Amount outstanding with
respect to such Series C Stock. For purposes hereof, the "SERIES
B AMOUNT" means an amount equal to the dividend that would have
accrued on such Series C Stock held by such holder from and after
the Series B Original Issue Date applicable to such share of
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 Company 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
Company in exchange for a share of Series B Stock, the date on
which the Company 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 Company 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
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
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the Company'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 Company, 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 that 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 $16,027 and
$82,583 for the three-month period ended February 28, 2011 and $106,066 and
$242,038 for the nine month period ending February 28, 2011. The remaining
Series B shares not converted were 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 nine month periods ending February 28, 2011.
The Company's outstanding Series B Preferred stock matured on December 30, 2010,
meaning that the holders of the Series B Stock became entitled to request that
the Company redeem their Series B Shares. As of this report, the Company has
received requests for redemption of 2,141.341 shares of Series B Preferred. The
aggregate amount to which the holders are entitled as of March 31, 2011, upon
redemption is $3,246,081.
Under the terms of the Series B Preferred Stock, upon receipt of such a request,
the Company's Board was required to make a good faith determination regarding
(A) whether the funds of the Company 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 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,
F-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 Company 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 Company 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 Company 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 Company 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 Company 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.
On March 8, 2011, The Company's Board of Directors determined based on the
criteria established under the terms of the Series B Preferred Stock that there
were insufficient funds available for the redemption of Series B Stock.
NOTE F - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
------------------------------------------------------------
As of February 28, 2011, the Company had accrued and withheld approximately
$64,000 in Federal payroll taxes and approximately $24,000 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. In December 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.
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
THREE MONTH PERIOD ENDED
INDUSTRY SEGMENT FEBRUARY 28, FEBRUARY 28,
---------------- 2011 2010
----------------- ----------------
REVENUES:
Investment advisory $ 75,878 $ 69,245
Surety insurance 338,383 276,393
Corporate - -
----------------- ----------------
Total revenues $ 414,261 $ 345,638
================= ================
NET INCOME (LOSS):
Investment advisory $ 30,713 $ 115,007
Surety insurance 125,210 224,616
Corporate (500,624) (485,488)
----------------- ----------------
Total net income (loss) $ (344,701) $ (145,865)
================= ================
NINE MONTH PERIOD ENDED
INDUSTRY SEGMENT FEBRUARY 28, FEBRUARY 28,
---------------- ---------------- ----------------
2011 2010
---------------- ----------------
REVENUES:
Investment advisory $ 202,297 $ 204,203
Surety insurance 941,307 842,745
Corporate - -
----------------- ----------------
Total revenues $ 1,143,604 $ 1,046,948
================ ================
NET INCOME (LOSS):
Investment advisory $ 28,259 $ 81,586
Surety insurance 352,597 428,390
Corporate (1,454,122) (1,500,166)
----------------- ----------------
Total net income (loss) $ (1,073,266) $ (990,190)
================ ================
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.
F-20
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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
February 28, 2011 and May 31, 2010, the Company had prepaid reinsurance premiums
of $247,041 and $214,385. At February 28, 2011, the Company had ceded premium
written in excess of ceded premium deposited with the Reinsurer, resulting in a
net payable of $51,962. At May 31, 2010, the Company had ceded reinsurance
deposited with the Reinsurer in excess of ceded premium written resulting in net
deposits of $122,568.
There were no ceded losses or loss adjustment expenses for the three and nine
months ended February 28, 2011 or 2010.
The effects of reinsurance on premium written and earned for the three and nine
month periods ending February 28, 2011 and 2010 are as follows;
THREE MONTH THREE MONTH THREE MONTH THREE MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING PERIOD ENDING
FEBRUARY 28, 2011 FEBRUARY 28, 2011 FEBRUARY 28, 2010 FEBRUARY 28, 2010
- - - -
WRITTEN EARNED WRITTEN EARNED
------------------ ----------------- ----------------- -------------------
DIRECT $ 549,309 $ 373,119 $ 311,773 $ 253,700
CEDED $ 193,198 $ 131,322 $ 108,752 $ 72,667
------------------ ----------------- ----------------- -------------------
NET $ 356,111 $ 241,797 $ 203,021 $ 181,033
================== ================= ================= ===================
NINE MONTH NINE MONTH NINE MONTH NINE MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING PERIOD ENDING
FEBRUARY 28, 2011 FEBRUARY 28, 2011 FEBRUARY 28, 2010 FEBRUARY 28, 2010
- - - -
WRITTEN EARNED WRITTEN EARNED
------------------ ----------------- ----------------- -------------------
DIRECT $ 1,097,599 $ 1,000,246 $ 691,676 $ 759,127
CEDED $ 371,491 $ 338,835 $ 237,538 $ 166,946
------------------ ----------------- ----------------- -------------------
NET $ 726,108 $ 661,411 $ 454,138 $ 592,181
================== ================= ================= ===================
F-21
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 February 28, 2011, the Company obtained borrowings of $194,000
from individuals to fund ongoing operations and made repayments of $75,000. 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 269,000 shares of its common stock as additional
consideration. Additionally, the Company obtained borrowings of $34,750 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 $74,450.
On March 10, 2011, the Company issued 6,738,900 shares of the Company's common
stock in connection with the semi-annual issuance of shares under the
bridge-financing arrangements (see Note D).
On March 31, 2011, 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
$30,654, $82,417 and $198,402, respectively. As of March 31, 2011, the
accumulated accrued and unpaid dividend amounted to $463,621, $1,443,475, and
$3,451,348, respectively.
On March 31, 2011 the Company issued 309,281 shares of the Company's common
stock in connection with the additional 2% stock dividend associated with Series
B Preferred shares that were requested to be redeemed upon maturity (see Note
E).
Subsequent to February 28, 2011, the Company has remitted approximately $69,000
in Federal payroll taxes and interest and has satisfied the outstanding
obligation with the Internal Revenue Service.
F-22
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
During fiscal 2010 and the nine-month period ended February 28, 2011, 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 FEBRUARY 28, 2011
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) for the three-month period ended
February 28, 2011 of $576,102 as compared with a loss of $355,613 for the
corresponding period ended February 28, 2010.
REVENUES
Revenues from operations for the three-month period ended February 28, 2011 were
$414,261 as compared with $345,638 for the corresponding period ended February
28, 2010. The overall increase in revenues is attributable to an increase in
written premium by FSC.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $69,670 for the three-month
period ended February 28, 2011 as compared with $62,596 for the corresponding
period ended February 28, 2010. 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.
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $338,383 for the three-month
period ended February 28, 2011 as compared with $276,393 for the corresponding
period ended February 28, 2010. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
-3-
Three-month Period Ended
February 28,
-----------------------------------
2011 2010
----------------- -----------------
Premium earned $ 241,797 $ 181,034
Net investment income 69,012 58,435
Net realized investment gains 26,994 42,926
----------------- -----------------
Commissions earned 580 (6,002)
----------------- -----------------
Total $ 338,383 $ 276,393
================= =================
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. Commission
revenue is dependent on the timing of issuance or renewal of bonds and is
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 February 28,
2011 in comparison to the corresponding period from the prior year is a result
of growth in bonds issued for new and existing clients. Investment income should
be 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 $6.61 million for the three-month period ended
February 28, 2010 to $7.29 million for the three-month period ended February 28,
2011, as well as an increase in investment yield from approximately 3.95% for
the three-month period ended February 28, 2010 to approximately 4.22% for the
three-month period ended February 28, 2011. Due to releases on coal reclamation
bonds written and timing difference in the recording of those transactions,
commissions earned resulted in a negative $6,002 for the quarter ended February
28, 2010.
During the three month period ending February 28, 2011, the Company sold certain
US Government agency mortgage backed securities and foreign obligations for
$1,236,762, resulting in realized gains of $26,994. In the three-month period
ending February 28, 2010, the Company sold certain available for sale
zero-coupon bond municipal securities for $404,958, resulting in a realized gain
of $42,926.
GAIN FROM EXTINGUISHMENT OF DEBT
In the three-month period ending February 28, 2010, the Company, upon advice of
legal counsel, removed certain dormant accounts payable in the aggregate amount
of $200,239, based upon the conclusion that none of accounts represented an
obligation that is legally enforceable against the Company. Such removal was
recorded as a gain on debt extinguishment.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of February 28, 2011.
However, "incurred but not reported" (IBNR) policy losses for the three-month
period ended February 28, 2011 and 2010 amounted to $55,290 and $41,382
respectively. Such amounts represent the provision for loss and loss adjustment
expense attributable to surety bonds issued by FSC. Such estimates based on
industry averages are adjusted for factors that are unique to FSC's underwriting
-4-
approach and are routinely reviewed for adequacy based on current market
conditions and other factors unique to FSC's business. For each of these
periods, IBNR policy losses were approximately 23% and 23% of earned premium,
respectively.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $87,135 and $60,721 for the three-month
periods ended February 28, 2011 and 2010, 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 36% and 34% for the periods ended February 28, 2011 and 2010
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended February
28, 2011 and 2010 were $253,797 and $289,068 respectively, representing a
decrease of $35,271, and were comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 110,602 $ 155,015 $ (44,413)
General office expense 28,399 28,823 (424)
Legal and other professional fees and costs 32,978 34,334 (1,356)
Audit, accounting and related services 10,024 33,237 (23,213)
Travel, meals and entertainment 23,956 8,331 15,625
Other general and administrative 47,838 29,328 18,510
------------------ ------------------ -------------------
Total general and administrative $ 253,797 $ 289,068 $ (35,271)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $44,000 and are comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 147,280 $ 128,021 $ 19,259
Commissions 41,741 16,995 24,746
Stock option expense 1,110 39,906 (38,796)
Fringe benefits 18,655 12,379 6,276
Key-man insurance 12,656 12,587 69
Deferred payroll costs (110,840) (54,873) (55,967)
------------------ ------------------ -------------------
Total salaries and related costs $ 110,602 $ 155,015 $ (44,413)
================== ================== ===================
-5-
The increase in salaries and taxes is attributable to year end bonuses paid to
certain employees in December 2010 which were not paid in the previous year. The
increase in commissions is attributable to the FSC's commission structure that
pays a larger commission percentage 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.
Legal and other professional fees and costs were comprised of the following:
Three-month Period Ended
February 28,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
General corporate services $ 655 $ 17,999 $ (17,344)
Statutory examination 13,148 - 13,148
Coal reclamation consulting 6,057 4,500 1,557
Acquisition and financing related costs 13,118 11,835 1,283
------------------ ------------------ -------------------
Total legal and other professional fees $ 32,978 $ 34,334 $ (1,356)
================== ================== ===================
In the three month period ending February 28, 2011, the Company incurred costs
in response to a statutory examination of its insurance subsidiary, required by
the West Virginia Insurance Commission. 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. 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
$13,1181 and $11,835 for the three-month periods ended February 28, 2011 and
2010, respectively.
The increase in travel, meals and entertainment expense for the three-month
period ended February 28, 2011 as compared to the corresponding 2010 period
related primarily to additional efforts made by management to pursue financing
and strategic partnerships.
Other general and administrative expense increased approximately $18,500 for the
three-month period ended February 28, 2011 as compared to the corresponding 2010
period, due mainly to the expiration of a finder's fee in February 2010.
INTEREST EXPENSE
Interest expense for the three-month period ended February 28, 2011 was $260,082
as compared with $181,995 for the corresponding period ended February 28, 2010.
Components of interest expense are comprised of the following:
-6-
Three-month Period Ended
February 28,
-----------------------------------
2011 2010 Difference
----------------- ----------------- -----------------
Interest expense on bridge-financing $ 146,712 $ 129,452 $ 17,260
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 30,589 25,354 5,235
Interest expense on demand and term notes 64,734 25,833 38,901
Other finance charges 18,047 1,356 16,691
----------------- ----------------- -----------------
Total interest expense $ 260,082 $ 181,995 $ 78,087
================= ================= =================
The increase in the expense of common shares issued (or to be issued) for the
three-month period ended February 28, 2011 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 increased due to increased borrowings and an adjustment of
accrued interest on a line of credit. Other finance charges increased due to
incentive fees paid to a note holder to obtain borrowings.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended February 28, 2011
and 2010 are as follows:
Three-month Period Ended
February 28,
--------------------------------------
2011 2010 Difference
------------------- ------------------ ----------------
Accretion of discount $ 1,576 $ 4,500 $ (2,924)
Accrued dividends - mandatorily redeemable preferred
stock 31,022 29,528 1,494
Accrued dividends - equity preferred stock 198,802 175,720 23,082
------------------- ------------------ ----------------
Total accretion and dividends $ 231,400 $ 209,748 $ 21,652
=================== ================== ================
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 $16,027 and dividends of $82,583 associated with the Series B remaining after
that date are deductions from net income and not included in the table above.
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. The decrease in
the accretion of discount in the table above relates to the final months
accretion of the discount on Series A Preferred stock being recognized in
December 2010.
-7-
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIOD ENDED FEBRUARY 28, 2011
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) for the nine-month period ended
February 28, 2011 of $1,758,629 as compared with a loss of $2,012,490 for the
corresponding period ended February 28, 2010.
REVENUES
Revenues from operations for the nine-month period ended February 28, 2011 were
$1,143,604 as compared with $1,046,948 for the corresponding period ended
February 28, 2010. 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 nine-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 $188,268 for the nine-month
period ended February 28, 2011 as compared with $193,885 for the corresponding
period ended February 28, 2010. Because 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 consistent 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,")
Nine-month Period Ended
February 28,
-----------------------------------
2011 2010
----------------- -----------------
Individually managed accounts $ 188,268 $ 182,100
Mutual fund - 11,785
----------------- -----------------
Total $ 188,268 $ 193,885
================= =================
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $941,307 for the nine-month
period ended February 28, 2011 as compared with $842,745 for the corresponding
period ended February 28, 2010. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
Nine-month Period Ended
February 28,
----------------------------------
2011 2010
----------------- ----------------
Premium earned $ 661,411 $ 592,181
Net investment income 169,446 201,938
Net realized investment gain 90,701 42,926
Commissions earned 19,749 5,700
----------------- ----------------
Total $ 941,307 $ 842,745
================= ================
-8-
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 nine-month period ended February 28, 2011 in
comparison to the corresponding period from the prior year is a result of
increased bonding written for new and existing clients. Investment income should
remain relatively consistent, but can fluctuate based on interest rates and
market conditions. The decrease in corresponding periods is attributable to a
decrease in investment yield from approximately 4.48% for the nine-month period
ended February 28, 2010 to approximately 3.74% for the nine-month period ended
February 28, 2011, although average assets held for investment in FSC's
investment portfolio grew from approximately $6.50 million for the nine-month
period ended February 28, 2010 to approximately $ 7.11 million for the
nine-month period ended February 28, 2011. In addition, the amortization of
premium for larger than usual principal payments on mortgage backed securities
in the six months ended February 28, 2011 resulted in decreased investment
income.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of February 28, 2011.
However, "incurred but not reported" (IBNR) policy losses for the nine-month
period ended February 28, 2011 and 2010 amounted to $148,002 and $139,068
respectively. Such amounts represent the provision for loss and loss adjustment
expense attributable to surety bonds issued by FSC. These estimates are based on
industry averages adjusted for factors that are unique to the FSC's underwriting
approach and are routinely reviewed for adequacy based on current market
conditions and other factors unique to FSC's business. IBNR policy losses were
approximately 22% and 23% of earned premium for the nine-month periods ending
February 28, 2011 and 2010, respectively.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $224,468 and $185,640 for the nine-month
periods ended February 28, 2011 and 2010, 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 33.94% and 31.35% for the periods ended February 28, 2011 and 2010
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the nine-month periods ended February
28, 2011 and 2010 were $823,400 and $1,022,642 respectively, representing a
decrease of $199,242, and were comprised of the following:
-9-
Nine-month Period Ended
February 28,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 376,241 $ 572,888 $ (196,647)
General office expense 89,181 86,230 2,951
Legal and other professional fees and costs 101,339 137,445 (36,106)
Audit, accounting and related services 67,380 81,763 (14,383)
Travel, meals and entertainment 49,999 36,539 13,460
Other general and administrative 139,260 107,777 31,483
------------------ ------------------ -------------------
Total general and administrative $ 823,400 $ 1,022,642 $ (199,242)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $197,000 and are comprised of the following:
Nine-month Period Ended
February 28,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 405,512 $ 380,158 $ 25,354
Commissions 77,085 32,264 44,821
Stock option expense 15,672 212,901 (197,229)
Fringe benefits 43,476 39,765 3,711
Key-man life insurance 51,456 42,844 8,612
Deferred policy acquisition costs (216,960) (135,044) (81,916)
------------------ ------------------ -------------------
Total salaries and related costs $ 376,241 $ 572,888 $ (196,647)
================== ================== ===================
The increase in salaries and taxes is attributable to year end bonuses paid to
certain employees in December 2010 which were not paid in the previous year. The
increase in commissions is attributable to FSC's commission structure that pays
a larger commission percentage 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:
Nine-month Period Ended
February 28,
-----------------------------------
2011 2010 Difference
----------------- ----------------- -----------------
General corporate services $ 10,163 $ 55,164 $ (45,001)
Statutory examination 13,148 - 13,148
SEC related costs 29,594 - 29,594
Coal reclamation consulting 17,940 10,094 7,846
Acquisition and financing related costs 30,494 72,187 (41,693)
----------------- ----------------- -----------------
Total legal and other professional fees $ 101,339 $ 137,445 $ (36,106)
================= ================= =================
In the nine month period ending February 28, 2011, the Company incurred costs in
response to a triennial SEC examination of its investment advisor subsidiary as
well as costs in response to a statutory examination of its insurance
subsidiary, required by the West Virginia Insurance Commission. 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 nine month periods ending February
28, 2011 and 2010, the Company incurred expense of $17,940 and $10,094 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
$30,494 and $72,187 for the nine-month periods ended February 28, 2011 and 2010,
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 February 28, 2011 was $54,866.
J&C had no revenue or expenses attributable to the Fund for the nine month
period ending February 28, 2011; it had absorbed $75,038 of the Fund's operating
expenses during the corresponding period from the previous year.
INTEREST EXPENSE
Interest expense for the nine-month period ended February 28, 2011 was $661,341
as compared with $691,093 for the corresponding period ended February 28, 2010.
Components of interest expense are comprised of the following:
-11-
Nine-month Period Ended
February 28,
-----------------------------------
2011 2010 Difference
----------------- ----------------- -----------------
Interest expense on bridge financing $ 445,029 $ 355,663 $ 89,367
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 94,175 263,546 (169,371)
Interest expense on demand and term notes 97,929 66,891 31,038
Other finance charges 24,208 4,994 19,214
----------------- ----------------- -----------------
Total interest expense $ 661,341 $ 691,093 $ (29,752)
================= ================= =================
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
nine-month period ended February 28, 2010 as compared to the corresponding
period of the previous year was largely attributable to the issuance of common
stock on June 5, 2009 in relation to the agreement with the bridge loan holders.
Interest expense on demand and term notes increased due to increased borrowings
and other finance charges increased due to incentive fees paid to a note holder
to obtain borrowings.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for nine-month periods ended February 28, 2010
and 2010 are as follows:
Nine-month Period Ended
February 28,
----------------------------------------
2011 2010 Difference
--------------------- ------------------ -----------------
Accretion of discount $ 10,888 $ 268,808 $ (257,920)
Accrued dividends - mandatorily redeemable preferred
stock 91,815 577,772 (485,957)
Accrued dividends - equity preferred stock 582,660 175,720 406,940
--------------------- ------------------ -----------------
Total accretion and dividends $ 685,363 $ 1,022,300 $ (336,937)
===================== ================== =================
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 $106,066 and dividends of $242,038 associated with the remaining Series B are
deductions from net income and not included in the table above. The decreases in
accretion of discount and accrued dividends on mandatorily redeemable preferred
stock result from this exclusion of Series B subsequent to November 30, 2009,
the application of the interest or constant yield method to the initial discount
recorded over a period of five years from the date of issuance of the stock and
the final month's accretion of the discount on Series A Preferred stock
recognized in December 2010. 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.
-12-
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 forecasts and projections, such assets may be
subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of February 28, 2011.
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. 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 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 periodically updated and compared to the value
of marketable securities pledged by the principal to FSC as collateral security
for the surety bond to mitigate exposure to loss. Should the principal default
in its obligation to reclaim the property as specified in the mining permit, FSC
would 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. FSC's exposure to loss is limited to the face amount of its
bond.
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.
-13-
To establish its reserves for losses and loss adjustment expense, management
routinely reviews its exposure to loss based on reports provided after periodic
monitoring and inspections, along with industry averages and historical
experience. Management estimates 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 $1,759,000 for the nine-month period
ended February 28, 2011. The Company had positive cash flow of approximately
$243,000 from operating activities for the nine-month period ended February 28,
2011. A substantial portion of the Company's cash flow is generated by its
insurance subsidiary which 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 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 $7,481,336 as of February 28, 2011, $7,480,311 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. The reinsurance
arrangement has allowed FSC to expand its market share and to improve 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.
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,
notwithstanding the reinsurance agreement with Lloyd's of London and the
resulting increase in bonding capacity. Management believes that if FSC's
capital and surplus reserves were 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. As an alternative means of addressing
access to markets, management is seeking to establish a relationship with any
one of several 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.
-14-
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.
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.
-15-
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 February 28, 2011. 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 February
28, 2011, 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
February 28, 2011 and May 31, 2010 and the results of its operations and cash
flows for the three and six month periods ended February 28, 2011 and 2010 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 nine months ended February 28, 2011, 5,040,999 common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings, 8,332,326 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 February 28, 2011, 244,000 common shares were issued in
private placements to various individuals pursuant to short term borrowings,
309,282 common shares were issued as stock dividends to Series B Preferred
shareholders, and 6,738,900 common shares were issued to the Bridge lenders.
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 $2,041,914.
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: April 19, 2011 JACOBS FINANCIAL GROUP, INC.
--------------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
--------------------------------------------------
John M. Jacobs, President
-19
