Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED MAY 31, 2013
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 84-0922335
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
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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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Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK $.0001 PAR VALUE
Indicate by check mark if registrant is a well-known seasoned insurer, as
defined in rule 405 of the Securities Act.
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Yes [_] No [X]
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Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
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Yes [_] No [X]
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Indicate by a check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
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Yes [X] No [_]
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
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[X]
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Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
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Large accelerated filer [_] Accelerated filer [_]
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Non-accelerated filer [_] Smaller reporting company [X]
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
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Yes [_] No [X]
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State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. As of November 30, 2012: $1,355,881 (308,154,805 shares at $.0044 /
share)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 332,980,027 shares of common
stock as of September 13, 2013.
PAGE
TABLE OF CONTENTS ----
PART I
ITEM 1 BUSINESS 4
ITEM 1A RISK FACTORS 5
ITEM 2 PROPERTIES 5
ITEM 3 LEGAL PROCEEDINGS 5
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 5
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES 6
ITEM 6 SELECTED FINANCIAL DATA 8
ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 8
ITEM 7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 24
ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 24
ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE 26
ITEM 9A(T)CONTROLS AND PROCEDURES 26
ITEM 9B OTHER INFORMATION 27
PART III
ITEM 10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE 27
ITEM 11 EXECUTIVE COMPENSATION 30
ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS 32
ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE 34
ITEM 14 PRINCIPAL ACCOUNTING FEES AND SERVICES 35
PART IV
ITEM 15 EXHIBITS, FINANCIAL STATEMENT SCHEDULES 37
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PART I
ITEM 1. BUSINESS
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The predecessor of Jacobs Financial Group, Inc. (the "Registrant", "JFG" or the
"Company"), NELX, Inc., was incorporated in the State of Kansas in March 1983 as
Nelson Exploration, Inc. In October 1993 the Company changed its name to NELX,
Inc. On or about December 29, 2005, NELX was merged with and into its
newly-formed wholly-owned subsidiary, JFG, a Delaware corporation. JFG survived
the merger as the Registrant. The merger effected a change in the Registrant's
name, a change in the state of incorporation of the Registrant from Kansas to
Delaware, and amendments to the Articles of Incorporation and Bylaws of the
Registrant. The Company holds four wholly owned subsidiaries, FS Investments,
Inc. ("FSI"), Jacobs & Company ("Jacobs & Co."), First Surety Corporation
("FSC") and Crystal Mountain Spring Water, Inc. ("CMW").
FSI, incorporated in 1997 in West Virginia, is a holding company that was
organized to develop surety business through the formation or acquisition of
subsidiaries engaged in the issuance of surety bonds collateralized by
investment accounts that are professionally managed by Jacobs & Co. Through its
wholly-owned subsidiary, Triangle Surety Agency, Inc. ("Triangle Surety" or
"TSA"), FSI is actively engaged in the placement with insurance companies of
surety bonds, with an emphasis on clients engaged in regulated industries.
Jacobs & Co., incorporated in 1988 in West Virginia, is a Registered Investment
Advisory firm whose executive offices are located in Charleston, West Virginia.
Jacobs & Co. provides fee based investment advisory services to institutions,
companies and individuals. In June 2001, the Jacobs & Company Mutual Fund (the
"Fund") was organized as a series of the Advisors Series Trust. On June 27,
2005, the Fund was reorganized as a series of Northern Lights Fund Trust. The
Fund's assets were liquidated in November 2009 and distribution of proceeds to
the Fund's shareholders was made on December 1, 2009.
On December 31, 2005 the Company acquired the former West Virginia Fire and
Casualty Company (WVFC), subsequently renamed First Surety Corporation (FSC),
from The Celina Mutual Insurance Company (Celina). The acquisition consisted of
the purchase of marketable investments and insurance licenses and did not
include any existing policies or customer base as the insurance lines being
offered by WVFC were not insurance lines that new ownership intended to pursue.
FSC is a West Virginia domiciled property and casualty company with licenses
(multi-line) in West Virginia, Indiana and Ohio, targeting primarily coal and
oil & gas industry surety markets in the Eastern United States. In 2006, the
Company was licensed for the surety line of business in West Virginia. In 2008,
the Company's license for surety was expanded to include Ohio.
CMW has an undeveloped leasehold interest in a mineral water spring located near
Hot Springs, Arkansas.
The Company is headquartered in Charleston, West Virginia, and through its
wholly-owned subsidiaries, employs a total of six (6) full-time employees.
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ITEM 1A.RISK FACTORS
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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. PROPERTIES
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Through its wholly-owned subsidiary, CMW, the Company has an undeveloped
leasehold interest in a mineral water spring located near Hot Springs, Arkansas.
Under this leasehold arrangement, CMW is obligated for minimum lease payments in
the amount of approximately $180 per month with automatic options to extend the
leasehold through October 2026. CMW has the right to cancel the lease upon sixty
(60) days written notice at any time. The property is presently not being
actively explored or developed. During the 2002 fiscal year, management
evaluated the lease and determined the development was not currently feasible.
Accordingly, the Company recorded an impairment of $116,661 to its investment in
the lease. Opportunities will continue to be explored as they arise with respect
to the development or sale of the leasehold interest. The stock of CMW has been
pledged to a group of lenders as collateral (See Item 7 "Bridge-financing,
Commitments and Material Agreements").
ITEM 3. LEGAL PROCEEDINGS
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None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Three new members have been appointed to the JFG Board of Directors since the
last annual meeting, held in December 2005, and will serve until the next called
meeting of shareholders which is not yet scheduled.
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PART II
ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES.
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The Company's common stock is traded in the over-the-counter market under the
symbol JFGI (OTC Bulletin Board Symbol). The table below sets forth the high and
low price information for the Company's common stock for the periods indicated.
Such prices are inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions.
HIGH LOW
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FISCAL YEAR ENDED MAY 31, 2013
4th Quarter .012 .005
3rd Quarter .006 .004
2nd Quarter .025 .004
1st Quarter .052 .003
FISCAL YEAR ENDED MAY 31, 2012
4th Quarter .004 .003
3rd Quarter .005 .002
2nd Quarter .007 .005
1st Quarter .009 .005
As of May 31, 2013, there were approximately 900 holders of record of the
Company's common stock.
Under the West Virginia insurance code, ordinary dividends to stockholders are
allowed to be paid only from that part of the insurance subsidiary's (FSC's)
available surplus funds which constitutes realized net profits from the business
and whereby all such dividends or distributions made within the preceding twelve
months does not exceed the lesser of 10% of the insurance subsidiary's (FSC's)
surplus as regards to policyholders as of December 31st of the preceding
year-end or net income from the insurance subsidiary's (FSC's) operations from
the previous two calendar years not including capital gains. Any payment of
extraordinary dividends requires prior approval from the WV state insurance
commissioner.
The Company has neither declared nor paid any cash dividends on its common stock
during the last two fiscal years, and it is not anticipated that any such
dividend will be declared or paid in the foreseeable future.
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Regulatory approval of the acquisition of FSC by JFG was provided under the
condition that no dividends or monies are to be paid to JFG from FSC without
regulatory approval. This consent order was terminated on March 26, 2012 and
dividends in the amounts of $590,000 and $380,000 were paid during the years
ended May 31, 2013 and May 31, 2012. For further information, see Notes C and O
to the Consolidated Financial Statements and "Restrictions on Use of Assets"
within the section of "Capital Resources and Financial Condition" of
Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in Part II Item 7 of this Annual Report on Form 10-K.
As of May 31, 2013, shares of the Company's common stock authorized for issuance
under the Registrant's 2005 Stock Incentive Plan, that was approved by the
stockholders of the Company on December 8, 2005, are as follows:
EQUITY COMPENSATION PLAN INFORMATION
Number of Shares to be Issued Weighted-Average Number of Shares
Upon Exercise of Exercise Price of Remaining Available
Outstanding Options Outstanding Options For Future Issuance
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9,800,000 .0400 2,600,000
There are no other equity compensation plans approved by stockholders of the
Company.
UNREGISTERED SALES OF EQUITY SECURITIES
The Certificate 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
The Certificate of Designations, Powers, Preferences and Rights of Series B
Preferred Stock adopted by the Board of Directors of the Company on December 22,
2005 is set forth as Exhibit 4.2
The Certificate of Designations, Powers, Preferences and Rights of Series C
Preferred Stock adopted by the Board of Directors of the Company on October 29,
2009 is set forth as Exhibit 4.3.
In the year ended May 31, 2013, 2,527,500 common shares were issued as
additional consideration to various lenders in private placements pursuant to
short term borrowings. 17,521,038 common shares were issued to the Bridge
lenders. 22,650,000 common shares were issued to an individual as compensation
for services instrumental to advancing the Company's business plan. 9,056,539
common shares were issued in connection with the additional 2% stock quarterly
dividend associated with Series A and B Preferred shares that have requested to
be redeemed upon maturity. Subsequent to May 31, 2013, 319,000 common shares
have been issued in private placements to various individuals pursuant to short
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term borrowings, 9,316,337 shares were issued to Bridge lenders, and 1,236,782
common shares were issued July 1, 2013 in connection with the additional 2%
stock quarterly dividend associated with Series A and B Preferred shares that
have requested to be redeemed.
The Registrant's Common Shares are issued under the restrictions of Rule 144 and
bear 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 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 6. SELECTED FINANCIAL DATA
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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 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL AND RESULTS OF
OPERATIONS
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During fiscal 2013, the Company has focused its primary efforts on the
development and marketing of its surety business in West Virginia and Ohio,
securing potential strategic relationships that will accelerate the progression
of the Company's business plan and raising additional capital to increase the
capital base of its insurance subsidiary, First Surety Corporation (FSC), to
facilitate entry into other state markets.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2013
RESULTS OF OPERATIONS
Total revenues decreased from approximately $1,833,000 in fiscal 2012 to
approximately $1,345,000 in fiscal 2013, while total operating expenses
decreased from approximately $1,817,000 in fiscal 2012 to approximately
$1,790,000 in fiscal 2013. This resulted in a net loss from operations of
approximately $445,000 in 2013 as compared with income from operations of
approximately $16,000 in fiscal 2012.
The decrease in revenues is largely attributable to the receipt in 2012 of a
cumulative No Claims Bonus from its reinsurers for the two years ending June 30,
2010 and June 30, 2011, as well as the need to recognize additional ceded
premium in 2013 in order to meet the minimum amount set forth in the Reinsurance
contract. For the twelve month period ended May 31, 2013 net investment income
declined due to the re-allocation of assets in the investment portfolio compared
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to the previous year. Some interest bearing mortgage backed securities were sold
at various times during the previous twelve-month period and replaced with U.S.
Treasury-backed zero coupon bonds. In addition, investment advisory fees
declined due to the decrease in the amount of assets in portfolios under
management. The decrease in expenses is attributable to decreased policy losses
incurred and policy acquisition costs as a result of a decrease in premium
written for existing clients.
Interest expense increased from approximately $906,000 in fiscal 2012 to
approximately $1,073,000 in fiscal 2013, as a result of the rise in market value
of the common stock used to calculate the price of shares to be issued for the
semi-annual bridge loan issuance in September 2012.
In the years ending May 31, 2012 the Company, upon advice of legal counsel,
removed certain dormant accounts payable in the aggregate amount of $150,604
based upon the vendor no longer requiring payment on a portion of the balance
owed to them. These removals were recorded as gains on debt extinguishment.
CAPITAL RESOURCES AND FINANCIAL CONDITION
Mandatorily Redeemable Preferred Stock
In conjunction with the acquisition of FSC at December 31, 2005, a restructuring
of the Company's financing was accomplished through the private placement of 350
shares of Series A Preferred stock and 3,980 shares of Series B Preferred stock,
each accompanied by warrants to acquire common stock of the Company in exchange
for cash totaling $3,335,000. $2,860,000 was used in the acquisition and funding
of the insurance subsidiary, with the remaining funds used to pay expenses
attributable to the acquisition and the funding of on-going operations.
Additionally, approximately $3,668,000 of indebtedness of the Company was
converted into preferred stock and warrants reducing the Company's borrowings
under short-term financing arrangements to approximately $167,000 as of December
30, 2005.
The Series A designation was designed for issuance to principals desiring surety
bonds under FSC's partially collateralized bonding programs. As designed,
proceeds from the sale of Series A preferred stock is down-streamed to FSC to
increase its capital and insurance capacity, although to the extent that
proceeds from the sale of Series B preferred shares was used in the initial
acquisition and funding of FSC, the Company was allowed to use such proceeds to
redeem Series B preferred stock (Company option to redeem) or for funding of
on-going operations. Effective June 1, 2007, the Company agreed to the
requirement of the West Virginia Insurance Department to downstream all future
proceeds from sales of Series A preferred stock in order to increase capital and
reserves of the insurance subsidiary to more substantial levels.
The Series A designation contains a conditional redemption feature providing for
the redemption of the Series A shares at any time after the seventh (7th)
anniversary of the Issue Date, provided that the principal no longer requires
surety bonds issued by FSC. Surety bonds currently being issued by FSC are
primarily for coal mining and reclamation permits, which are long-term in nature
and continually evolving whereby outstanding bonds are periodically released as
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properties are mined and reclaimed and new bonds issued for properties to be
mined in the future. Accordingly, this source of financing was designed to be
long-term by nature.
The Company's outstanding Series A Preferred stock matures on the seventh
anniversary of the issuance date and thereafter holders of the Series A Stock
are eligible to request that the Company redeem their Series A Shares. As of
this report, the Company has received requests for redemption of 291 shares of
Series A Preferred. The aggregate amount to which the holders requesting
redemption are entitled as of June 30, 2013, is $387,071.
Under the terms of the Series A 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 A Stock are sufficient to redeem the total number of shares of Series
A 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 affect the
redemption will not result in an impairment of the operations of the Insurance
Subsidiary, then the redemption shall occur on the Redemption Date. If, however,
the Board determines either that there are not sufficient funds legally
available to accomplish the redemption or that the use of such funds to effect
the redemption will result in an impairment of the operations of the Insurance
Subsidiary, then (X) the 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 A
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 A Stock to be redeemed shall be increased by 2%
of the Series A Face Amount, with the amount of such increase (i.e., 2% of the
Series A 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 A 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 A 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 A
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 to redemption
shall be paid on a pari passu basis with the Redemption Price of the Series A
Stock subject to redemption in accordance herewith. Until the Redemption Price
for each share of Series A Stock elected to be redeemed shall have been paid in
full, such share of Series A Stock shall remain outstanding for all purposes and
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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 April 4, 2013, the Company's Board of Directors determined based on the
criteria established under the terms of the Preferred Stocks that there were
insufficient funds available for the redemption of Preferred Stocks.
The Series B designation was designed for issuance to investors in JFG and
contains both conversion rights to common stock and redemption features. Each
share of the Series B preferred stock is convertible, at the option of the
holder, into 1,000 shares of JFG common stock and can be converted at any time.
The Series B preferred shares were issued at a twenty-five percent (25%)
discount to the stated face value of $1,000 per share or approximately
$2,217,650 in total. Additional shares of the Series B were subsequently sold at
a discount of approximately four and one-half percent (4.5%) or approximately
$36,000. Additionally, the Series B preferred stock can be redeemed, at the
option of the holder, at full-face value plus accrued and unpaid cumulative
dividends, commencing with the fifth (5th) anniversary of the original issue
date. The Company has the option to redeem the Series B preferred shares at any
time after the first (1st) anniversary of the original issue date, subject to
the holder choosing to exercise conversion privileges prior to the stated
redemption date.
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 2,219 shares of Series B Preferred. The
aggregate redemption amount to which the holders are entitled as of June 30,
2013, is $4,020,115.
Under the terms of the Series B Preferred Stock, receipt of a redemption request
required the Company's Board 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 affect the redemption will not
result in an impairment of the operations of the Insurance Subsidiary, then the
redemption shall occur on the Redemption Date. If, however, the Board determines
either that there are not sufficient funds legally available to accomplish the
redemption or that the use of such funds to effect the redemption will result in
an impairment of the operations of the Insurance Subsidiary, then (X) the
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
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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 to 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 Preferred
Stock.
As an inducement to the initial preferred stock shareholders, warrants to
purchase 45,402,996 shares of common stock at an exercise price of one-tenth of
one cent ($.001) per share were issued. Warrants issued to Series A Preferred
holders had a seven year expiration; warrants issued to Series B Preferred
holders had a five-year expiration period. Such warrants were valued at
approximately $533,000 using the Black-Scholes pricing model. 386,667 warrants
issued in connection with Series B Preferred Stock expired unexercised on
December 31, 2010, while 600,000 warrants issued in connection with Series A
Preferred Stock expired unexercised on December 31, 2012.
The Company experienced a loss after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily redeemable
preferred stock of $2,031,471 in fiscal 2013 as compared with a loss after
accretion of mandatorily redeemable convertible preferred stock, and accrued
dividends on mandatorily redeemable preferred stock of $1,219,559 in fiscal
2012.
EQUITY PREFERRED STOCK
In November 2009, 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 Board deemed it advisable to designate a
Series C Preferred Stock, with 10,000 authorized shares. The Recapitalization
consisted of the exchange of 6,805 Series B Shares Preferred for a combination
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of Series C Preferred Shares and Common Stock Shares. For each Series B
Preferred Share, the participating holder received (i) one Series C Preferred
Share and (ii) 2,000 shares of JFG Common Stock. The accumulated dividend rights
and preferences associated with the Series B Preferred Shares transferred
undiminished to the corresponding Series C Preferred Shares. This exchange
amounted to $6,269,051 of carrying value of Series B Preferred stock being
exchanged for Series C Preferred and Common Stock. 13,609,872 shares of Common
Stock were issued to the Series C Preferred Stock holders at the rate of 2,000
Common shares for each exchanged Series B Preferred Stock, with the related cost
associated with the Common issuance offsetting the Series C Preferred 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 preceding the date of the transaction. Series C Preferred stock may be
redeemed by the Company but does not have a fixed maturity date and is
considered permanent equity. Holders of over 70% of the outstanding Series B
Preferred Shares elected to participate in the recapitalization.
Unlike the Series B Preferred Shares with their fixed maturity date, the Series
C Preferred 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 Preferred Shares on the
Company's balance sheet is to increase the aggregate claim by the Series C
Preferred 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 Preferred Shares to a priority in
relation to junior securities with respect to dividends and on liquidation does
not create an obligation by the Company and therefore no liability is recorded
until the dividends are declared by the Board of the Company. The Series C
Preferred Shares are pari passu with the Series A Preferred Shares and Series B
Preferred Shares 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 Shares while dividends are in arrears.
The accrual of dividends on the equity preferred stock resulted in a charge to
common stockholders' equity and a credit to the equity of equity preferred stock
of $915,335 in fiscal 2013 as compared with a charge to common stockholders'
equity of $847,833 in fiscal 2012.
DIVIDEND PREFERENCE AND ACCRETION
During the year ended May 31, 2012, two holders of Series A Preferred stock
released all of their outstanding bonds held with FSC. The carrying value of
these shares of Series A Preferred Shareholders are listed in the Liability
section of the Balance Sheet, and therefore the dividends associated with these
shares of Series A Preferred stock after February 29, 2012 is a deduction from
net income. The carrying value of the Series B Preferred Shares that did not
convert are listed in the Liabilities section of the Balance Sheet, and
therefore the accretion and dividends associated with the Series B Preferred
stock after November 30, 2009 are deductions from net income. Series C Preferred
stock has no accretion. The recorded values of the Series A preferred stock was
increased to their stated liquidation values using the interest method over a
period of five years and such amounts were categorized as accretion of
mandatorily redeemable preferred stock in the consolidated statement of
operations. This accretion was concluded in December 2010.
-13-
The Series A Preferred designation is entitled to receive cumulative dividends
at the rate of 4.00% per annum and the Series B Preferred and Series C Preferred
designations are entitled to receive cumulative dividends at the rate of 8.00%
per annum, with the Series A, B and C Preferred designations having equal
ranking and preference as to dividends, liquidation rights and priority to the
Company's common stockholders. The accrued (but undeclared) dividends associated
with the Series C Preferred exchange amounted to $2,295,624 and are included in
the total amount exchanged for Series C Preferred Shares.
At this time, management has chosen to defer payment of dividends to the holders
of the Series A, B and C Preferred Shares until the Company has sufficient cash
flow from operations to service the obligation.
BRIDGE-FINANCING, COMMITMENTS AND MATERIAL AGREEMENTS
Of primary importance to the Company's ability to fully implement its business
plan is the expansion of that business into additional states. Regulatory
approval and licensing is required for each state where FSC seeks to conduct
business. Management found entry into additional states (as a surety) was
proving difficult without the benefit of more substantial capital and reserves
due to FSC's status as a recent entry into this market. Accordingly, management
began pursuing avenues that would provide additional capital to facilitate such
expansion.
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 purpose of the financing was to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing and, in addition, to increase the capital surplus
of FSC to make possible the reactivation of FSC's surety license in the state of
Ohio. The terms of the bridge-financing arrangement provide 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 were
provided under the terms of the bridge loan documents. Upon issuance of the
-14-
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. Finally, 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. An additional 2.8%
of the Company's outstanding common shares are required to be issued upon each
six-month anniversary date thereof until retirement of the notes.
In anticipation of a proposed financing and as a condition thereof, the Company
and each of the bridge lenders entered into a Loan Modification Agreement dated
February 25, 2012 which provided for modification of the Promissory Notes,
including an extension of the term of the Promissory Notes, and Subscription
Agreements in exchange for a partial cash payment to each bridge lender. To
date, the proposed financing has not closed, and the Company has been unable to
remit the partial payment. On August 10, 2012, the Company entered into an
agreement with the bridge lenders, pursuant to which the bridge lenders formally
agreed to forbear from exercising their rights and remedies arising from the
accumulated acknowledged events of default with respect to the bridge loans
until such date. As consideration for this forbearance, the Company entered into
an Amended and Restated General Hypothecation and Pledge Agreement dated August
9, 2012 (the "August 2012 Pledge"), but effective September 23, 2011, granting
to the bridge lenders as security for the repayment of the loans a lien and
security interest in all of the Company's shares of capital stock of First
Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledge
that the effectiveness of certain of the rights and remedies provided by such
agreement may be subject to prior approval by the Office of the Commissioner of
Insurance for the State of West Virginia. To date, none of the bridge lenders
has elected to pursue legal remedies under the Promissory Notes or the August
2012 Pledge.
RESTRICTIONS ON USE OF ASSETS
Regulatory approval for the acquisition of FSC by JFG was provided by a Consent
Order issued December 23, 2005 by the Commissioner of Insurance of the State of
West Virginia and imposed several conditions for the operation of FSC, including
the condition that no dividends or monies were to be paid to JFG without
regulatory approval. On May 26, 2012, all conditions imposed by the Consent
Order were terminated by the Commissioner of Insurance. Accordingly, the payment
of ordinary dividends is no longer restricted but cash, marketable investments,
and other receivables held by FSC are restricted from the Company's use to fund
operations or meet cash needs outside of the insurance company's domain. As of
May 31, 2013, such assets amounted to approximately $7.50 million.
Under the West Virginia insurance code, ordinary dividends to stockholders are
allowed to be paid only from that part of the insurance subsidiary's (FSC's)
available surplus funds which constitutes realized net profits from the business
and whereby all such dividends or distributions made within the preceding twelve
-15-
months does not exceed the lesser of 10% of the insurance subsidiary's (FSC's)
surplus as regards to policyholders as of December 31st of the preceding
year-end or net income from the insurance subsidiary's (FSC's) operations from
the previous two calendar years not including capital gains. Any payment of
extraordinary dividends requires prior approval from the WV state insurance
commissioner.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INVESTMENTS
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, 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 classifies 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.
INSURANCE PREMIUMS
Insurance premiums are recognized as revenue ratably over the term of the
related policies in proportion to the insurance protection provided. Premium
revenues are net of amounts ceded to reinsurers. Unearned premiums represent the
portion of premiums written, before ceded reinsurance which is shown as an
asset, applicable to the unexpired terms of policies in force determined on a
pro rata basis.
Insurance premium receivables are presented net of an estimated allowance for
doubtful accounts, which is based on a periodic evaluation of the aging and
collectability of premium receivables.
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 but these reinsurance contracts do
not relieve the Company from its obligations to policyholders. Ceded premiums,
at a rate of 35% of written premium, are recognized as reductions in revenue
ratably over the term of the related policies. Ceded unearned premiums represent
the portion of ceded premiums written applicable to the unexpired terms of
policies in force determined on a pro rata basis.
Under the terms of its reinsurance treaty, the Company is entitled to a No
Claims Bonus from the reinsurers for each contract year in which no claims are
received. The bonus is 20% of the contract year reinsurance premium and no
claims have been made since the inception of the treaty.
-16-
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions, premium taxes and other
underwriting expenses which vary with, and are primarily related to, the
production of business, are deferred and amortized as a charge to income as the
related premiums are earned. The Company periodically tests that deferred policy
acquisition costs are recoverable based on the expected profitability embedded
in the reserve for unearned premium. If the expected profitability is less than
the balance of deferred policy acquisition costs, a charge to income is taken
and the deferred policy acquisition cost balance is reduced to the amount
determined to be recoverable. Anticipated investment income is considered in the
determination of the recoverability of deferred policy acquisition costs.
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the property and casualty licenses of
FSC in the states of West Virginia, Ohio and Indiana. Such licenses have
indefinite lives and are evaluated annually for recoverability and impairment
loss. Impairment loss, if any, is measured by estimating future cash flows
attributable to such assets based on forecasts and projections and comparing
such discounted cash flow amounts to the carrying value of the asset. Should
actual results differ from such forecasts and projections, such assets may be
subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using information derived from Company experience in
addition to management's estimate of expected future claims on those policies in
force. Management's estimate considers relevant industry information but is
largely dependent upon management's experience and judgment since prior Company
experience and industry data available are extremely limited. FSC has
experienced no claims for losses as of May 31, 2013.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability
limit surety bonds in West Virginia and Ohio. Coal permit bonds are required by
regulatory agencies to assure the reclamation of land that has been disturbed by
mining operations, and accordingly, is a highly regulated process by federal and
state agencies. Such bonds are generally long-term in nature with mining
operations and reclamation work being conducted in unison as the property is
mined. Additionally, no two principals and 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 properties in accordance with the specifications of the mining
permit, prepared by independent outside professionals experienced in this field
of work. Such estimates are then periodically updated and compared with
marketable securities pledged, and held for the benefit of FSC as collateral for
the surety bond, to mitigate the exposure to significant loss. Should the
principal default in its obligation to reclaim the property as specified in the
mining permit, FSC would then use the funds held in the collateral account to
-17-
reclaim the property or forfeit 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, if sufficient
collateral is not obtained, or if the collateral held has experienced
significant deterioration in value and if FSC is not otherwise able to recover
under its contractual rights to indemnification.
Miscellaneous fixed-liability limit surety bonds are generally fully
collateralized by the principal's cash investment into a collateral investment
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 experience deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided in
conjunction with the periodic monitoring and inspections performed along with
industry averages and historical experience. Management has estimated such
losses based on management's experience, adjusted for factors that are unique to
the Company's approach, and in consultation with its consulting actuary
experienced in the surety field. As a result of the limited Company and industry
data and experience there is a significant risk that amounts reserved for future
expected losses and loss adjustment expenses could vary from those amounts
reserved and the variance could be material. Adjustments to reserves are
reflected in earnings in the period of determination.
LIQUIDITY AND GOING CONCERN
The Company experienced operating income (loss) from operations of approximately
($445,000) and $16,000 for the years ended May 31, 2013 and 2012, respectively.
The Company's income (or loss) decreases (or increases) when accretion of
mandatorily redeemable convertible preferred stock and accrued dividends on
mandatorily redeemable preferred stock are taken into account, to losses of
approximately $2,031,000 and $1,220,000 for the years ended May 31, 2013 and
2012. The Company has not been able to pay certain amounts due to professionals
and others and continues to be unable to pay its preferred stock dividend
obligation and to cure its defaults in certain quarterly payments due its
bridge-financing lenders. A substantial portion of the Company's cash flow is
generated by its insurance subsidiary and is subject to certain withdrawal
restrictions and regulatory restrictions including the ability to pay dividends
to its parent. 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.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to continue FSC's expansion of market share
and to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. In fiscal 2009, the Company was able
to increase the capital of FSC and reactivate FSC's insurance license in Ohio
-18-
and obtain authority to issue surety bonds in that state. However, management
has found that entry into other states (as a surety) has been difficult without
the benefit of more substantial capital and reserves due to FSC's status as a
recent entry into this market and the financial condition of the Company. This
is the case notwithstanding the reinsurance agreement entered into by FSC with
Lloyd's of London and the resulting increase in bonding capacity. Management
believes that if FSC's capital and surplus reserves were significantly more
substantial and the financial condition of the Company was stabilized, entry
into other states would be less challenging. Accordingly, management continues
to pursue avenues that can provide additional capital to increase the capacity
of its insurance subsidiary and to fund continuing operations as the business is
being fully developed. In addition, as an alternative means of addressing access
to markets, management is seeking to establish a relationship with any one of
several possible sureties that are licensed in those states other than West
Virginia and Ohio that comprise significant markets for the bonding programs of
FSC and could issue surety bonds that are underwritten and reinsured by FSC.
Under such a "fronting" arrangement, the need for additional capital at the
level of FSC to facilitate entry to other state markets would become secondary,
since the payment of a fronting fee to the insurance company with active
licenses would provide access to the state market without formal entry.
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 Preferred 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 now cash flow positive, the use of its
assets and profits are restricted to its stand-alone operation by regulatory
authority. While growth of the FSC business continues to provide additional
revenue opportunities to the Company's other subsidiaries, Jacobs & Company and
Triangle Surety, it is anticipated that working capital deficiencies will
continue 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, there is substantial doubt as
to the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
-19-
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 2013 WITH 2012
The Company experienced a loss from operations of approximately $445,000 in 2013
as compared with income from operations of $16,000 in fiscal 2012. The net loss
attributable to common stockholders was $2,946,806 in fiscal 2013 as compared
$2,067,392 in fiscal 2012.
REVENUES
Revenues decreased 27% in fiscal 2013, $1,344,655 as compared with $1,833,194 in
fiscal 2012. The decrease is largely attributable to the receipt in 2012 of a
cumulative No Claims Bonus from its reinsurers totaling $213,281 for the two
years ending June 30, 2010 and June 30, 2011, as well as the need to recognize
additional ceded premium in 2013 in order to meet the minimum amount set forth
in the Reinsurance contract. In addition, premium written to existing clients
decreased during the current fiscal year.
Revenue from the investment management segment, net of advisory referral fees,
declined 26% with fiscal 2013 reporting $178,328 as compared to $242,472 in
fiscal 2012, a decrease of $64,144. Net investment income declined due to the
re-allocation of assets in the investment portfolio compared to the previous
year. Some interest bearing mortgage backed securities were sold at various
times during the previous twelve-month period and replaced with U.S.
Treasury-backed zero coupon bonds. In addition, investment advisory fees
declined due to the decrease in the amount of assets in portfolios under
management. Investment advisory fees are based on the market value of assets
under management and some fluctuation will occur due to overall market
conditions. Generally such revenues will remain relatively constant from year to
year with large fluctuations attributable to the growth or loss of assets under
management.
Revenue from the surety insurance segment, consisting of FSC and TSA, decreased
27%, with $1,150,621 in fiscal 2013 as compared with $1,576,107 for the prior
year. Revenues attributable to the insurance segment are as follows:
Year Ended May 31,
2013 2012
--------------------- -------------------
Premiums earned $ 748,112 $ 956,615
Commissions earned 30,898 33,422
No Claims Bonus from Reinsurers 98,000 213,281
Net investment income 230,373 279,410
Net realized investment gains 43,238 93,379
--------------------- -------------------
Total $ 1,150,621 $ 1,576,107
===================== ===================
Premium revenue is recognized ratably over the term of the policy period and
thus is relatively stable from period to period with fluctuations for comparable
periods generally reflecting the overall growth or loss of business. Whereas,
commission revenue, which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations for comparable periods largely reflecting the overall growth or
loss of business. Investment income is expected to remain relatively consistent
-20-
from period to period, but can fluctuate based on interest rates, market
conditions, growth or loss of business, and investment funds expended in the
payment of claims.
The decrease in revenues reflected above is mainly attributable to the receipt
in 2012 of a cumulative No Claims Bonus from its reinsurers for the two years
ending June 30, 2010 and June 30, 2011, as well as the need to recognize
additional ceded premium in 2013 in order to meet the minimum amount set forth
in the Reinsurance contract. The Company has experienced no claims for losses as
of May 31, 2013. Gross premium written in fiscal 2013 amounted to $1,088,202 as
compared to $1,343,661 in fiscal 2012 and is reflective of a decline in the
volume of bonds required by a major customer, as well as overall decrease in new
premium written for new and existing clients. Commission income earned for the
placement of bonds with outside insurers has remained relatively stagnant.
FSC's investment holdings in fiscal 2013 averaged $7.570 million as compared to
$7.749 million for fiscal 2012, with investment yields decreasing from 3.58% to
2.75%. This decrease in investment yield is mostly attributable to the
diversification of some invested assets from interest earning, mortgage backed
securities to non-interest earning, zero coupon bonds. The ultimate effect of
zero coupon bonds will be reflected over the life of the bond through accretion
rather than yield. During the period, equity securities in the portfolio
provided dividends and gains from the covered call strategy utilized on the
equities.
EXPENSES
Incurred policy losses represent the provision for loss and loss adjustment
expense for "incurred but not reported" (IBNR) losses attributable to surety
bonds issued by FSC. Incurred policy losses for fiscal 2013 have been recorded
as $181,414 or 24% of earned premium as compared to $210,977 or 22% of earned
premium for fiscal 2012. The increase is due to the increased cost of
reinsurance based upon the reduced volume of written premiums. IBNR loss
estimates have been based on management's judgment that are unique to the FSC's
underwriting approach. As of May 31, 2013 FSC has not received any claims for
losses on any bonds underwritten since business began in 2006, therefore its
actuary has adjusted the percentage of premiums reserved for IBNR due to this
historical pattern.
Insurance policy acquisition costs represent charges to operations for
underwriting, commissions and premium tax attributable to surety polices issued
by FSC and are recognized ratably over the period in which premiums are earned.
In fiscal 2013 such costs amounted to $267,587 or 36% of earned premium as
compared with $311,385 or 33% in fiscal 2012. The decrease of $43,798 in
expenses is attributable to costs associated to the decrease in gross premium
written, while the increase as a percentage of earned premium for the current
fiscal year is due to FSC's increased cost of ceded premiums required in the
Reinsurance contract, without a corresponding increase in the premiums written.
General and administrative expenses for fiscal 2013 were $1,330,234 as compared
with $1,284,341 for fiscal 2012, representing an increase of $45,893 and are
comprised of the following:
-21-
Year Ended May 31,
2013 2012 Difference
------------- ------------ -------------
Salaries and related costs $ 710,376 $ 642,539 $ 67,837
General office expense 108,257 111,816 (3,559)
Legal and other professional fees 125,672 156,460 (30,788)
Audit, accounting and related services 133,109 136,687 (3,578)
Travel, meals and entertainment 83,483 85,006 (1,523)
Other general and administrative 169,337 151,833 17,504
------------- ------------ -------------
Total general and administrative $ 1,330,234 $ 1,284,341 $ 45,893
============= ============ =============
Salaries and related costs, net of deferred internal policy acquisition costs,
increased $67,837 and are comprised of the following:
Year Ended May 31,
2013 2012 Difference
------------- ------------- -------------
Salaries and wages $ 596,103 $ 528,871 $ 67,232
Commissions 32,261 134,564 (102,303)
Payroll taxes 44,061 48,033 (3,972)
Stock option expense - 370 (370)
Fringe benefits 97,629 89,266 8,363
Key-man life insurance 60,355 56,889 3,466
Deferred policy acquisition costs (120,033) (215,454) 95,421
------------- ------------- -------------
Total salaries and related costs $ 710,376 $ 642,539 $ 67,837
============= ============= =============
The increase in salaries is due to the issuance of Company stock to its
employees as compensation for services rendered. The decrease in payroll taxes
is due to the rate used for State Unemployment tax reducing from 4.5% to 3.7% in
2013, as well as certain employee wages reaching the taxable limit for social
security due to the stock compensation awarded. The decrease in commissions is
partially attributable to FSC's commission structure that pays a larger
commission percentage on the origination of a policy but reduced for subsequent
policy, as well as to the timing of payment of commissions based upon
collections. In addition, two customers were purchased by a multi-national firm
with existing surety capacity, resulting in the release of those bonds and the
subsequent reduced commissions. The increase in fringe benefits is attributable
to increased cost of health insurance and additional life insurance for
employees.
Legal and professional fees decreased compared to the prior year. In 2012 the
Company incurred $27,500 in costs associated with the due diligence performed by
third parties for the benefit of potential investors as well as costs associated
with a statutory examination of its insurance subsidiary by the West Virginia
Insurance Commission in that year. Costs related to the Company's on-going
efforts to obtain financing necessary to expand the Company's business and
penetrate new markets decreased in 2013, offset by increases in general
corporate services, resulting primarily from increased legal and consulting
expenses affecting the insurance subsidiary.
-22-
Other general and administrative expense increased approximately $17,000
compared to the corresponding 2012 period. This increase is due to the
non-recurring use of temporary personnel for clerical projects in the current
year. Other less significant increases and decreases were experienced in other
general administrative categories in fiscal 2013 as compared to fiscal 2012.
Gain on Extinguishment of Debt
During the year ended May 31, 2012, the Company removed certain dormant accounts
payable in the aggregate amount of $150,604 based on the vendor no longer
requiring payment on a portion of the balance owed.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense for fiscal 2013 was $1,073,338 compared to $905,601 in fiscal
2012. Components of interest expense are comprised of the following:
Year Ended May 31,
2013 2012 Difference
------------- ----------- ----------
Interest expense on bridge financing $ 595,000 $ 596,630 $ (1,630)
Expense of common shares issued or to
be issued in connection with bridge
financing and other arrangements 301,333 122,621 178,712
Interest expense on demand and term notes 159,924 179,010 (19,086)
Other finance charges 17,081 7,340 9,741
------------- ----------- ----------
Total interest expense $ 1,073,338 $ 905,601 $ 167,737
The increase in the expense of common shares issued (or to be issued) for fiscal
year 2013 as compared to fiscal year 2012 was attributable a rise in the market
value of the common stock, affecting the calculated expense of shares issued for
the semi-annual bridge loan issuance in September 2012. Interest expense on
demand and term notes decreased due to reduced borrowings taken during the
current year. Other finance charges in the current year reflect interest charged
on past due accounts payable and Federal and State payroll taxes.
Preferred Stock Accretion and Dividends
Accretion of mandatorily redeemable convertible preferred stock is comprised of
accretion of discount and accrued but unpaid dividends on preferred stock as
follows:
Year Ended May 31,
2013 2012
----------------- ----------------
Accrued dividends - mandatorily redeemable
preferred stock $ 74,774 $ 113,726
Accrued dividends - equity preferred stock 915,335 847,833
----------------- ----------------
$ 990,109 $ 961,559
================= ================
-23-
The Series B class of stock became treated as a liability effective November 30,
2009 when the majority was exchanged for Series C equity stock. Therefore, for
the year ended May 31, 2013, dividends of $380,239 associated with the Series B
outstanding after November 30, 2009 are deductions from net income and not
included in the table above. For the year ended May 31, 2012, accretion of $251
and dividends of $352,271 associated with the Series B outstanding after that
date are deductions from net income and not included in the table above. During
the year ended May 31, 2012, two holders of Series A stock released all of their
outstanding bonds held with FSC. Therefore these shares of Series A Preferred
Shareholders are listed in the liability section of the Consolidated Condensed
Balance Sheet and the dividends after February 29, 2012 associated with these
shares are a deduction from net income in the amounts of $57,855 and $14,069,
for the years ended May 31, 2013 and 2012, and not included in the table above.
Series C equity stock is not mandatorily redeemable and does not accrete.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
-------------------------------------------------------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------
The following financial statements are included herein in response to Item 8:
Page
---------
Table of Contents F-1
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Loss F-6
Consolidated Statements of Cash Flows F-7
Consolidated Statements of Series A Redeemable Preferred Stock
and Stockholders' Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
-24-
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in
Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-48
Schedule IV - Supplementary Insurance Information - Reinsurance F-49
Schedule VI - Supplemental Information F-50
-25-
TABLE OF CONTENTS
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Loss F-6
Consolidated Statements of Cash Flows F-7
Consolidated Statements of Series A Redeemable Preferred Stock
and Stockholders' Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in
Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-48
Schedule IV - Supplementary Insurance Information - Reinsurance F-49
Schedule VI - Supplemental Information F-50
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated balance sheet of Jacobs Financial
Group, Inc. and subsidiaries (the "Company") as of May 31, 2013, and the related
consolidated statements of operations, comprehensive loss, cash flows, and
Series A redeemable preferred stock and stockholders' deficit for the year then
ended. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Jacobs Financial
Group, Inc. and subsidiaries as of May 31, 2013, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note A to the financial
statements, the Company has insufficient liquidity and capitalization, is in
default with respect to certain loan and preferred stock agreements and has
suffered recurring losses from operations. These conditions among others raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans regarding these matters are also described in Note A. The
accompanying consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ EKS&H LLLP
January 16, 2015
Denver, Colorado
F-2
MALIN, BERGQUIST & COMPANY, LLP
CERTIFIED PUBLIC ACCOUNTANTS & BUSINESS ADVISORS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated balance sheet of Jacobs Financial
Group, Inc. and subsidiaries (the "Company") as of May 31, 2012, and the related
consolidated statements of operations, comprehensive income (loss), cash flows,
and mandatorily redeemable preferred stock and stockholders' equity (deficit)
for the year then ended. Our audit also included the financial statement
schedules listed in the Index as Item 15. The Company's management is
responsible for these consolidated financial statements and financial statement
schedules. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of May 31, 2012, and the consolidated results of its operations and
its cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note A to the
financial statements, the Company's significant net working capital deficit and
operating losses raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/ Malin, Bergquist & Company, LLP
Pittsburgh, PA
September 13, 2012
F-3
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 2013 MAY 31, 2012
-----------------------------
ASSETS
INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at fair value $ 5,472,116 $ 6,098,648
(amortized cost - 5/31/13 $5,374,252; 05/31/12 $5,915,428)
Equity investments available for sale, at fair value, net 454,639 484,274
( cost - 5/31/13 $455,708; 05/31/12 $519,120)
Short-term investments, at cost (approximates fair value) 1,255,234 991,875
Cash 315,226 259,079
-----------------------------
TOTAL INVESTMENTS AND CASH 7,497,215 7,833,876
Investment income due and accrued 41,605 42,981
Premiums and other accounts receivable 258,698 289,463
Prepaid reinsurance premium 196,565 243,877
Funds deposited with Reinsurers 90,647 42,458
Deferred policy acquisition costs 138,497 167,010
Furniture, automobile, and equipment, net of accumulated
depreciation of $113,302 and $102,616, respectively 11,719 22,404
Other assets 99,187 96,370
Intangible assets 150,000 150,000
-----------------------------
TOTAL ASSETS $ 8,484,133 $ 8,888,439
=============================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 1,207,903 $ 1,026,489
Reserve for unearned premiums 621,974 771,089
Advanced premium 117,920 139,402
Accrued expenses and professional fees payable 737,925 473,540
Accounts payable 295,960 172,627
Related party payable 124,409 109,309
Term and demand notes payable to related party 259,688 377,954
Notes payable 4,587,482 4,836,000
Accrued interest payable 2,286,052 1,716,884
Accrued interest payable to related party 277,769 209,069
Other liabilities 418,368 290,706
Mandatorily redeemable Series A Preferred Stock, $.0001 par
value per share; 1 million shares authorized; 1,126 shares issued
and outstanding at May 31, 2013 and May 31, 2012, respectively;
stated liquidation value of $1,000 per share; aggregate liquidation
value at May 31, 2013 and May 31, 2012, of $1,482,718 and
$1,424,863, respectively. 1,482,718 1,424,863
Mandatorily redeemable Series B Preferred Stock, $.0001 par
value per share; 3,136 shares authorized; 2,817 shares issued and
outstanding at May 31, 2013 and May 31, 2012; stated liquidation
value of $1,000 per share; aggregate liquidation value at
May 31, 2013 and May 31, 2012, of $4,990,463 and $4,610,224, respectively. 4,990,463 4,610,224
-----------------------------
TOTAL LIABILITIES 17,408,631 16,158,156
Series A Preferred Stock, $.0001 par value per share; 1 million
shares authorized; 1,549 shares issued and outstanding at May
31, 2013 and May 31, 2012, respectively; stated liquidation value
of $1,000 per share; aggregate liquidation value at May 31, 2013
and May 31, 2012, of $1,916,330 and $1,841,555, respectively. 1,916,330 1,841,555
-----------------------------
TOTAL MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK 1,916,330 1,841,555
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Series C Preferred Stock, $.0001 par value per share; 10,000
shares authorized; 6,805 shares issued and outstanding at May
31, 2013 and May 31, 2012, respectively; includes $5,214,516
and $4,299,181 accrued Series C dividends, respectively; aggregate
liquidation value at May 31, 2013 and May 31, 2012, of $11,245,447
and $10,330,112, respectively. 11,245,447 10,330,112
Common stock, $.0001 par value per share; 490 million shares
authorized; 322,107,908 and 270,352,831 shares issued and outstanding
at May 31, 2013 and May 31, 2012, respectively 32,211 27,035
Additional paid in capital 4,013,242 3,664,923
Accumulated deficit (26,228,523) (23,281,717)
Accumulated other comprehensive income 96,795 148,375
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (10,840,828) (9,111,272)
-----------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,484,133 $ 8,888,439
=============================
See accompanying notes.
F-4
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
2013 2012
--------------- -------------
REVENUES:
Investment advisory services $ 178,328 $ 242,472
Insurance premiums and commissions 877,010 1,203,318
Net investment income 230,373 279,410
Net realized investment gains 43,238 93,379
Other income 15,706 14,615
--------------- -------------
TOTAL REVENUES 1,344,655 1,833,194
OPERATING EXPENSES:
Incurred policy losses 181,414 210,977
Insurance policy acquisition costs 267,587 311,385
General and administrative 1,330,234 1,284,341
Depreciation 10,685 10,736
--------------- -------------
TOTAL OPERATING EXPENSES 1,789,920 1,817,439
--------------- -------------
NET INCOME (LOSS) FROM OPERATIONS (445,265) 15,755
Gain on debt extinguishment - 150,604
Accrued dividends of Series A Mandatorily Redeemable
Preferred Stock (57,855) (14,069)
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (380,239) (352,522)
Interest expense (1,073,338) (905,601)
--------------- -------------
NET INCOME (LOSS) (1,956,697) (1,105,833)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (74,774) (113,726)
Accrued dividends on Series C Preferred Stock equity (915,335) (847,833)
--------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,946,806) $ (2,067,392)
=============== =============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.01)
=============== =============
WEIGHTED-AVERAGE SHARES OUTSTANDING 297,316,429 255,549,409
=============== =============
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
YEAR ENDED MAY 31,
2013 2012
-------------- --------------
COMPREHENSIVE INCOME (LOSS):
Net loss attributable to common stockholders $ (2,946,806) $ (2,067,392)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale investments
arising during period (43,844) 19,320
Reclassification adjustment for realized loss included in
net loss (7,736) (53,616)
-------------- --------------
Net unrealized loss attributable to available-for-sale
investments recognized in other comprehensive income (loss) (51,580) (34,296)
-------------- --------------
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,998,386) $ (2,101,688)
============== ==============
F-6
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31,
2013 2012
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,956,697) $ (1,105,833)
Adjustments to reconcile net loss to net cash
provided by operating activities:
(Increase) decrease in short-term investments (263,359) 15,742
Unearned premium (123,285) 59,399
Stock option expense - 370
Stock issued in connection with financing arrangements 249,133 70,175
Stock issued in connection with dividend arrangements 33,312 43,098
Accrual of Series A preferred stock dividends 57,855 14,069
Accrual of Series B preferred stock dividends and accretion 380,239 352,521
Stock issued in connection with services rendered 71,049 4,470
Provision for loss reserves 181,414 210,977
Amortization of premium 90,162 81,247
Depreciation 10,685 10,736
Accretion of discount (23,055) (104)
Realized gain on sale of securities (43,238) (93,379)
Gain on extinguishment of debt - (150,604)
Change in operating assets and liabilities:
Other assets (2,817) (74,384)
Premium and other receivables 30,765 (117,761)
Investment income due and accrued 4,114 (5,831)
Deferred policy acquisition costs 28,513 23,701
Related party accounts payable 15,100 10,100
Accounts payable 123,333 27,630
Accrued expenses and other liabilities 981,727 768,973
---------------- ----------------
NET CASH FLOWS FROM OPERATING ACTIVITIES (155,050) 145,312
CASH FLOWS FROM INVESTING ACTIVITIES
Costs of bonds acquired (1,137,860) (1,883,581)
Costs of mortgaged-backed securities acquired (759,207) (634,182)
Purchase of equity securities (365,751) (247,056)
Proceeds from sale of securities available for sale 1,974,793 1,757,718
Repayment of mortgage-backed securities 868,743 894,294
(Purchase)/Collection - accrued interest (2,737) 1,586
---------------- ----------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES 577,981 (111,221)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 1,310,924 1,124,925
Repayment of related party debt (1,429,190) (1,152,006)
Proceeds from borrowings 452,500 849,000
Repayment of borrowings (701,018) (887,500)
Proceeds from exercise of common stock warrants - -
---------------- ----------------
NET CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES (366,784) (65,581)
NET INCREASE (DECREASE) IN CASH 56,147 (31,490)
CASH AT BEGINNING OF PERIOD $ 259,079 290,569
================ ================
CASH AT END OF PERIOD $ 315,226 $ 259,079
================ ================
SUPPLEMENTAL DISCLOSURES
Interest paid $ 134,138 $ 145,398
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 249,133 70,347
See accompanying notes.
F-7
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF SERIES A REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED MAY 31, 2013
-----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A -----------------------------------------------------------------------------------------
REDEEMABLE COMMON STOCK SERIES C PREFERRED ACCUMULATED
------------------------------ --------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
----- ---------- ----------- ------- ---------- --------- ----------- ------------ -------- ------------
BALANCE, MAY 31, 2012 1,549 $1,841,555 270,352,831 $27,035 $3,664,923 6,805 $10,330,112 $(23,281,717) $148,375 $(9,111,272)
Issuance of common
stock as compensation
for services - - 22,650,000 2,265 57,869 - - - - 60,134
Issuance of common
stock as additional
consideration for
financing arrangements - - 29,105,077 2,911 260,553 - - - - 263,464
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 74,775 - - - - - (74,775) - (74,775)
Accrued dividends of
Series C equity
preferred stock - - - - - - 915,335 (915,335) - -
Accrual of common
shares to be issued
in connection with
financing arrangements - - - - 29,897 - - - - 29,897
Unrealized net loss
on available for
sale securities - - - - - - - - (51,580) (51,580)
Net loss, year ended
May 31, 2013 - - - - - - - (1,956,697) - (1,956,697)
----- ---------- ----------- ------- ---------- --------- ----------- ------------ -------- ------------
BALANCE, MAY 31, 2013 1,549 $1,916,330 322,107,908 $32,211 $4,013,242 6,805 $11,245,447 $(26,228,524) $ 96,795 $(10,840,829)
===== ========== =========== ======= ========== ========= =========== ============ ======== ============
See accompanying notes.
F-8
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF SERIES A REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
YEAR ENDED MAY 31, 2012
-----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES A -----------------------------------------------------------------------------------------
REDEEMABLE COMMON STOCK SERIES C PREFERRED ACCUMULATED
------------------------------ --------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
----- ---------- ----------- ------- ---------- --------- ----------- ------------ -------- ------------
BALANCE, MAY 31, 2011 2,675 $3,138,623 242,304,304 $24,230 $3,549,443 6,805 $ 9,482,279 $(21,214,153) $182,671 $(7,975,530)
Issuance of common
stock as compensation
for services - - 1,000,000 100 4,370 - - - - 4,470
Issuance of common
stock as additional
consideration for
financing arrangements - - 27,048,527 2,705 120,818 - - - - 123,523
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 113,726 - - - - - (113,726) - (113,726)
Accrued dividends of
Series C equity
preferred stock - - - - - - 847,833 (848,005) - (172)
Reclassification of
Series A from
temporary equity
to liabilities (1,126) (1,410,794) - - - - - - - -
Increase (Decrease) in
accrual of common
shares to be issued
in connection with
financing arrangements - - - - (10,078) - - - - (10,078)
Common stock option
expense - - - - 370 - - - - 370
Unrealized net loss
on available for
sale securities - - - - - - - - (34,296) (34,296)
Net loss, year ended
May 31, 2012 - - - - - - - (1,105,833) - (1,105,833)
----- ---------- ----------- ------- ---------- --------- ----------- ------------ -------- ------------
BALANCE, MAY 31, 2012 1,549 $1,841,555 270,352,831 $27,035 $3,664,923 6,805 $10,330,112 $(23,281,717) $148,375 $(9,111,272)
===== ========== =========== ======= ========== ========= =========== ============ ======== ============
See accompanying notes.
F-9
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND BUSINESS
----------------------------------
ORGANIZATION AND NATURE OF BUSINESS
Jacobs Financial Group, Inc. (the "Company" or "JFG"), formerly NELX,
Inc., was incorporated in Kansas on March 25, 1983. In 2001, the
Company acquired all the outstanding stock of two corporations located
in Charleston, West Virginia: Jacobs & Company ("Jacobs") and FS
Investments, Inc. ("FSI"). Jacobs is a registered investment advisory
firm that derives its revenue from asset-based investment advisory
fees. FSI, through its wholly-owned subsidiary Triangle Surety Agency,
Inc. ("Triangle"), is engaged in the business of placing surety bonds
with insurance companies for clients engaged in regulated industries,
such as the extraction of coal, oil and gas. FSI receives commission
income from the placement of these bonds and is licensed in ten states
primarily in the eastern United States. On December 30, 2005, the
Company acquired all of the outstanding stock of West Virginia Fire &
Casualty Company ("WVFCC"), an insurance company licensed to engage in
business in West Virginia, Ohio and Indiana. The acquisition of WVFCC
consisted of the purchase of marketable investments and insurance
licenses and did not include any existing policies or customer base as
the insurance lines of business offered by WVFCC were not insurance
lines that the Company intended to pursue. Following the acquisition,
the name of WVFCC was changed to First Surety Corporation ("FSC"). FSC
receives insurance premium income in connection with the issuance of
surety bonds. The Company and its subsidiaries are subject to the
business risks inherent in the financial services industry.
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. Additionally, the Company
has insufficient liquidity and capitalization, is in default with
respect to certain loan and preferred stock agreements, and has
suffered recurring losses from operations. Losses are expected to
continue until FSC develops a more substantial book of business. While
improvement is anticipated as the Company's business plan is
implemented, other conditions, such as restrictions on the use of FSC's
assets (See Note C), and 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.
Management intends to improve cash flow through the implementation of
its business plan. Additionally, management continues to seek to raise
additional funds for operations through private placements of stock,
other long-term or permanent financing, or short-term borrowings.
However, the Company cannot be certain that it will be able to continue
to obtain adequate funding in order to reasonably predict whether it
will be able to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jacobs
Financial Group, Inc. and its wholly owned subsidiaries, after the
elimination of intercompany transactions.
F-10
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
USE OF ESTIMATES
Preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities. Significant areas requiring the use of management
estimates are loss reserves, stock options, valuation of investments,
and the valuation of deferred tax assets. Actual results inevitably
will differ from those estimates, and such differences may be material
to the financial statements.
REVENUE RECOGNITION
Fees for investment advisory services are based on an agreed percentage
of the value of client assets under management and are accrued monthly
based on the market value of client assets.
The Company accounts for its surety bond issuances as short duration
contracts. Surety premiums are recorded as receivables when due and are
earned pro rata over the term of the policies of generally one year,
subject to annual renewal. The reserve for unearned premiums represents
the portion of premiums written relating to the unexpired terms of
coverage. The reserve for unearned premium is determined using the
monthly pro rata method. Advance premiums represent renewal premiums
paid in advance of the effective renewal date.
Agency commissions for surety bond services are based on a percentage
of premiums charged for bonds placed with insurance companies, and are
recorded upon issuance or effective renewal date of the bonds. No
significant continuing services subsequent to the issuance or renewal
of surety bonds are required.
Policy acquisition costs include costs that vary with and are primarily
related to the acquisition of new business. Such costs generally
include commissions, underwriting expenses, and premium taxes and are
deferred and amortized over the period in which the related premiums
are earned. The deferred policy acquisition cost assets are reviewed
for recoverability based on the profitability of the underlying surety
policy. Investment income is not anticipated in the recoverability of
deferred policy acquisition costs.
INVESTMENTS
Debt securities are designated at purchase as held-to-maturity, trading
or available for sale. Held-to-maturity debt securities are carried at
amortized cost where the Company has the ability and intent to hold
these securities until maturity. Premiums and discounts arising from
the purchase of debt securities are treated as yield adjustments over
the estimated lives or call date, if applicable.
Debt and equity securities that are bought and held principally for
sale in the near future are classified as trading securities and are
carried at current fair values, with changes in fair value being
recorded in current operations.
F-11
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt and equity securities that the Company may not have a positive
intent to hold until maturity and not classified as trading, are
considered to be available for sale and carried at fair value.
Management has 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
classifies 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.
An investment is considered impaired when its fair value investment is
less than its cost or amortized cost, as applicable. When an investment
is impaired, a determination is made as to whether the impairment is
other than temporary ("OTTI").
Factors considered in identifying OTTI include: 1) for debt securities,
whether the Company intends to sell the investment or whether it is
more likely than not that the Company will be required to sell the
security prior to the anticipated recovery in value; 2) the likelihood
of the recoverability of principal and interest for debt securities
(i.e., whether there is a credit loss) or cost for equity securities;
3) the length of time and extent to which the fair value has been less
than amortized cost for debt securities or cost for equity securities;
and 4) the financial condition, near-term and long-term prospects for
the issuer, including the relevant industry conditions and trends, and
implications of rating agency actions and offering prices.
Short-term investments consist primarily of debt securities having
maturities of one year or less at date of purchase, money-market
investment funds and other similar investments that have immediate
availability.
Interest income with respect to fixed maturity securities is accrued as
earned. Dividend income is generally recognized when receivable.
Realized gains and losses are determined by specific identification of
the security sold.
DERIVATIVES
The Company uses derivatives in the form of covered call options sold
to generate additional income and provide limited downside protection
in the event of a market correction.
These transactions expose the Company to potential market risk for
which the Company receives a premium up front. The market risk relates
to the requirement to deliver the underlying security to the purchaser
of the call within a definite time at an agreed market price regardless
of the then current market price of the security. As a result the
Company takes the risk that it may be required to sell the security at
the strike price, which could be a price less than the then market
price. Should the security decline in market price over the holding
F-12
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
period of the call option, the Company realizes the option premium
received as income and the Company lessens or mitigates this risk which
may be eliminated by a closing transaction for the covered call and
sale of the underlying security.
The Company invests in large capitalized US securities traded on major
US exchanges and writes standardized covered calls only against these
positions (covered calls), which are openly traded on major US
exchanges. The use of such underlying securities and standardized calls
lessens the credit risk to the furthest extent possible.
The Company is not exposed to significant cash requirements through the
use of covered calls in that it sells a call for a premium and may use
these proceeds to enter a closing transaction for the call at a later
date.
ALLOWANCE FOR UNCOLLECTIBLE PREMIUM AND OTHER RECEIVABLES
The majority of the Company's fee revenue is generated by services
provided to companies and individuals throughout the Eastern United
States. Management evaluates the need for a reserve for the amount of
these receivables that may be uncollectible, based on historical
collection activity adjusted for current conditions. Premium and other
receivables are charged-off when deemed uncollectible. Based on this
evaluation, management believes that substantially all accounts
receivable are collectible, and therefore has not established an
allowance for estimated uncollectible accounts.
IMPAIRMENT
The Company evaluates long-lived assets for impairment annually, or
whenever events or changes in circumstances indicate that the assets
may not be recoverable. The impairment is measured by discounting
estimated future cash flows expected to be generated, and comparing
this amount to the carrying value of the asset. Cash flows are
calculated utilizing forecasts and projections and estimated lives of
the assets being analyzed. Should actual results differ from those
forecasted and projected, The Company may be subject to future
impairment charges related to these long-lived assets.
FURNITURE AND EQUIPMENT
Furniture and equipment is recorded at cost. Maintenance and repairs
are charged to operations when incurred. When property and equipment
are sold or disposed of, the asset account and related accumulated
depreciation account are relieved, and any gain or loss is included in
operations. The cost of property and equipment is depreciated over the
estimated useful lives of the related assets, ranging from three to
seven years, using the straight-line and double-declining balance
methods, which approximates estimated economic depreciation.
RESERVE FOR LOSSES AND LOSS EXPENSES
Losses and loss adjustment expenses represent management's best
estimate of the ultimate net cost of all reported and unreported losses
incurred. Reserves for unpaid losses and loss adjustment expenses are
estimated using industry averages, however, will include individual
case-basis valuations in the event if claims are received. These
estimates and methods of establishing reserves are continually reviewed
and updated.
F-13
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK-BASED COMPENSATION
The fair value of stock options is estimated at the grant date using
the Black Scholes Option Pricing Model. This model requires the input
of a number of assumptions, including expected volatility and dividend
yields, expected stock price, risk-free interest rates, and an expected
life of the options. Although the assumptions used reflect management's
best estimate, they involve inherent uncertainties based on market
conditions generally outside the control of the Company.
INCOME TAXES
The Company currently has net operating loss ("NOL") carry-forwards
that can be utilized to offset future income for federal and state tax
purposes. These NOLs generate a significant deferred tax asset.
However, the Company has recorded a valuation allowance against this
deferred tax asset as it has determined that it is more likely than not
that it will not be able to fully utilize the NOLs. Should assumptions
regarding the utilization of these NOLs change, the Company may reduce
some or all of this valuation allowance, which would result in the
recording of a deferred income tax benefit.
The Company prescribes a more-likely-than-not measurement methodology
to reflect the financial statement impact of uncertain tax positions
taken or expected to be taken in a tax return. If taxing authorities
were to disallow any tax positions taken by the Company, the additional
income taxes, if any, would be imposed on the stockholders rather than
the Company.
Interest and penalties associated with tax positions are recorded in
the period assessed as general and administrative expenses. However, no
interest or penalties have been assessed as of May 31, 2013 or 2012.
The Company's tax returns subject to examination by tax authorities
include May 31, 2011 through the current period for state and federal
tax reporting purposes.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share of common stock are computed using the
weighted average number of shares outstanding during each period.
Diluted earnings per share are computed on the basis of the average
number of common shares outstanding plus the dilutive effect of
convertible debt, stock options and warrants. In periods of net loss,
there are no diluted earnings per share since the result would be
anti-dilutive.
RECLASSIFICATIONS
Certain amounts in the 2012 Consolidated Financial Statements have been
reclassified to be consistent with the presentation in the Consolidated
Financial Statements as of May 31, 2013 and for the year then ended.
These reclassifications had no impact on previously reported net
income, cash flows from operations or changes in shareholders' equity.
F-14
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - NEWLY ADOPTED AND RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------------------------
In December 2011, the Financial Accounting Standards Board (FASB)
issued Accounting Standards Update 2011-11 (ASU 2011-11), DISCLOSURES
ABOUT OFFSETTING ASSETS AND LIABILITIES. The amendments in this Update
will enhance disclosures required by U.S. GAAP by requiring improved
information about financial instruments and derivative instruments that
are either (1) offset in accordance with either Section 210-20-45 or
Section 815-10-45 or (2) subject to an enforceable master netting
arrangement or similar agreement. The amendments are effective for
fiscal years beginning after January 1, 2013 and for interim periods
within those fiscal years. The amendments of ASU 2011-11 did not have a
material impact on the Company's consolidated financial statements.
In January 2013, the FASB issued Accounting Standards Update 2013-01
(ASU 2013-01), CLARIFYING THE SCOPE OF DISCLOSURES ABOUT OFFSETTING
ASSETS AND LIABILITIES. The main objective in developing this Update is
to address implementation issues about the scope of Accounting
Standards Update No. 2011-11, Balance Sheet Topic 210: Disclosures
about Offsetting Assets and Liabilities. The amendments are effective
for fiscal years beginning on or after January 1, 2013, and interim
periods within those annual periods. The amendments of ASU 2013-01 did
not have a material impact on the Company's consolidated financial
statements.
In February 2013, the FASB issued Accounting Standards Update 2013-02
(ASU 2013-02), REPORTING OF AMOUNTS RECLASSIFIED OUT OF ACCUMULATED
OTHER COMPREHENSIVE INCOME. The objective of this Update is to improve
the reporting of reclassifications out of accumulated other
comprehensive income. The amendments in this Update seek to attain that
objective by requiring an entity to report the effect of significant
reclassifications out of accumulated other comprehensive income on the
respective line items in net income if the amount being reclassified is
required under U.S. GAAP to be reclassified in its entirety to net
income. For other amounts that are not required under U.S. GAAP to be
reclassified in their entirety to net income in the same reporting
period, an entity is required to cross-reference other disclosures
required under U.S. GAAP that provide additional detail about those
amounts. The amendments are effective prospectively for annual
reporting periods beginning after December 15, 2012 and interim periods
within those annual periods. The amendments of ASU 2013-02 did not have
a material impact on the Company's consolidated financial statements.
In July 2013, the FASB issued Accounting Standards Update 2013-11 (ASU
2013-11), PRESENTATION OF AN UNRECOGNIZED TAX BENEFIT WHEN A NET
OPERATING LOSS CARRYFORWARD, A SIMILAR TAX LOSS, OR A TAX CREDIT
CARRYFORWARD EXISTS A CONSENSUS OF THE FASB EMERGING ISSUES TASK FORCE.
The objective of this Update is to eliminate the diversities that exist
in financial statement presentation. The amendments aim at attaining
this objective by giving explicit guidance on the financial statement
presentation of an unrecognized tax benefit when a net operating loss
carryforward, a similar tax loss, or a tax credit carryforward exists.
The amendments in this Update are effective for fiscal years, and
interim periods within those years, beginning after December 15, 2013.
The amendments of ASU 2013-11 did not have a material impact on the
Company's consolidated financial statements.
F-15
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, the FASB issued Accounting Standards Update 2014-09 (ASU
2014-09), REVENUE FROM CONTRACTS WITH CUSTOMERS. The guidance in this
Update affects any entity that either enters into contracts with
customers to transfer goods or services or enters into contracts for
the transfer of nonfinancial assets unless those contracts are within
the scope of other standards (for example, insurance contracts or lease
contracts). The standard's core principle is that a company will
recognize revenue when it transfers promised goods or services to
customers in an amount that reflects the consideration to which the
company expects to be entitled in exchange for those goods or services.
In doing so, companies will need to use more judgment and make more
estimates than under current guidance. This may include identifying
performance obligations in the contract, estimating the amount of
variable consideration to include in the transaction price and
allocating the transaction price to each separate performance
obligation. The amendments in this Update are effective for annual
reporting periods beginning after December 15, 2016, including interim
periods within that reporting period. Early adoption is not permitted.
Companies have the option of using either a full or modified
retrospective approach in applying this standard. The Company is in the
process of assessing the impact of ASU 2014-09 on its consolidated
financial statements.
In August 2014, the Financial Accounting Standards Board ("FASB")
issued Accounting Standards Update No. 2014-15, PRESENTATION OF
FINANCIAL STATEMENTS-GOING CONCERN (SUBTOPIC 205-40) (ASU 2014-15). ASU
2014-15 is intended to define management's responsibility to evaluate
whether there is substantial doubt about an organization's ability to
continue as a going concern and to provide related footnote
disclosures. This guidance is effective for us for the annual period
ending May 31, 2017 and interim and annual periods thereafter. We do
not expect the adoption of this standard to have a material impact on
our consolidated financial position, results of operations and cash
flows.
Management has assessed the potential impact of recently issued, but
not yet effective, accounting standards and determined that the
provisions are either not applicable to the Company, or are not
anticipated to have a material impact on the consolidated financial
statements.
NOTE C - INVESTMENTS
--------------------
The Company held the following investments, by security type, that have
been classified as available-for-sale and carried at fair value at May
31, 2013:
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ------------ ----------- -----------
State and municipal $ 1,760,341 $ 5,293 $ 36,627 $ 1,729,007
securities
Equity securities 474,311 52,190 21,979 504,522
Derivatives (18,603) (31,442) (162) (49,883)
Foreign Obligations 200,750 - 6,913 193,837
Mortgage Backed Securities 3,413,161 145,390 9,279 3,549,272
-------------- ------------ ----------- -----------
$ 5,829,960 $ 171,431 $ 74,636 $ 5,926,755
============== ============ =========== ===========
F-16
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company held the following investments, by security type, that were
classified as available-for-sale and carried at fair value at May 31,
2012:
Gross Gross
Unrealized Unrealized
Amortized Cost Gains Losses Fair Value
-------------- ----------- ----------- ------------
State and municipal $ 2,077,399 $ 16,051 $ 6,110 $ 2,087,340
securities
Equity securities 533,669 15,176 52,377 496,468
Derivatives (14,549) (2,344) (4,699) (12,194)
Foreign Obligations 205,247 - 9,997 195,250
Mortgage Backed Securities 3,632,782 185,140 1,864 3,816,058
-------------- ----------- ----------- ------------
$ 6,434,548 $ 214,023 $ 65,649 $ 6,582,922
============== =========== =========== ============
There are no securities classified as held to maturity at May 31, 2013
or May 31, 2012.
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 Operations.
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company uses the following
fair value hierarchy in selecting inputs, with the highest priority
given to Level 1, as these are the most transparent or reliable:
o Level 1 - Quoted prices for identical instruments in active
markets.
o Level 2 - Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets.
o Level 3 - Valuations derived from valuation techniques in
which one or more significant inputs are unobservable.
Fair values are provided by the Company's independent investment
custodians that utilize third-party quotation services for the
valuation of the fixed-income investment securities and money-market
funds held. The Company's investment custodians are large money-center
banks. The Company's equity investment is valued using quoted market
prices.
The following section describes the valuation methodologies used to
measure different financial instruments at fair value, including an
indication of the level in the fair value hierarchy in which the
instrument is generally classified.
F-17
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
May 31, 2013
------------------------------------------------------------------
-------------------------------------------------- ---------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
---------------- ---------------- ---------------- ---------------
Assets:
Fixed income securities at fair value $ - $ 5,472,116 $ - $ 5,472,116
Equity securities at fair value (includes
derivatives) 454,639 - - 454,639
Short-term investments at fair value 1,255,234 - - 1,255,234
---------------- ---------------- ---------------- ---------------
Total Assets $ 1,709,873 $ 5,472,116 $ - $ 7,181,989
================ ================ ================ ===============
May 31, 2012
------------------------------------------------------------------
-------------------------------------------------- ---------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
---------------- ---------------- ---------------- ---------------
Assets:
Fixed income securities at fair value $ - $ 6,098,648 $ - $ 6,098,648
Equity securities at fair value (includes
derivatives) 484,274 - - 484,274
Short-term investments at fair value 991,875 - - 991,875
---------------- ---------------- ---------------- ---------------
Total Assets $ 1,476,149 $ 6,098,648 $ - $ 7,574,797
================ ================ ================ ===============
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, 2013 or at May 31, 2012.
At May 31, 2013, the Company's insurance subsidiary had securities and
short term investment with a fair value of $1,068,225 on deposit with
the State insurance department to satisfy regulatory requirements. In
connection with regulatory approval of the Company's acquisition of its
insurance subsidiary, certain restrictions were imposed on the ability
of the Company to withdraw funds from FSC without prior approval of the
F-18
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
state Insurance Commissioner. Accordingly, investments and cash in the
amount of $7,495,538 and $7,833,825 as of May 31, 2013 and 2012,
respectively, are restricted to the use of FSC.
Principal repayments on U.S. government agency mortgage-backed
securities held by the Company as of May 31, 2013 are estimated as
follows:
Amortized Fair Market
Cost Value
--------------- ---------------
Due in one year or less $ 337,348 $ 351,522
Due after one year through five years 209,720 219,830
Due after five years through ten years 130,678 137,147
Due after ten years 2,735,415 2,840,773
--------------- ---------------
$ 3,413,161 $ 3,549,272
=============== ===============
Estimated repayments are forecast based on varying prepayment speeds
for each particular security held assuming that interest rates remain
constant. Expected repayments will differ from actual repayments
because borrowers of the underlying mortgages have a right to prepay
obligations.
An analysis of net investment income follows:
2013 2012
------------------- ---------------------
Bonds - fixed maturities $ 85,761 $ 76,424
Mortgage-backed securities
117,696 190,949
Equity investments 15,929 11,960
Short-term investments 88 77
Other investment income 20,175 -
------------------- ---------------------
Total investment income 239,649 279,410
------------------- ---------------------
Investment expense 9,276 -
------------------- ---------------------
Net investment income $ 230,373 $ 279,410
=================== =====================
The increase (decrease) in unrealized appreciation of investments were
as follows:
2013 2012
--------------- ---------------
Bonds-fixed maturities $ (58,185) $ 26,899
Mortgage-backed securities (47,164) (23,802)
Equity securities 33,776 (37,393)
--------------- ---------------
Increase (decrease) in unrealized
appreciation $ (71,573) $ (34,296)
=============== ===============
Gains and losses are calculated based on sales proceeds received less
the cost of the security sold, which is determined by specific
identification for each investment. The gross gains and gross losses
realized on available-for-sale securities were as follows:
F-19
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Gross Gross
Gross Realized Realized
Proceeds Gains Losses
------------ ----------- ------------
2013
Bonds-fixed maturities $ 1,487,611 $ 22,940 $ (7,512)
Mortgage-backed securities 28,581 - (1,627)
Equity securities 381,580 14,833 (5,054)
Derivatives (equity securities) 72,967 27,695 (8,036)
------------ ----------- ------------
Total $ 1,970,739 $ 65,468 $ (22,229)
============ =========== ============
2012
Bonds-fixed maturities $ 688,281 $ 26,439 $ -
Mortgage-backed securities 874,051 50,399 -
Equity securities 112,876 2,168 (2,976)
Derivatives (equity securities) 78,578 26,676 (9,327)
------------ ----------- ------------
Total $ 1,753,786 $ 105,682 $ (12,303)
============ =========== ============
The following table summarizes the gross unrealized losses and fair
value on investment securities aggregated by major investment category
and length of time that individual securities have been in a continuous
loss position at May 31, 2013 and May 31, 2012.
Less than 12 Months 12 Months or More Total
--------------------------------- ------------------------------- --------------------------------
Cost Unrealized Cost Unrealized Fair Unrealized
(a) Losses (a) Losses Value Losses
---------------- ---------------- --------------- --------------- --------------- ----------------
2013
Equity securities $ 71,398 $ 1,665 $ 89,751 $ 20,314 $ 139,171 $ 21,979
Bonds- Fixed Maturities 856,467 20,752 836,301 22,788 1,649,229 43,540
Mortgage-backed
securities 488,878 5,440 142,854 3,838 622,454 9,278
---------------- ---------------- --------------- --------------- --------------- ----------------
Total $ 1,416,743 $ 27,857 $ 1,068,906 $ 46,940 $ 2,410,854 $ 74,797
================ ================ =============== =============== =============== ================
2012
Equity securities $ 266,036 $ 36,909 $ 81,169 $ 15,468 $ 294,828 $ 52,377
Bonds- Fixed Maturities 888,501 13,734 523,068 2,373 1,395,462 16,107
Mortgage-backed
securities 272,548 1,362 38,189 503 308,872 1,865
---------------- ---------------- --------------- --------------- --------------- ----------------
Total $ 1,427,085 $ 52,005 $ 642,426 $ 18,344 $ 1,999,162 $ 70,349
================ ================ =============== =============== =============== ================
(a) For bonds-fixed maturities and mortgage-backed securities,
represents amortized costs.
F-20
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2013, the Company held nine mortgage-backed securities
with gross unrealized losses of $9,278, three of which have been in a
continuous loss position for more than 12 months. These securities
consist of fixed-rate securities issued by Government National Mortgage
Association (GNMA) that are sensitive to movements in market interest
rates.
As of May 31, 2013, the Company held eight fixed maturity bonds with
gross unrealized losses of $43,540, three of which has been in a
continuous loss position for more than 12 months.
As of May 31, 2013, the Company held five equity security investments
with gross unrealized losses of $21,979, three of which has been in a
continuous loss position for more than 12 months. These securities
consist of common stock whose fair value is sensitive to movements in
market interest rates.
NOTE D-DEFERRED POLICY ACQUISITION COSTS
----------------------------------------
The following reflects the policy acquisition costs deferred for
amortization against future income and the related amortization charged
to operations.
2013 2012
-------------------------------------- ------------- -------------
Balance at beginning of year $ 167,010 $ 190,711
-------------------------------------- ------------- -------------
Acquisition costs deferred 239,074 287,684
-------------------------------------- ------------- -------------
Amortization charged to operations (267,587) (311,385)
-------------------------------------- ------------- -------------
Total $ 138,497 $ 167,010
-------------------------------------- ------------- -------------
NOTE E - OTHER ASSETS
---------------------
Included in other assets as of May 31, 2013 and May 31, 2012 are
$99,187 and $96,370 of prepaid expenses and deposits. The balance on
May 31, 2013 includes an $80,000 deposit for legal fees.
NOTE F - INTANGIBLES
--------------------
As the result of the acquisition of FSC on December 30, 2005, in
exchange for the purchase price of $2,900,000, the Company received
cash and investments held by FSC with a fair value of $2,750,000, with
the difference of $150,000 being attributed to the property and
casualty licenses of FSC in the states of West Virginia, Ohio and
Indiana. Such licenses have indefinite lives and are evaluated
annually, or more frequently if circumstances indicate that a possible
impairment has occurred, for recoverability and possible impairment
loss. No impairment has been recorded in fiscal years ended May 31,
2013 and 2012.
NOTE G - RESERVE FOR LOSSES AND LOSS EXPENSE
--------------------------------------------
Reserves for unpaid losses and loss adjustment expenses are estimated
based primarily on management's judgment as the Company has not
incurred a loss since its inception and available industry data is
extremely limited. In the event of the Company receiving a claim it
will use individual case basis estimates including all estimated future
expenses to settle such claims. As of May 31, 2013, the Company's
insurance subsidiary, FSC, is only licensed to write surety in West
Virginia and Ohio and has focused its primary efforts towards coal
permit bonds while also providing other miscellaneous surety bonds,
most of which are partially collateralized by investment accounts that
F-21
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are managed by Jacobs & Company. Reclamation of land that has been
disturbed by mining operations is highly regulated by federal and state
agencies and the required bonds are generally long-term in nature with
mining operations and reclamation work conducted in unison as the
property is being mined. Additionally, no two principals or properties
are alike due to varied company structures and unique geography and
geology of each site. In underwriting such bonds, management develops,
through consultation with professionals experienced in the specific
field of work, estimates of costs to reclaim the properties subject of
the permit(s) in accordance with those mining permit(s), in addition to
other underwriting and financial risk considerations. FSC requires the
principal to provide cash, or other acceptable collateral such as
irrevocable letters of credit, in amounts determined through the
underwriting process to reclaim the disturbed land and thus mitigate
the exposure to significant loss. FSC maintains reinsurance agreement
with various syndicates at Lloyd's of London. The reinsurance agreement
is an excess of loss contract that protects FSC against losses up to
certain limits over stipulated amounts. Such cash is invested in
investment collateral accounts managed by Jacobs utilizing investment
strategies consistent with the state code governing investments of an
insurance company. Inspections of mining activity and reclamation work
are performed on a regular basis with initial costs estimates being
updated periodically. Should the principal default in the obligation to
reclaim the property in accordance with the mining permit, FSC would
then use the funds held in the collateral account to reclaim the
property or would be required to forfeit the face amount of the bond to
the agency to which the bond is issued. Losses can occur if the costs
of reclamation exceed estimates obtained at the time the bond was
underwritten or upon subsequent re-evaluations, if sufficient
collateral is not obtained and increased if necessary, or if collateral
held has experienced a significant deterioration in value. FSC has
experienced no claims for losses as of May 31, 2013 and thus provisions
for losses and loss adjustment expense have been based on management's
experience adjusted for other factors unique to the Company's approach,
and in consultation with consulting actuaries experienced in the surety
field.
At May 31, 2013 and May 31, 2012, the reserve for losses and loss
expenses consisted of:
2013 2012
--------------- -------------
Balance at beginning of year
$ 1,026,489 $ 815,512
Incurred policy losses-current year 181,414 210,977
--------------- -------------
Balance at end of year $ 1,207,903 $ 1,026,489
=============== =============
F-22
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NOTES PAYABLE
----------------------
At May 31, 2013 and 2012, the Company had the following unsecured notes
payable to individuals:
2013 2012
--------------- ---------------
Unsecured demand notes payable to individuals and
others; interest rate fixed @ 10% ($75,000 to
related party) $ 1,227,482 $ 1,589,000
Unsecured demand notes payable to individuals and
others; interest rate fixed @ 12% 15,000 15,000
Secured demand note payable to individuals;
interest rate fixed @ 14%; secured by accounts
receivable for investment advisory fees 185,000 62,000
Secured demand note payable to individuals;
interest rate fixed @ 10%; secured by accounts
receivable for investment advisory fees 95,000 105,000
Unsecured short-term advances to principal
shareholder and chief executive officer; interest
rate fixed @ 12% (Also See Note T -
Related Party Transactions) (175,312) (57,046)
Unsecured note(s)payable to individual(s) under
bridge- financing arrangements described below
($360,000 to related party) 3,500,000 3,500,000
--------------- ---------------
Total $ 4,847,170 $ 5,213,954
=============== ===============
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 note holders' 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
F-23
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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).).This featured was analyzed and determined
to be an embedded derivative, but the value was considered to be
immaterial.
Beginning September 10, 2008, because a qualified financing had not
been completed, the Company became required under the terms of the
bridge financing to issue 2.80% of the Company's outstanding common
shares and shall issue 2.80% of the Company's outstanding common shares
upon each six-month anniversary date thereof until retirement of the
notes. This feature was analyzed and determined to be an embedded
derivative, but the value was considered to be immaterial. The
following table summarizes the common shares issued to those note
holders as a result incurring these penalties.
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
March 10, 2011 6,738,900
September 10, 2011 7,043,710
March 10, 2012 7,430,017
September 10, 2012 8,573,594
March 10, 2013 8,947,444
--------------
66,188,606
==============
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. The Original forbearance was
amended October 13, 2009. As consideration for the forbearance, the
Company issued 5,171,993 shares of Common stock, and pledged the stock
of an inactive subsidiary of the Company, 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 failed to make the payment that was due September
10, 2009 and the payments that were due in the ensuing quarters,
F-24
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
management has remained in close contact with the bridge lenders,
providing reports regarding its efforts to refinance or otherwise repay
the bridge loans.
In anticipation of a proposed financing and as a condition thereof, the
Company and each of the bridge lenders entered into a Loan Modification
Agreement dated February 25, 2012 which provided for modification of
the Promissory Notes, including an extension of the term of the
Promissory Notes, and Subscription Agreements in exchange for a partial
cash payment to each bridge lender. To date, the proposed financing has
not closed, and the Company has been unable to remit the partial
payment. On August 10, 2012, the Company entered into an agreement with
the bridge lenders, pursuant to which the bridge lenders formally
agreed to forbear from exercising their rights and remedies arising
from the accumulated acknowledged events of default with respect to the
bridge loans until such date. As consideration for this forbearance,
the Company entered into an Amended and Restated General Hypothecation
and Pledge Agreement dated August 9, 2012 (the "August 2012 Pledge"),
but effective September 23, 2011, granting to the bridge lenders as
security for the repayment of the loans a lien and security interest in
all of the Company's shares of capital stock of First Surety
Corporation. Under the August 2012 Pledge, the bridge lenders
acknowledge that the effectiveness of certain of the rights and
remedies provided by such agreement may be subject to prior approval by
the Office of the Commissioner of Insurance for the State of West
Virginia. To date, none of the bridge lenders has elected to pursue
legal remedies under the Promissory Notes or the August 2012 Pledge.
Scheduled maturities are as follows:
2013
--------------
Fiscal year 2013-2014 (including demand notes) $ 4,701,755
Fiscal year 2014-2015 145,415
Total $ 4,847,170
==============
NOTE I - OTHER LIABILITIES
--------------------------
In the year ended May 31, 2012, the Company, upon advice of legal
counsel, removed certain dormant accounts payable in the aggregate
amount of $150,604, based on the vendor no longer requiring payment on
that portion of the balance owed to them. Such removals were recorded
as gains on debt extinguishment.
As of May 31, 2013, the Company had accrued and withheld approximately
$319,000 in Federal payroll taxes and approximately $45,000 in
estimated penalties and interest, which are reflected in the financial
statements as other liabilities. Subsequent to the year ended May 31,
2013, the Company satisfied its obligation to the IRS in full.
As of May 31, 2013, the Company had accrued and withheld approximately
$64,000 in West Virginia payroll withholdings and approximately $14,000
in interest and penalties, which are reflected in the accompanying
financial statements as other liabilities. Subsequent to the year ended
May 31, 2013, the Company satisfied its obligation to the State of West
Virginia in full.
F-25
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE J - PREFERRED STOCK
------------------------
REDEEMABLE PREFERRED STOCK
On December 30, 2005, through a private placement, the Company issued
350 shares of 4% Non-Voting Series A Preferred Stock (Series A
Preferred Stock), along with 1,050,000 warrants for common shares of
Company stock as additional consideration, for a cash investment in the
amount of $350,000, in connection with the Company's acquisition of
FSC. Holders of Series A Preferred Stock are entitled to participate in
FSC's partially collateralized bonding programs, subject to continuing
satisfaction of underwriting criteria, based upon the bonding capacity
of FSC attributable to capital reserves of FSC established with the
subscription proceeds (i.e., bonding capacity equal to ten times
subscription proceeds) and for so long as the subscriber holds the
Series A shares. Holders of the Series A Preferred Stock are entitled
to receive, when and as declared by the board of directors, cumulative
preferential cash dividends at a rate of four percent of the $1,000
liquidation preference per annum (equivalent to a fixed annual rate of
$40 per share). The Series A Preferred Stock ranks senior to the
Company's common stock and pari passu with the Company's Series B
Preferred and Series C Preferred Stock with respect to dividend rights
and rights upon liquidation, dissolution or winding up of the Company.
The holder may redeem the Series A Preferred Stock on or after the
seventh anniversary of the Issue Date, if the holder provides a written
statement to the Company that it will no longer require surety bonds
issued by the Company's insurance subsidiary (FSC) under its partially
collateralized bonding programs and, if no such surety bonds are then
outstanding, the Company, at the option of the holder, will redeem all
or any portion of the Series A Preferred Stock of such holder at a
price per share equal to the Series A Preferred Stock Issue Price plus
all accrued and unpaid dividends with respect to the shares of the
Series A Preferred Stock of such holder to be redeemed. The conditional
redemption shall not be available to any holder of Series A Preferred
Stock for so long as surety bonds of the Company's insurance subsidiary
issued on a partially collateralized basis remain outstanding for the
benefit of such holder, and upon redemption, such holder shall no
longer be eligible to participate in the partially collateralized
bonding programs of the insurance subsidiary. The Company is authorized
to issue up to 1,000,000 shares of the Series A Preferred Stock. As of
May 31, 2013, the Company has issued 2,675 shares of Series A Preferred
Stock in exchange for cash investments in the amount of $2,675,000, of
which no shares were issued in fiscal 2013 or 2012.
The Company's outstanding Series A Preferred stock matures on the
seventh anniversary of the issuance date and thereafter holders of the
Series A Stock are eligible to request that the Company redeem their
Series A Shares. As of May 31, 2013, the Company has received requests
for redemption of 100 shares of Series A Preferred. The aggregate
amount to which the holders requesting redemption are entitled as of
May 31, 2013, is $1,482,718.
Under the terms of the Series A 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 A Stock are sufficient to
redeem the total number of shares of Series A 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
F-26
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
determines that there is a sufficiency of legally available funds to
accomplish the redemption and that the use of such funds to affect the
redemption will not result in an impairment of the operations of the
Insurance Subsidiary, then the redemption shall occur on the Redemption
Date. If, however, the Board determines either that there are not
sufficient funds legally available to accomplish the redemption or that
the use of such funds to effect the redemption will result in an
impairment of the operations of the Insurance Subsidiary, then (X) the
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 A 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 A Stock to be redeemed shall be increased by 2%
of the Series A Face Amount, with the amount of such increase (i.e., 2%
of the Series A 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 A 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 A 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 A 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 to redemption shall be paid on a pari passu basis with the
Redemption Price of the Series A Stock subject to redemption in
accordance herewith. Until the Redemption Price for each share of
Series A Stock elected to be redeemed shall have been paid in full,
such share of Series A Stock shall remain outstanding for all purposes
and entitle the holder thereof to all the rights and privileges
provided herein, and Dividends shall continue to accrue and, if unpaid
prior to the date such shares are redeemed, shall be included as part
of the Redemption Price.
The Company's Board of Directors determined based on the criteria
established under the terms of the Preferred Stocks that there were
insufficient funds available for the redemption of Preferred Stocks.
On December 30, 2005, through a private placement, the Company issued
3,980 shares of 8% Non-Voting Series B Convertible Preferred Stock
(Series B Preferred Stock), along with 19,900,000 warrants for common
shares of Company stock as additional consideration, for a cash
investment in the amount of $2,985,000; and issued 4,891 shares of
Series B Preferred Stock, along with 24,452,996 warrants for common
shares of Company stock as additional consideration, for a conversion
of $3,667,949 of indebtedness of the Company, in connection with the
Company's acquisition of FSC. Holders of the Series B Preferred Stock
are entitled to receive, when and as declared by the board of
F-27
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
directors, cumulative preferential cash dividends at a rate of eight
percent of the $1,000 liquidation preference per annum (equivalent to a
fixed annual rate of $80 per share). The Series B Preferred Stock ranks
senior to the Company's common stock and pari passu with the Company's
Series A Preferred and Series C Preferred Stock with respect to
dividend rights and rights upon liquidation, dissolution or winding up
of the Company. Each share of the Series B Preferred Stock is
convertible at the option of the holder, at any time after the original
issue date, into 1,000 fully paid and non-assessable shares of the
Company's common stock at a conversion price of $1.00 per common share.
The Company may redeem the Series B Preferred Stock at any time after
the first anniversary of the Original Issue Date at a price per share
equal to the Series B Preferred Stock Face Amount plus all accrued and
unpaid dividends with respect to the shares of the Series B Preferred
Stock of such holder to be redeemed. To the extent that the Series B
Preferred Stock has not been redeemed by the Company, the holder may
redeem the Series B Preferred Stock on or after the fifth anniversary
of the Original Issue Date at a price per share equal to the Series B
Preferred Stock Face Amount plus all accrued and unpaid dividends with
respect to the shares of the Series B Preferred Stock of such holder to
be redeemed. The Company is authorized to issue up to 10,000 shares of
the Series B Preferred Stock. The Company has not issued any additional
shares of Series B Preferred Stock during fiscal 2013.
The Company's outstanding Series B Preferred stock matured on December
30, 2010, meaning that the holders of the Series B Stock that had not
requested exchange to the Company's Series C Preferred stock became
entitled to request that the Company redeem their Series B Shares. As
of May 31, 2013, of the 2,807 shares of Series B Preferred that
remained outstanding, the Company has received requests for redemption
of 2,219 shares of Series B Preferred. The aggregate amount to which
the holders requesting redemption are entitled as of May 31, 2013, is
$4,990,463.
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 affect the
redemption will not result in an impairment of the operations of the
Insurance Subsidiary, then the redemption shall occur on the Redemption
Date. If, however, the Board determines either that there are not
sufficient funds legally available to accomplish the redemption or that
the use of such funds to effect the redemption will result in an
impairment of the operations of the Insurance Subsidiary, then (X) the
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
F-28
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 to redemption shall be paid on a pari passu basis with the
Redemption Price of the Series B Stock subject to redemption in
accordance herewith. Until the Redemption Price for each share of
Series B Stock elected to be redeemed shall have been paid in full,
such share of Series B Stock shall remain outstanding for all purposes
and entitle the holder thereof to all the rights and privileges
provided herein, and Dividends shall continue to accrue and, if unpaid
prior to the date such shares are redeemed, shall be included as part
of the Redemption Price.
The Company's Board of Directors 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.
The Company experienced a loss after accretion of mandatorily
redeemable convertible preferred stock, and accrued dividends on
mandatorily redeemable preferred stock of $2,031,471 in fiscal 2013 as
compared with a loss after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily
redeemable preferred stock of $1,219,559 in fiscal 2012.
F-29
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EQUITY PREFERRED STOCK
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 is 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and
upon Liquidation senior and prior to the Common Stock and all other
equity securities to which the Series C ranks prior, with respect to
dividends and upon Liquidation (collectively, "JUNIOR SECURITIES"), (b)
pari passu with the Corporation's Series A Preferred Stock, par value
$0.0001 per share (the "SERIES A STOCK"), the Corporation's Series B
Stock, and any other series of Preferred Stock subsequently established
by the Board with equal ranking (any such other series of Preferred
Stock, together with the Series C Stock, the Series B Stock and Series
A Stock are collectively referred to as the "EQUAL RANKING PREFERRED")
and (c) junior to any other series of Preferred Stock subsequently
established by the Board with senior ranking.
4. Dividends. (a) DIVIDEND ACCRUAL AND PAYMENT. The holders of
the Series C Stock shall be entitled to receive, in preference to the
holders of Junior Securities, dividends ("DIVIDENDS") on each
outstanding share of Series C Stock at the rate of 8% per annum of the
sum of (i) the Series C Face Amount plus (ii) an amount equal to any
accrued, but unpaid, dividends on such Series C Stock, including for
this purpose the exchanged Series B Amount outstanding with respect to
such Series C Stock. For purposes hereof, the "SERIES B AMOUNT" means
an amount equal to the dividend that would have accrued on such Series
C Stock held by such holder from and after the Series B Original Issue
Date applicable to such share of Series C Stock, through the Original
Issue Date as if such Series C Stock had been issued on such Series B
Original Issue Date, less all amounts thereof distributed by the
Corporation with respect to such Series C Stock. Dividends shall be
payable quarterly in arrears on each January 1, April 1, July 1 and
October 1 following the Original Issue Date, or, if any such date is a
Saturday, Sunday or legal holiday, then on the next day which is not a
Saturday, Sunday or legal holiday (each a "DIVIDEND PAYMENT DATE"), as
declared by the Board and, if not paid on the Dividend Payment Date,
shall accrue. Amounts available for payment of Dividends (including for
F-30
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
this purpose the Series B Amount) shall be allocated and paid with
respect to the shares of Series C Preferred and any other Equal Ranking
Preferred, FIRST, among the shares of Equal Ranking Preferred pro rata
in accordance with the amounts of dividends accruing with respect to
such shares at the current Dividend Payment Date, and, THEN, any
additional amounts available for distribution in accordance with the
accrued, but unpaid, dividends (and the Series B Amount then
outstanding) at each prior Dividend Payment Date, in reverse
chronological order, with respect to all shares of the Equal Ranking
Preferred then outstanding in accordance with amounts accrued, but
unpaid. For purposes hereof, the term "SERIES B ORIGINAL ISSUE DATE"
shall mean, with respect to any share of Series C Stock issued by the
Corporation in exchange for a share of Series B Stock, the date on
which the Corporation originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a
combination of Series C Shares and Common Stock. For each Series B
Share, the participating holder received (i) one Series C Share and
(ii) 2,000 shares of JFG Common Stock (for no additional
consideration).
For the year ending May 31, 2010, 6,805 shares of Series B Stock were
surrendered and exchanged for 6,805 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. For the year ending May 31, 2013, 2,817 shares of Series B
Stock had not been exchanged.
The accrual of dividends on the equity preferred stock resulted in a
charge to common stockholders' equity and a credit to the equity of
equity preferred stock of $915,335 in fiscal 2013 as compared with a
charge to common stockholders' equity of $847,833 in fiscal 2012.
DIVIDEND PREFERENCE AND ACCRETION
The Series A Shares are entitled to receive cumulative dividends at the
compounding rate of 4.00% per annum.
The Series B Shares have an 8.0% per annum compounding dividend
preference, are convertible into Common Shares of JFG at the option of
the holders at a conversion price of $1.00 per Share (as adjusted for
dilution) and, to the extent not converted, must be redeemed by the
Corporation at any time after December 31, 2010 at the option of the
holder. Any such redemption is subject to legal constraints, such as
the availability of capital or surplus out of which to pay the
redemption, and to a determination by the Board of Directors that the
redemption will not impair the operations of First Surety Corporation.
F-31
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 to the Company and therefore no liability is recorded
until the dividends are declared by the Board of the Company. The
Series C Shares are pari passu with the Corporation's Series A
Preferred Stock and Series B Shares (to the extent any remain
outstanding following the Recapitalization) and no dividends or other
distributions will be paid upon Common Shares or any other class of
Shares that is junior in priority to the Series C Preferred while
dividends are in arrears. In addition, the Series C Shares are
convertible into Common Shares of JFG at the option of the holders at a
conversion price of $0.10 per Share. The Series C Shares may be
redeemed by the Corporation, at its option, when it is in a financial
position to do so.
Holders of over 70% of the outstanding Series B Preferred Shares
elected to participate in the recapitalization. The shares of Series B
Preferred Shareholders that chose not to convert 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. Dividends on Series B mandatorily
redeemable preferred stock deducted from net income amounted to
$380,239 for the year ended May 31, 2013. 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 year ended May 31, 2013.
During the year ended May 31, 2012, two holders of Series A stock
released all of their outstanding bonds held with FSC. These shares of
Series A Preferred Shareholders are listed in the liability section of
the Balance Sheet as of May 31, 2013, in the amount of $1,482,718,
which consists of $1,126,000 face value of stock and $356,718 in
dividends payable. The dividends associated with these shares of Series
A stock for the year ended May 31, 2013, is a deduction from net income
in the amount of $57,855. There was no accretion on these shares of
Series A stock.
As of May 31, 2013 the Company has chosen to defer payment of dividends
on Series A Preferred Stock with such accrued and unpaid dividends
amounting to $724,048 through May 31, 2013.
F-32
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2013 the Company has chosen to defer payment of dividends
on Series B and Series C Preferred Stock with such accrued and unpaid
dividends amounting to $2,175,985 and $5,214,516 through May 31, 2013.
ACCOUNTING TREATMENT
U.S. GAAP requires that an entity classify as liabilities certain
financial instruments with characteristics of both liabilities and
equity. The Company's Series A and B preferred stock each have
mandatory redemption features that subject the Company to the analysis
of equity versus liability. Both Series A and B have features that
embody a conditional obligation to redeem the instrument upon events
not certain to occur and accordingly, are not classified as liabilities
until such events are certain to occur. With respect to the Series A
Preferred Stock, such condition is contingent upon the holder having no
further need for surety bonds issued by the Company's insurance
subsidiary (FSC) under its partially collateralized bonding programs
and, having no such surety bonds then outstanding. With respect to the
Series B Preferred Stock, if the stock provides an option to the holder
to convert to common shares at a rate equivalent to fair value, then
the financial instruments are not mandatorily redeemable during the
period in which the holder can convert the shares into common shares.
Accordingly, the Company has determined that only the Series A
preferred stocks held by principals with outstanding surety bonds
should not be classified as liabilities. However, in accordance with
Securities and Exchange Commission (SEC) Issued Topic No. D- 98, SEC
Staff Announcement, "Classification and Measurement of Redeemable
Securities", a company that issues preferred shares that are
conditionally redeemable is required to account for the conditionally
redeemable preferred shares in accordance with Accounting Series
Release 268, which states that the shares are to be reflected on the
Company's balance sheet between total liabilities and stockholders'
equity as temporary equity.
NOTE K - STOCK WARRANTS
-----------------------
On December 30, 2005, the Company issued warrants to purchase
45,402,996 shares of common stock in connection with the Series A and B
Preferred Stock private placements. The exercise price of the warrants
is $.001 per share. The warrants were valued using the Black-Scholes
pricing model. The warrants issued in connection with the Series A
Preferred Stock were valued at $.08 per share or $83,043. The warrants
issued in connection with the Series B Preferred Stock were valued at
$.01 per share or $449,972.
386,667 warrants issued in connection with Series B Preferred Stock
expired unexercised on the fifth anniversary at December 31, 2010;
600,000 warrants issued in connection with Series A Preferred Stock
expired unexercised on the seventh anniversary at December 31, 2012.
As of May 31, 2013 there were no warrants outstanding.
F-33
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE L-STOCK-BASED COMPENSATION
-------------------------------
On October 12, 2005, the board of directors adopted its 2005 Stock
Incentive Plan (the "Plan") to allow the Company to make awards of
stock options as part of the Company's compensation to key employees,
non-employee directors, contractors and consultants. The Plan was
approved by the stockholders on December 8, 2005. The aggregate number
of shares of Common Stock issuable under all awards under the Plan is
35,000,000. No awards may be granted under the Plan after December 8,
2015. On July 9, 2012, the Company issued 22,600,000 shares to
employees and a board member as additional compensation, reducing the
number of shares of Common Stock issuable under all awards under the
plan to 12,400,000.
On December 28, 2006, the compensation committee of the board of
directors awarded 2,100,000 of incentive stock options to acquire
common shares at an exercise price of $.04 per share, of which 450,000
shares vested immediately and the remaining 1,650,000 options vesting
over the next three years ending in December 2009. As of May 31, 2010,
the awarded options had been reduced to 1,800,000 due to changes in
employment status, all of which expired in December 2011.
On June 30, 2009 the compensation committee of the board of directors
awarded 10,000,000 of incentive stock options to acquire common shares
at an exercise price of $.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. As of May 31, 2013, the awarded options
had been reduced to 9,800,000 due to changes in employment status.
The following table summarizes option activity under the Plan for the
fiscal year ended May 31, 2013.
Number Weighted-Avg.
Weighted-Avg. Of Shares Remaining Aggregate
Exercise Under Life Intrinsic
Price Option (Years) Value
-------------- ------------ ---------- --------------
Balance at June 1, 2012 $ .04000 10,000,000
Options granted - -
Options exercised - -
Options canceled/expired .04000 200,000
-------------- ------------
Balance, May 31, 2013 $ .04000 9,800,000
============== ============
Exercisable at May 31, 2013 $ .04000 9,800,000 1.08 $ -
============== ============
Expected to vest $ - - - $ -
============== ============
There were no options exercised in fiscal 2013 or 2012. The total fair
value of shares vested amounted to approximately $9,000 in fiscal 2012.
All shares were vested as of May 31, 2012.
Stock-based compensation expense attributable to such awards amounted
to $370 in the fiscal year ended May 31, 2012. There is no unrecognized
F-34
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
compensation expense related to non-vested awards at May 31, 2013 or
May 31, 2012 as all awards are fully vested.
The Company estimates the fair value of stock options using a
Black-Scholes valuation model. Key inputs and assumptions used to
estimate the fair value of stock options include the grant price of the
award, the expected option term, volatility of the Company's stock, the
risk-free interest rate and the company's dividend yield.
NOTE M - INCOME TAXES
---------------------
Deferred tax assets and liabilities are recorded for the effects of
temporary differences between the tax basis of an asset or liability
and its reported amount in the consolidated financial statements. Such
differences include the income recognition of a portion of the unearned
premium reserve, loss reserve deductibility, accruals not currently
deductible relating to stock option expense and certain accrued
expenses that are not paid within specified time frames by the Internal
Revenue Service, and the deductibility of deferred policy acquisition
costs paid. As of May 31, 2013, the Company had operating loss carry
forwards of approximately $18.6 million. These carry forwards begin
expiring in 2015 and, as a result of the ownership change resulting
from the 2001 acquisitions of FSI and Jacobs, the utilization of
approximately $6.4 million of the operating loss carry forwards are
substantially limited.
The Company has fully reserved the $6.6 million tax benefit of the
operating loss carry forward, by a valuation allowance of the same
amount, because the likelihood of realization of the tax benefit cannot
be determined.
NOTE N - STOCKHOLDERS' EQUITY
-----------------------------
In fiscal 2013, the Company issued 2,527,500 shares of the Company's
common stock as additional consideration in connection with new and
continued borrowings totaling $2,147,500. The shares were valued at
approximately $.005295 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 $13,383.
On fiscal 2013, the Company issued 9,056,539 shares of the Company's
common stock in connection with the additional 2% stock dividend
associated with Series A and B Preferred shares that were requested to
be redeemed upon maturity (see Note J). The shares were valued at
approximately $.004883 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 $44,227.
In fiscal 2013, the Company issued 8,573,594 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 $.01874 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 $160,669.
In fiscal 2013, the Company issued 8,947,444 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
F-35
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
at approximately $.00505 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 $45,185.
In fiscal 2013, the Company awarded 50,000 shares to an individual as
compensation for services instrumental to advancing the Company's
business plan. The shares were valued at approximately $.004875 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 $244.
On July 9, 2012 the Company issued 22,600,000 shares of the Company's
common stock to employees and other individuals for services rendered.
The shares were valued at approximately $.002650 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 $59,890.
In fiscal 2012, the Company issued 3,545,000 shares of the Company's
common stock as additional consideration in connection with new and
continued borrowings totaling $2,798,000. The shares were valued at
approximately $.005088 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 $18,036.
In fiscal 2012, the Company issued 9,029,800 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 J). The shares were valued at
approximately $.00444 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 $40,098.
In fiscal 2012, the Company issued 7,043,710 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 $.00506 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 $35,561.
In fiscal 2012, the Company issued 7,430,017 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 $.00360 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 $26,748.
In fiscal 2012, the Company awarded 1,000,000 shares to an individual
as compensation for services rendered. The shares were valued at
approximately $.004447 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 $4,470.
NOTE O - STATUTORY FINANCIAL DATA (UNAUDITED)
---------------------------------------------
The Company's insurance subsidiary files calendar year financial
statements prepared in accordance with statutory accounting practices
prescribed or permitted by regulatory authorities. The principal
F-36
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
differences between statutory financial statements and financial
statements prepared in accordance with generally accepted accounting
principals are that statutory financial statements do not reflect
deferred policy acquisition costs and certain assets are non-admitted.
Statutory surplus as of May 31, 2013 and 2012 and net income for the
Company's insurance subsidiary for the calendar year ended December 31,
2012 and 2011 and five-month periods ended May 31, 2013 and 2012 are as
follows:
-------------------- ------------------------ ----------------
Statutory Surplus May 31, 2013 $5,804,785
-------------------- ------------------------ ----------------
Statutory Surplus May 31, 2012 6,075,541
==================== ======================== ================
Net Income Calendar year 2012 350,214
-------------------- ------------------------ ----------------
Net Income Calendar year 2011 378,455
==================== ======================== ================
Net Income Five-month period 2013 75,003
-------------------- ------------------------ ----------------
Net Income Five-month period 2012 167,043
-------------------- ------------------------ ----------------
Statutory surplus exceeds the minimum capital requirements provided by
West Virginia state law of $2.0 million.
Under the West Virginia insurance code, ordinary dividends to
stockholders are allowed to be paid only from that part of the
insurance subsidiary's (FSC's) available surplus funds which
constitutes realized net profits from the business and whereby all such
dividends or distributions made within the preceding twelve months does
not exceed the lesser of 10% of the insurance subsidiary's (FSC's)
surplus as regards to policyholders as of December 31st of the
preceding year-end or net income from the insurance subsidiary's
(FSC's) operations from the previous two calendar years not including
capital gains. Any payment of extraordinary dividends requires prior
approval from the WV state insurance commissioner.
On March 26, 2012 the Commissioner of the State of West Virginia
terminated in its entirety the Amended Consent Order of June 7, 2007
and terminated the restrictive conditions of the Consent Order issued
December 23, 2005 which approved acquisition of the insurance
subsidiary by the Company. Among other consequences, removal of these
restrictions allowed dividends to be declared by and paid from the
insurance subsidiary to the Company. Dividends in the amounts of
$590,000 and $380,000 were declared and paid for the twelve month
periods ending May 31, 2013 and May 31, 2012.
F-37
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE P - COMMITMENTS AND CONTINGENCIES
--------------------------------------
LEASE COMMITMENTS
The Company leases certain office equipment with combined monthly
payments of approximately $465 that have varying remaining terms of
less than five years. The Company leases office, parking and storage
space under month-to-month lease arrangements that approximate $3,844
each month.
The Company' inactive subsidiary, CMW, holds an undeveloped leasehold
interest in a mineral water spring located near Hot Springs, Arkansas.
Under the leasehold arrangement, the Company makes minimum lease
payments of $180 per month. The Company has options to extend the
leasehold arrangement through October 2026 and also has a right to
cancel the lease at any time upon sixty (60) days written notice.
Rental expense for these lease commitments totaled approximately
$54,880 and $56,112 during fiscal years 2013 and 2012.
Minimum future lease payments under non-cancelable operating leases
having remaining terms in excess of one year as of May 31, 2013 are:
Fiscal year 2013-2014 $ 5,580
----------------------- -----------
Fiscal year 2014-2015 5,580
----------------------- -----------
Fiscal year 2015-2016 5,580
----------------------- -----------
Total $ 16,740
NOTE Q - FINANCIAL INSTRUMENTS
------------------------------
FAIR VALUE
The following methods and assumptions were used to estimate fair value
of each class of financial instruments for which it is practicable to
estimate that value:
INVESTMENT SECURITIES
Fair values for investment securities (U.S. Government, government
agencies, government agency mortgage-backed securities, state and
municipal securities, and equity securities) held for investment
purposes (available-for-sale) are based on quoted market prices or
dealer quotes. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
OTHER FINANCIAL INSTRUMENTS
The carrying amount of cash, short-term investments, receivables,
prepaid expenses, short-term and demand notes payable, accounts
payable, accrued expenses and other liabilities approximate fair value
because of the immediate or relatively short-term maturity of these
financial instruments. Fair value of term notes payable, including
notes payable under the bridge-financing arrangement, were deemed to
approximate their carrying value based on the Company's incremental
borrowing rates for similar types of borrowings with maturities
consistent with those remaining for the debt being valued.
The carrying values and fair values of the Company's financial
instruments at May 31, 2013 and 2012 are as follows:
F-38
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2013 2012
-------------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------- ------------ ------------ -----------
ASSETS
Bonds available for sale $ 5,472,116 $ 5,472,116 $ 6,098,648 $ 6,098,648
Cash and short-term investments 1,570,460 1,570,460 1,250,954 1,250,954
Premiums and other receivables 300,303 300,303 332,444 332,444
Equity securities (including derivatives) 454,639 454,639 484,274 484,274
LIABILITIES
Notes payable 4,847,170 4,847,170 5,213,954 5,213,954
Accounts payable and advance premiums 538,289 538,289 421,338 421,338
Accrued expenses and other liabilities
3,720,114 3,720,114 2,690,199 2,690,199
NOTE R - OTHER RISKS AND CONCENTRATIONS
---------------------------------------
CONCENTRATION OF CREDIT RISK
As of May 31, 2013 the Company's investment securities of approximately
$7,200,000 are solely comprised of mortgage-backed securities, fixed
maturity municipal bonds, equity investments, and money-market mutual
funds that invest principally in obligations issued by the U.S
government, its agencies or instrumentalities. Such instruments are
generally considered to be of the highest credit quality investment
available.
The Company transacts the majority of its business with three financial
institutions, one for commercial banking services and the others for
brokerage and custodial services. Periodically, the amount on deposit
in financial institutions providing commercial banking services exceeds
the $250,000 federally insured limit. Management believes these
financial institutions are financially sound. With respect to the
financial institutions providing brokerage and custodial services,
amounts on deposit are invested in money market funds that invest
principally in obligations issued by the U.S government, its agencies
or instrumentalities.
Management believes that substantially all receivables are collectible,
and therefore has not established an allowance for estimated
uncollectible accounts.
CONCENTRATION IN PRODUCTS, MARKETS AND CUSTOMERS
The Company's insurance subsidiary currently writes only the surety
line of business, is licensed to write surety only in West Virginia and
Ohio and has focused its primary efforts towards coal permit bonds.
Such business, including investment advisory fees from managed
collateral accounts, accounted for approximately 56% and 63% of the
Company's fiscal 2013 and 2012 revenues, respectively. Furthermore, the
Company provides surety bonds to companies that share common ownership
F-39
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interests that constitute 37% and 45% of the Company's fiscal 2013 and
2012 revenues, respectively, as follows:
------------------------------- ---------------------- ----------------------
2013 2012
------------------------------- ---------------------- ----------------------
Investment Investment
Surety Advisory Surety Advisory
Premium Fees Premium Fees
------------------------------- ---------- ----------- ---------- -----------
Customer group # 1 $ 133,000 $ - $ 77,000 $ 2,900
------------------------------- ---------- ----------- ---------- -----------
Customer group # 2 117,000 40,000 567,000 104,000
------------------------------- ---------- ----------- ---------- -----------
Customer group # 3 242,000 3,000 195,000 3,000
------------------------------- ---------- ----------- ---------- -----------
Customer group # 4 138,000 3,700 94,000 3,400
------------------------------- ---------- ----------- ---------- -----------
TOTAL $ 630,000 $ 46,700 $ 933,000 $ 113,300
------------------------------- ---------- ----------- ---------- -----------
NOTE S - 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.
(REMAINDER OF PAGE LEFT BLANK INTENTIONALLY)
F-40
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
INDUSTRY SEGMENT MAY 31, 2013 MAY 31, 2012
---------------- --------------- ---------------
REVENUES:
Investment advisory $ 194,034 $ 257,087
Surety insurance 1,150,621 1,576,107
Corporate - 150,604
--------------- ---------------
Total revenues $ 1,344,655 $ 1,983,798
=============== ===============
OPERATING INCOME (LOSS):
Investment advisory $ 19,372 $ 73,432
Surety insurance 316,038 613,377
Corporate (2,292,107) (1,792,642)
--------------- ---------------
Total operating income (loss) $ (1,956,697) $ (1,105,833)
=============== ===============
IDENTIFIABLE ASSETS:
Investment advisory $ 51,017 $ 60,932
Surety insurance 8,349,897 8,739,074
Corporate 83,219 88,433
--------------- ---------------
Total assets $ 8,484,133 $ 8,888,439
=============== ===============
CAPITAL ACQUISITIONS:
Investment advisory $ - $ -
Surety insurance - -
Corporate - -
--------------- ---------------
Total capital acquisitions $ - $ -
=============== ===============
DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
Investment advisory $ 45 $ 45
Surety insurance 7,874 7,874
Corporate 2,766 2,817
--------------- ---------------
Total Depreciation $ 10,685 $ 10,736
=============== ===============
INTEREST EXPENSE:
Investment advisory $ - $ -
Surety insurance - -
Corporate 1,073,338 905,601
--------------- ---------------
Total interest expense $ 1,073,338 $ 905,601
=============== ===============
F-41
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE T - RELATED PARTY TRANSACTIONS
-----------------------------------
BORROWING AND OTHER TRANSACTIONS OF LARGEST SHAREHOLDER AND CEO
For the past several years the Company's operating expenses were
partially funded by advances from its largest shareholder and chief
executive officer, John M. Jacobs. The source of funding for these
advances originated with obligations incurred by Mr. Jacobs with third
parties (such obligations together with the loans by Mr. Jacobs to the
Company, "back-to-back loans") with interest rates ranging from 6.75%
to 12%.
To assure that repayments of the various borrowings by the Company that
were either guaranteed by Mr. Jacobs or loaned to the Company by Mr.
Jacobs via such back-to-back loan arrangements did not result in a
deemed loan to Mr. Jacobs, because Mr. Jacobs entered into an
Assumption Agreement with the Company. Pursuant to the assumption
agreement Mr. Jacobs assumes, and agrees to hold the Company harmless
from, principal of specified indebtedness of the Company and to fully
offset when necessary what might otherwise be deemed an advance of
funds arising out of the Company's financing activities.
During fiscal 2013, advances to the Company from Mr. Jacobs amounted to
$1,310,925, which included assumption of company debt in the amount of
$319,653, and repayments to Mr. Jacobs amounted to $1,429,190. As of
May 31, 2013, the balance due the Company from Mr. Jacobs was $175,312.
The largest aggregate amount outstanding to Mr. Jacobs in fiscal 2012
was $20,925.
During fiscal 2012, advances to the Company from Mr. Jacobs amounted to
$1,124,925, which included assumption of company debt in the amount of
$393,519, and repayments to Mr. Jacobs amounted to $1,152,006. As of
May 31, 2012, the balance due the Company was $57,046. The largest
aggregate amount outstanding to Mr. Jacobs in fiscal 2012 was $18,003.
The rate of interest on such amounts due from and obligations due to
Mr. Jacobs was 12% for both the 2013 and 2012 fiscal years.
OTHER RELATED PARTIES
During the years ended May 31, 2013 and May 31, 2012, a company owned
by a board member provided consulting services. This company provided
services totaling $62,100 and $62,100 in 2013 and 2012. Amounts owed to
this company at year end are treated as related party payables in the
amounts $124,409 and $109,309 at May 31, 2013 and 2012 respectively.
During the year ended May 31, 2009, the Company borrowed money from an
individual that became a board member during 2010. On March 22, 2013
this individual resigned his duties as a board member. Total amounts
owed to this individual at May 31, 2013 and May 31, 2012 consisted of
$75,000 in demand notes and $360,000 in bridge financing.
NOTE U - 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
F-42
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
companies. The Company cedes insurance to other companies and these
reinsurance contracts do not relieve the Company from its obligations
to policyholders.
Effective April 1, 2009, FSC entered into a reinsurance agreement with
various syndicates at Lloyd's of London ("Reinsurer") for its coal
reclamation surety bonding programs. The agreement has been renewed
annually with the Reinsurer, with the most recent renewal effective
July 1, 2012. The reinsurance agreement is an excess of loss contract
which protects the Company against losses up to certain limits over
stipulated amounts and can be terminated by either party by written
notice of at least 90 days prior to any July 1. The contract calls for
a premium rate of 35% subject to a minimum premium $490,000. Deposits
are made to the reinsurers quarterly in arrears in equal amounts of
$140,000. At May 31, 2013 and May 31, 2012, the Company had prepaid
reinsurance premiums of $196,565 and $243,877 and ceded reinsurance
deposited of $41,605 and $42,458.
There were no ceded Loss and Loss Adjustment Expenses for the years
ended May 31, 2013 or 2012.
The effects of reinsurance on premium written and earned for fiscal
2013 and 2012 are as follows;
2013 Written 2013 Earned 2012 Written 2012 Earned
------------- ------------ ------------- ------------
Direct $1,088,202 $1,237,316 $1,343,661 $ 1,424,355
Ceded 441,893 489,204 446,853 467,739
------------- ------------ ------------- ------------
Net $ 646,309 $ 748,112 $ 896,808 $ 956,616
============= ============ ============= ============
NOTE V - EVENTS SUBSEQUENT TO MAY 31, 2013
------------------------------------------
Subsequent to May 31, 2013, the Company obtained various borrowings
from individuals and businesses totaling $645,500 at rates varying from
10% to 14%, which mature at various dates subsequent to this filing,
and made repayments on notes in the amount of $497,406. These
borrowings, and the renewal of other borrowings, included the issuance
of 1,057,356 shares of its common stock as additional consideration.
Additionally, the Company obtained borrowings of $1,470,633 from its
principal shareholder and chief executive officer under its
pre-approved financing arrangement bearing interest at the rate of 12%
and made repayments totaling $1,122,024. After taking into account the
net accrued payroll owed that is to be offset against these borrowings,
the balance owed to the principal shareholder is $330,311 at the date
of this filing.
On September 10, 2013, in accordance with the Bridge financing
agreement, the Company became obligated to issue in the aggregate
9,316,337 shares of its common stock to the holders of such notes.
On May 10, 2014, in accordance with the Bridge financing agreement, the
Company became obligated to issue in the aggregate 9,630,856 shares of
its common stock to the holders of such notes.
On September 10, 2014, in accordance with the Bridge financing
agreement, the Company became obligated to issue in the aggregate
10,221,845 shares of its common stock to the holders of such notes.
F-43
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company elected to continue to defer payment of quarterly dividends
on its Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock with such accumulated accrued and unpaid dividends
amounting to $933,351, $2,806,516, and $6,732,373 as of September 30,
2014.
On July 1, 2013 the Company issued 1,236,782 Common shares representing
the additional 2% stock dividend for the quarter ending June 30, 2013
to the holders of Series A and B Preferred shares that had requested to
be redeemed upon maturity (see Note J).
On October 1, 2013 the Company issued 1,463,551 Common shares
representing the additional 2% stock dividend for the quarter ending
September 30, 2013 to the holders of Series A and B Preferred shares
that had requested to be redeemed upon maturity (see Note J).
On January 1, 2014 the Company issued 3,415,315 Common shares
representing the additional 2% stock dividend for the quarter ending
December 31, 2013 to the holders of Series A and B Preferred shares
that had requested to be redeemed upon maturity (see Note J).
On April 1, 2014 the Company issued 4,879,900 Common shares
representing the additional 2% stock dividend for the quarter ending
March 31, 2014 to the holders of Series A and B Preferred shares that
had requested to be redeemed upon maturity (see Note J).
On July 1, 2014 the Company issued 2,105,485 Common shares representing
the additional 2% stock dividend for the quarter ending June 30, 2014
to the holders of Series A and B Preferred shares that had requested to
be redeemed upon maturity (see Note J).
On October 1, 2014 the Company issued 3,193,319 Common shares
representing the additional 2% stock dividend for the quarter ending
September 30, 2014 to the holders of Series A and B Preferred shares
that had requested to be redeemed upon maturity (see Note J).
On July 9, 2014 the Company completed a $4,500,000 financing. In
effect, a subsidiary of Company borrowed the funds at 8.00% interest
with principal repayments on a ten year schedule. Proceeds of the
borrowing were applied (i) to purchase from certain of the Company's
note holders 50.7% ($1.775 million face amount) of the outstanding
senior promissory notes comprising a $3.5 million financing dating from
2008 (the Bridge financing agreement), together with interest accrued
thereon and the associated collateral, which senior promissory notes
have been in default, (ii) to pay in full delinquent tax liabilities
owed to the Internal Revenue Service and State of West Virginia, (iii)
to pay an outstanding judgment, and (iv) to pay certain other current
liabilities. The financing was a product of the Registrant's ongoing
efforts to restructure its balance sheet to position itself to take
advantage of business opportunities.
F-44
-----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES SCHEDULE I
------------------------------------------------------------------------------------------------------------------------------
AMOUNT
AT WHICH
AT MAY 31, 2013 SHOWN IN THE
COST* VALUE BALANCE SHEET
------------- --------------- ---------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ - $ - $ -
Foreign obligations 200,750 193,837 198,837
States, municipalities, and political subdivisions 1,760,341 1,729,007 1,729,007
------------- --------------- ---------------
Total fixed maturities 1,961,091 1,922,844 1,927,844
Equity securities (including derivatives):
Common stock and derivatives 455,708 454,639 454,639
------------- --------------- ---------------
Total equity securities 455,708 454,639 454,639
Mortgage-backed securities guaranteed by U.S. government agency 3,413,161 3,549,272 3,549,272
Short-term investments, at cost (approximates market value) 1,255,234 1,255,234 1,255,234
------------- --------------- ---------------
Total investments $ 7,085,194 $ 7,181,989 $ 7,186,989
============= =============== ===============
* Original cost of equity securities and, as to fixed maturities,
original cost reduced by repayments and adjusted for amortization of
premiums and accrual of discounts
F-45
-----------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
-----------------------------------------------------------------------------------------------------------
BALANCE SHEETS - PARENT COMPANY ONLY
MAY 31, 2013 MAY 31, 2012
------------- -------------
Assets:
Cash $ (72,647) $ (22,407)
Accounts receivable from affiliates - -
Prepaid expense and other assets 81,389 83,864
Furniture and equipment, net 1,802 4,568
Investment in subsidiaries, equity method 5,586,388 5,907,389
Due from affiliates, net 320,300 555,000
------------- -------------
Total assets $ 5,917,232 $ 6,528,414
============= =============
LIABILITIES:
Accounts payable $ 27,673 $ 46,661
Accrued expenses and professional fees 527,064 367,572
Related party payable 394,444 310,644
Notes payable 4,587,482 4,836,000
Related party note payable 259,688 377,954
Due to affiliates - -
Other liabilities 2,668,993 1,972,588
Series A Preferred Stock 1,482,718 1,424,863
Series B Preferred Stock 4,990,463 4,610,224
------------- -------------
Total liabilities 14,938,525 13,946,506
MANDATORILY REDEEMABLE PREFERRED STOCK 1,916,330 1,841,555
STOCKHOLDERS EQUITY:
Common stock 32,211 27,035
Additional paid in capital 4,013,242 3,664,923
Series C Stock 11,245,447 10,330,112
Accumulated deficit (26,228,523) (23,281,717)
------------ -------------
Total stockholders equity (deficit) (10,937,623) (9,259,647)
------------ -------------
Total liabilities and stockholders equity $ 5,917,232 $ 6,528,414
============= =============
STATEMENTS OF INCOME - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2013 2012
------------ -------------
REVENUES
Equity in undistributed net income (loss) of consolidated subsidiaries $ (321,001) $ 109,064
Tax benefit to parent from subsidiary attributable to utilization of
net operating loss carryforwards 66,411 197,745
Dividends paid to parent from subsidiary 590,000 380,000
Gain on extinguishment of debt - 150,604
------------ -------------
Total revenues 335,410 837,413
EXPENSES:
General and administrative 777,909 668,238
Interest 1,073,338 905,601
Accrued dividends on stock liability 438,094 366,591
Depreciation 2,766 2,816
------------ -------------
Total expenses 2,292,107 1,943,246
------------ -------------
Net income (loss) (1,956,697) (1,105,833)
Accrued dividends on equity stock (915,335) (847,833)
Accretion of mandatorily redeemable convertible preferred stock,
including accrued dividends (74,774) (113,726)
------------ -------------
Net income (loss) attributable to common stockholders $ (2,946,806) $ (2,067,392)
============ =============
F-46
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2013 2012
------------ -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,956,697) $ (1,105,833)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Equity in undistributed net loss of consolidated subsidiaries 321,001 (108,967)
Accrual of preferred stock dividend 438,094 366,339
Accretion of preferred stock - 251
Stock option compensation expense - 370
Stock issued in connection with financing arrangements 353,496 117,743
Depreciation 2,766 2,817
Loss on disposal of equipment - -
Gain on extinguishment of debt - (150,604)
Change in other assets, accounts payable and accrued expense, net 923,184 825,718
------------ -------------
TOTAL CASH USED IN OPERATIONS 81,844 (52,166)
CASH FLOWS FROM INVESTING ACTIVITIES:
Funds provided to affiliates for operations 234,700 122,801
Purchase of furniture and equipment - -
------------ -------------
TOTAL CASH USED IN INVESTING ACTIVITIES 234,700 122,801
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock warrants - -
Proceeds from borrowings 452,500 849,000
Repayment of borrowings (701,018) (887,500)
Proceeds from short-term borrowings from related party 1,310,924 1,124,925
Repayment of short-term borrowings to related party (1,429,190) (1,152,006)
------------ -------------
TOTAL CASH PROVIDED BY FINANCING ACTIVITIES (366,784) (65,581)
------------ -------------
CHANGE IN CASH (50,240) 5,054
Cash at beginning of year (22,407) (27,461)
------------ -------------
Cash at end of year $ (72,647) $ (22,407)
============ =============
F-47
------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INSURANCE INFORMATION
AS OF MAY 31, 2013 AND 2012 AND FOR THE YEARS THEN ENDED SCHEDULE III
------------------------------------------------------------------------------------------------------------------------------------
RESERVE FOR
LOSSES OTHER AMORTIZATION
AND POLICY CLAIMS OF
DEFERRED LOSS EXPENSES, AND LOSSES AND DEFERRED
POLICY FUTURE CONTRACT NET SETTLEMENT POLICY OTHER NET
ACQUISITION POLICY UNEARNED CLAIMS PREMIUM INVESTMENT EXPENSES ACQUISITION OPERATING PREMIUMS
SEGMENT COSTS CLAIMS PREMIUMS PAYABLE REVENUE INCOME INCURRED COSTS EXPENSES WRITTEN
----------- ------------ ------------- --------- -------- ---------- ---------- ----------- ----------- ---------- ---------
2013
Surety $ 138,497 $ 1,207,903 $ 621,974 $ - $ 846,112 $ 230,373 $ 181,414 $ 267,587 $ - $ 646,309
------------------------------------------------------------------------------------------------------------------------------------
2012
Surety $ 167,010 $ 1,026,489 $ 771,089 $ - $1,169,897 $ 279,410 $ 210,977 $ 311,385 $ - $ 896,808
F-48
------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INSURANCE INFORMATION - REINSURANCE
AS OF MAY 31, 2013 AND 2012 AND FOR THE YEARS THEN ENDED SCHEDULE IV
------------------------------------------------------------------------------------------------------------------------------
CEDED TO OTHER
2013 GROSS AMOUNT COMPANIES NET AMOUNT
--------------------- ------------------- -------------------
Premiums written:
Property and casualty insurance $ 1,088,202 $ 441,893 $ 646,309
--------------------- ------------------- -------------------
Total premiums written $ 1,088,202 $ 441,893 $ 646,309
===================== =================== ===================
Premiums earned:
Property and casualty insurance $ 1,237,316 $ 489,205 $ 748,111
--------------------- ------------------- -------------------
Total premiums earned $ 1,237,316 $ 489,205 $ 748,111
===================== =================== ===================
CEDED TO OTHER
2012 GROSS AMOUNT COMPANIES NET AMOUNT
--------------------- ------------------- -------------------
Premiums written:
Property and casualty insurance $ 1,343,661 $ 446,853 $ 896,808
--------------------- ------------------- -------------------
Total premiums written $ 1,343,661 $ 446,853 $ 896,808
===================== =================== ===================
Premiums earned:
Property and casualty insurance $ 1,424,355 $ 467,739 $ 956,616
--------------------- ------------------- -------------------
Total premiums earned $ 1,424,355 $ 467,739 $ 956,616
===================== =================== ===================
F-49
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
AS OF MAY 31, 2013 AND 2012 AND FOR THE YEARS THEN ENDED SCHEDULE VI
------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
RESERVE
FOR
LOSSES CLAIMS, LOSSES
AND DISCOUNT AND SETTLEMENT AMORTIZATION
LOSS IF ANY, EXPENSES INCURRED OF
DEFERRED EXPENSES, DEDUCTED RELATED TO DEFERRED PAID CLAIMS
POLICY FUTURE IN NET POLICY AND CLAIMS NET
AFFILIATION WITH ACQUISITION POLICY COLUMN UNEARNED PREMIUM INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS CLAIMS C PREMIUMS REVENUE INCOME YEAR YEARS COSTS EXPENSES WRITTEN
----------------- ----------- ---------- -------- --------- -------- ---------- --------- ------- --------- ----------- --------
2013
Consolidated
property-casualty
entities $138,497 $1,207,903 $ - $621,974 $ 748,111 $ 230,373 $ 181,414 $ - $ 267,587 $ - $ 646,309
------------------------------------------------------------------------------------------------------------------------------------
2012
Consolidated
property-casualty
entities $167,010 $1,026,489 $ - $771,089 $ 956,616 $ 279,410 $ 210,977 $ - $ 311,385 $ - $ 896,808
F-50
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
--------------------------------------------------------------------------------
In connection with the audits for the years ended May 31, 2013 and May 31, 2012,
there have been no disagreements with independent accountants with respect to
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
ITEM 9A (T). CONTROLS AND PROCEDURES
------------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In connection with the preparation of this Annual Report on Form 10-K, an
evaluation was carried out by JFG's management, with the participation of JFG's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
JFG's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of May
31, 2013. Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
frames specified in SEC rules and forms and that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosures.
During the evaluation of disclosure controls and procedures as of May 31, 2013,
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. As a result, JFG's Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2013, JFG's disclosure controls
and procedures were ineffective. Changes will be considered as additional
financial resources and accounting staff become available.
Notwithstanding the above, JFG believes the consolidated financial statements in
this Annual Report on Form 10-K fairly present, in all material respects, JFG's
financial condition as of May 31, 2013 and 2012, and the results of its
operations and cash flows for the years ended May 31, 2013 and 2012 in
conformity with U.S. generally accepted accounting principles (GAAP).
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of JFG is responsible for establishing and maintaining adequate
internal control over financial reporting. JFG's internal control over financial
reporting is a process under the supervision of JFG's Chief Executive Officer
and Chief Financial Officer, designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of JFG's financial
statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
-26-
inadequate because of change in conditions, or the degree of compliance with the
policies and procedures may deteriorate.
JFG management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of May 31, 2013. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework issued in 1992. Based on this assessment, management
concluded that the Company's internal control over financial reporting was not
effective as of May 31, 2013. A material weakness is a control deficiency, or
combination of control deficiencies, that results in more than a remote
likelihood that a material misstatement of our annual or interim financial
statements would not be prevented or detected.
JFG management identified control deficiencies that, in the aggregate,
constitute a material weakness in internal control over financial reporting as
of May 31, 2013. 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.
Changes are to be considered as additional financial resources and accounting
staff become available. Management believes that overall controls over financial
reporting are in place, but may not, at this time, be sufficient to effectively
mitigate this material weakness.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to exemption rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
ITEM 9B. OTHER INFORMATION
--------------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERANCE
---------------------------------------------------------------
The directors and executive officers of the Company, their ages and positions
are as follows:
NAME AGE POSITION
-------------------------- --- -------------------------------
John M. Jacobs 59 President and CEO/CFO, Director
C. David Thomas 60 Director
Mario J. Marra 59 Director
Bradley W. Tuckwiller 60 Director
Robert J. Kenney 66 Vice President
-27-
JOHN M. JACOBS
--------------
Mr. Jacobs is a Certified Public Accountant, the founder of Jacobs & Co., a
Registered Investment Advisor and is licensed as a property and casualty
insurance agent in twelve (12) states. Mr. Jacobs has served as a Director and
President of both Jacobs & Co. and FS Investments, Inc. since their inception.
Prior to establishing Jacobs & Co., in 1988, Mr. Jacobs was a practicing public
accountant for over thirteen years, during which he was a managing partner of
his accounting firm and a business and personal advisor to his clients. Mr.
Jacobs has served as a director and President of JFG since May 2001.
C. DAVID THOMAS
---------------
Mr. Thomas is a licensed resident insurance agent in West Virginia and holds
non-resident agent licenses in several other states. Mr. Thomas began his surety
career in 1976 with United States Fidelity and Guaranty Company and served as
the surety underwriter in the Charleston, WV branch office until 1979. At that
time he joined George Friedlander & Company, a regional insurance agency based
in Charleston, WV, where he presently serves as Vice President and Manager of
the Surety Department. Mr. Thomas is a shareholder and Director of George
Friedlander & Company. He has served as a Director of FS Investments, Inc. since
its inception in December 1997, and has served as a director of JFG since July
2002.
MARIO J. MARRA
--------------
Mr. Marra holds a Masters in Business Administration from the University of
Findlay and is the production supervisor for the Bridgeport WV facility of a
multinational aerospace and building industries company where he has been
employed since 1986. Mr. Marra joined the JFG board in June 2009.
BRADLEY W. TUCKWILLER
---------------------
Mr. Tuckwiller is a licensed resident insurance agent in West Virginia. Mr.
Tuckwiller served in various bank management and credit administration
capacities for a small regional bank based in West Virginia from 1977 through
2001, concluding as Executive Vice President. Mr. Tuckwiller is the owner of a
consulting firm, providing assistance in financial and regulatory compliance
matters. He has served as a Director of Jacobs and Company since January 2008,
Director of First Surety Corporation since June 2010 and Director of JFG since
June 2009.
ROBERT J. KENNEY
----------------
Mr. Kenney has been Vice President of the Company since 2003. Mr. Kenney joined
FSI and Jacobs & Co. in 2000, and is President of First Surety Corporation and
Vice President and Assistant Portfolio Manager of Jacobs & Co. Mr. Kenney is a
licensed resident insurance agent in West Virginia and also holds Series 63 and
65 securities licenses. Prior to joining the Company Mr. Kenney had over 20
years' experience in the oil and gas industry with Columbia Energy Group. With
Columbia, Mr. Kenney held various positions in Treasury, Human Resources, and
Law Departments and served as both Manager of Risk Management and Special
Projects Manager.
-28-
There are no family relationships among any of the Company's directors and
executive officers.
During the past five years, there have been no filings of petitions under
federal bankruptcy laws or any state insolvency laws, by or against any business
of which any director or executive officer of the Company was a general partner
or executive officer at the time or within two years before the time of such
filing.
During the past five years no director or executive officer of the Company has
been convicted in a criminal proceeding or been subject to a pending criminal
proceeding.
During the past five years, no director or executive officer of the Company has
been the subject of any order, judgment, or decree, not subsequently reversed,
suspended or vacated by a court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities.
During the past five years, no director or executive officer of the Company has
been found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
CODE OF ETHICS
The Company adopted a Code of Business Conduct and Ethics ("Code") that applies
to the Employees, Officers and Directors of Jacobs Financial Group, Inc.,
Triangle Surety Agency, Inc. and First Surety Corporation on November 13, 2007.
Further, the Code contains additional guidelines and standards for the Company's
principal executive officer and senior financial officer. A copy of the Code of
Business Conduct and Ethics can be obtained, without charge, upon written
request as follows:
Jacobs Financial Group, Inc.
Attn: Compliance Director
300 Summers Street, Suite 970
Charleston, WV 25301
Jacobs & Co., as an investment advisor, has its own compliance policy that was
revised and updated in September 2006 and is specifically designed to assure
compliance by Jacobs & Co. and its employees with the Investment Advisors Act of
1940 and the rules promulgated thereunder.
AUDIT (COMMITTEE) FINANCIAL EXPERT
The Board has determined that John M. Jacobs is the Audit (Committee) Financial
Expert as such term is defined in Item 407(d)(5)(ii) of Regulation SK. Mr.
Jacobs is not independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Securities Exchange Act.
-29-
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation paid by the Company during the
fiscal years ended May 31, 2012 and 2011 to the Principal Executive Officer and
the two most highly compensated executive officers of the Company (the "Named
Executive Officers").
ALL
NAMES AND STOCK OPTION OTHER
PRINCIPAL SALARY BONUS/ AWARDS AWARDS COMPENSATION TOTAL
POSITION YEAR ($) COMMISSIONS($) ($) ($)(1)(2) ($) (3) ($)
----------------- ---- -------- --------------- -------- ---------- ------------ ----------
John M. Jacobs, 2013 $150,000 $ - $ 56,727 $ - $ 24,675 $ 231,402
CEO 2012 $150,000 $ 79,732 $ - $ - $ 29,952 $ 259,684
Robert J. 2013 $ 99,000 $ 16,200 $ 19,787 $ - - $ 134,987
Kenney, VP 2012 $ 91,000 $ 16,200 $ - $ - - $ 107,200
-----------------
(1) On June 30, 2009, the compensation committee of the board of directors
awarded 5,000,000 and 2,000,000 of incentive stock options to acquire
common shares at an exercise price of four cents ($.04) per share to Mr.
Jacobs and Mr. Kenney, respectively, which vest as set forth in the table
below. The term of the options is five years and they expire in June 2014.
Vesting date Incentive Stock Option Awards
------------------------- ---------------------- -------------------------
John M. Jacobs Robert J. Kenney
---------------------- -------------------------
June 30, 2009 2,500,000 1,000,000
June 30, 2010 2,500,000 1,000,000
The amounts shown in this column represent the dollar amount recognized for
financial reporting purposes during the fiscal year for the fair value of stock
options received by the named individuals, excluding the effects of forfeitures
relating to service-based vesting conditions. The assumptions used to compute
the fair value are disclosed in "Note L, Stock-Based Compensation" to the
audited financial statements included herein under Part II Item 8.
(2) Other compensation includes insurance premiums paid by the Registrant on
behalf of the named executive officer under verbal agreement with the
Executive Officer.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth for each of our Named Executive Officers certain
information regarding unexercised options and stock awards as of May 31, 2012.
-30-
OPTION AWARDS
-------------------------------------------------------------------
EQUITY
NUMBER OF INCENTIVE PLAN
NUMBER OF SECURITIES AWARDS; NUMBER
SECURITIES UNDERLYING OF SECURITIES
UNDERLYING UNEXERCISED UNDERLYING
UNEXERCISED OPTIONS (#) UNEXERCISED OPTION OPTION
OPTIONS (#) UNEXERCISABLE UNEARNED EXERCISE EXPIRATION
NAME EXERCISABLE OPTIONS (#) PRICE ($) DATE
------------- ------------- ------------- -------------- ---------- ------------
John M. 5,000,000 - - $.04 06/30/2014
Jacobs, CEO
Robert J.
Kenney, VP 2,000,000 - - $.04 06/30/2014
OTHER EXECUTIVE COMPENSATION PLANS
The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
The Company has no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a named executive officer at,
following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.
DIRECTOR COMPENSATION
Directors of JFG are not compensated for board meetings or other duties as board
members.
Non-employee board members of FSC, which include some JFG board members, are
compensated at the rate of $150 per meeting.
The following table sets forth compensation received by non-employee directors
for the fiscal year ended May 31, 2013.
NAME FEES EARNED OR PAID IN CASH ($) TOTAL ($)
------------------------- ----------------------------------------- ------------
Brad Tuckwiller $ 850 $ 850
C. David Thomas $ 850 $ 850
Timothy Maddox $ 300 $ 300
Linda G. Aguilar $ 300 $ 300
-31-
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
The following tables set forth the beneficial ownership of common stock of the
Company as of September 13, 2013 by (i) each person known by the Company to own
more than 5% of the Company's common stock, (ii) each of the directors, (iii)
the Named Executive Officers and (iv) all directors and executive officers as a
group. Unless otherwise noted, such persons have sole voting and investment
power with respect to such shares.
-------------------------------------------- ---------------------------------- ----------------- --- ----------------
Amount and
Nature of
Name and Address of Beneficial Percent of
Title of Class Beneficial Owner Ownership 1 Class 2
-------------------------------------------- ---------------------------------- ----------------- --- ----------------
MORE THAN 5.00% BENEFICIAL OWNERSHIP
------------------------------------
Common John M. Jacobs 42,775,746 3 12.41%
300 Summers St. Suite 970
Charleston, WV 285301
Common Ungurean, Charles D. 46,673,910 14.02%
8400 Dunsinane Drive
Dublin, OH 43017
Common Fay S. Alexander 33,309,715 4 9.94%
6318 Timarron Cove Lane
Burke, VA 22015-4073
DIRECTORS AND NAMED EXECUTIVE OFFICERS
--------------------------------------
John M. Jacobs 42,775,746 3 12.41%
Common 300 Summers St. Suite 970
Charleston, WV 285301
Robert J. Kenney 7,150,000 5 2.13%
Common 809 Sherwood Drive
Charleston, WV 25314
Mario J. Marra 989,795 * *
Common 204 Olive Street
Bridgeport, WV 26330
-32-
C. David Thomas 917,295 * *
Common P. O., Box 5157
Charleston, WV 25361
Bradley W. Tuckwiller 5,869,152 6 1.76%
Common P O Box 1294
Lewisburg, WV 24901
ALL DIRECTORS AND EXECUTIVE
Common OFFICERS AS A GROUP 57,701,988 20.25%
* Represents beneficial ownership of less than one percent of the Company's
common stock.
1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment power
with respect to securities. Shares of common stock issuable upon the exercise of
options or warrants currently exercisable within 60 days of September 13, 2013
are deemed outstanding for computing the percentage ownership of the person
holding such options or warrants but are not deemed outstanding for computing
the percentage ownership of any other person.
2) Based on 332,980,027 shares of common stock issued and outstanding as of
September 13, 2013.
3) Includes 12,233,044 shares of common stock held in the name of FS Limited
Partnership ("FSLP") of which Mr. Jacobs is the sole general partner. Mr. Jacobs
has the power to vote and to direct the voting of and the power to dispose and
direct the disposition of the shares beneficially owned by FSLP. Includes
785,000 shares of common stock held in the name of JF Limited Partnership
("JFLP") of which Mr. Jacobs is the sole general partner. Mr. Jacobs has the
power to vote and to direct the voting of and the power to dispose and direct
the disposition of the shares beneficially owned by JFLP. Includes 5,193,416
shares held in joint tenancy with spouse, Kathleen M. Jacobs. Includes 5,000,000
in vested options to purchase Company stock exercisable within 60 days of
September 13, 2013. Includes the right to convert Series C Preferred Stock
holdings to 6,733,340 shares of common stock exercisable within 60 days of
September 13, 2013. John M. Jacobs is the CEO and a member of the board of
directors for the Registrant.
4) Includes 27,179,207 shares of common stock held in the name of Graphite
Investment, LLC ("Graphite") and 2,774,467 shares held in the name of Southall
Management Corporation ("Southall") of which Fay S. Alexander is President (both
entities). Includes the right to convert Series B Preferred Stock holdings of
Graphite and Southall to 2,141,341 shares of common stock exercisable within 60
days of September 13, 2013. Includes 1,214,700 shares held in joint tenancy with
spouse, Dan C. Alexander.
-33-
5) Includes 75,000 shares of common stock held in joint tenancy with spouse, Lee
Anne Kenney. Includes 335,000 shares of common stock held in the Individual
Retirement Account ("IRA") of Robert J. Kenney. Includes 510,000 shares of
common stock held in the Individual Retirement Account ("IRA") of spouse, Lee
Anne Kenney. Includes 2,000,000 in vested options to purchase Company stock
exercisable within 60 days of September 13, 2013.
6) Includes 75,000 shares of common stock held in joint tenancy with spouse,
Lynn D. Tuckwiller. Includes 1,000,000 in vested options to purchase Company
stock exercisable within 60 days of September 13, 2013.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
--------------------------------------------------------------------------------
For the past several years the Company's operating expenses were partially
funded by advances from its largest shareholder and chief executive officer,
John M. Jacobs. The source of funding for these advances originated with
obligations incurred by Mr. Jacobs with third parties (such obligations together
with the loans by Mr. Jacobs to the Company, "back-to-back loans") with interest
rates ranging from 6.75% to 12%.
To assure that repayments of the various borrowings by the Company that were
either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such
back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs,
Mr. Jacobs entered into an Assumption Agreement with the Company, pursuant to
which Mr. Jacobs assumes, and agrees to hold the Company harmless from,
principal of specified indebtedness of the Company as and when necessary to
fully offset what might otherwise be deemed an advance of funds arising out of
the Company's financing activities.
During fiscal 2013, advances to the Company from Mr. Jacobs amounted to
$1,310,925, which included assumption of company debt in the amount of $319,653,
and repayments to Mr. Jacobs amounted to $1,429,190. As of May 31, 2013, the
balance due the Company from Mr. Jacobs was $175,312. The largest aggregate
amount outstanding to Mr. Jacobs in fiscal 2013 was $20,925.
During fiscal 2012, advances to the Company from Mr. Jacobs amounted to
$1,124,925, which included assumption of company debt in the amount of $393,519,
and repayments to Mr. Jacobs amounted to $1,152,006. As of May 31, 2012, the
balance due the Company from Mr. Jacobs was $57,046. The largest aggregate
amount outstanding to Mr. Jacobs in fiscal 2012 was $18,003.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2013 and 2012 fiscal years.
As of September 13, 2013, $150,000 was owed by the Company to Mr. Jacobs.
-34-
DIRECTOR'S INDEPENDENCE
The board of directors ("Board") is comprised of four members, John M. Jacobs,
Bradley W. Tuckwiller, Mario J. Marra and C. David Thomas. Mr. John M. Jacobs,
who serves as Chief Executive Officer for the Company and Bradley W Tuckwiller,
who is owed fees for consulting services, are not independent within the meaning
of The Nasdaq Stock Market, Inc. listing standards.
There were no transactions, relationships or arrangements with Mr. Marra or Mr.
Thomas that would affect their independence.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
AUDIT FEES
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-Q, and services provided by the accountant in connection with
statutory and regulatory filings for the year ended May 31, 2013 amounted to
$108,479.
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-Q, and services provided by the accountant in connection with
statutory and regulatory filings for the year ended May 31, 2012 amounted to
$102,080.
AUDIT-RELATED SERVICES
Billings for assurance and related services by the principal accountant that are
reasonably related to the performance of the annual audit or review of financial
statements for the year ended May 31, 2013 amounted to $4,702.
Billings for assurance and related services by the principal accountant that are
reasonably related to the performance of the annual audit or review of financial
statements for the year ended May 31, 2012 amounted to $8,270.
FEES FOR TAX PREPARATION SERVICES
During fiscal 2013, billings for tax preparation services were $8,939. During
fiscal 2012, billings for tax preparation services were $8,919.
ADMINISTRATION OF AUDIT AND NON-AUDIT ENGAGEMENTS
The Company does not have a standing audit committee. The full Board of
Directors is performing the functions of the audit committee. The Board of
Director's policy is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
-35-
periodically report to the Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. The Board of Directors may also
pre-approve particular services on a case-by-case basis. The Board of Directors
pre-approved each audit and non-audit service rendered to the Company by its
independent Auditors as set forth above.
-36-
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
------------------------------------------------
(a)(1) The following financial statements are included in response to Item 8
herein:
Page
---------
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-4
Consolidated Statements of Operations F-5
Consolidated Statements of Comprehensive Loss F-6
Consolidated Statements of Cash Flows F-7
Consolidated Statements of Series A Redeemable Preferred Stock
and Stockholders Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
(a)(2) The following financial statement schedules are included in response to
Item 8 herein:
Page
---------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments
in Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-47
Schedule IV - Supplementary Insurance Information - Reinsurance F-48
Schedule VI - Supplemental Information F-49
(b) The following exhibits are filed as a part of this Annual Report.
EXHIBITS
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2.1 Agreement and Plan of Merger dated as of May 18, 2001 by and among
NELX, Inc., FSI Acquisition Corp. and FS Investments, Inc. (1)
2.2 Agreement and Plan of Merger dated as of May 18, 2001 by and among
NELX, Inc., J&C Acquisition Corp. and Jacobs & Company (1)
2.3 Agreement and Plan of Merger dated as of December 8, 2006 by and among
NELX, Inc. and Jacobs Financial Group, Inc. (2)
3.1 Company's Articles of Incorporation (3)
3.2 Company's By-laws (3)
3.3 Certificate of the Designations, Powers, Preferences and Rights of
Series A Preferred Stock of Jacobs Financial Group (3)
3.4 Certificate of the Designations, Powers, Preferences and Rights of
Series B Preferred Stock of Jacobs Financial Group (3)
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4.1 Certificate of the Designations, Powers, Preferences and Rights of
Series A Preferred Stock of Jacobs Financial Group (3)
4.2 Certificate of the Designations, Powers, Preferences and Rights of
Series B Preferred Stock of Jacobs Financial Group (3)
10.1 Stock Purchase Agreement with National Indemnity Company to purchase
Unione Italiana Insurance Company of America dated August 20, 2008 (11)
10.2 Engagement Agreement between Friedman, Billings, Ramsey & Co., Inc. and
Jacobs Financial Group, Inc. dated December 5, 2007 (7) (9)
10.3 Agreement to acquire by merger Reclamation Surety Holding, Inc. (5) (6)
(10)
21.1 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of
1934
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) promulgated under the Securities Exchange Act of
1934
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
32.2 Certification of 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 (4)
99.2 Form of Amended Subscription Agreement and Promissory Note (8)
99.3 Form of Subscription Agreement and Promissory Note (Second Round) (8)
101.INS XBRL Instance Document (16)
101.SCH XBRL Taxonomy Extension Schema Document (16)
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document (16)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (16)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (16)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (16)
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(1) Incorporated by reference to the Company's Current Report On Form 8-K
dated May 29, 2001.
(2) Incorporated by reference to the Company's Definitive Proxy Statement
dated November 7, 2005.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 29, 2005.
(4) Incorporated by reference to the Company's Current Report on Form 8-K
dated September 10, 2007.
(5) Incorporated by reference to the Company's Current Report on Form 8-K
dated December 14, 2007.
(6) Incorporated by reference to the Company's Current Report on Form 8-K
dated February 8, 2008.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB for the quarterly period ended February 29, 2008
(8) Incorporated by reference to the Company's Current Report on Form 8-K
dated May 30, 2008
(9) Incorporated by reference to the Company's Current Report on Form 8-K
dated April 15, 2008
(10) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 24, 2008
(11) Incorporated by reference to the Company's Current Report on Form 8-K
dated August 26, 2008
(12) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 20, 2008
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 23, 2009
(14) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 16, 2009
(15) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 7, 2009
(16) Pursuant to Rule 406T of Regulation S-T, this interactive data file is
deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933, is deemed
not filed for purposes of Section 18 of the Securities Exchange Act of
1934, and otherwise is not subject to liability under these sections.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
JACOBS FINANCIAL GROUP, INC.
Dated: January 16, 2015 By: /s/ John M. Jacobs
------------------------------------------
John M. Jacobs
President and CEO
Director
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: January 16, 2015 By: /s/ John M. Jacobs
------------------------------------------
John M. Jacobs
President and CEO
Director
Dated: January 16, 2015 By: /s/ John M. Jacobs
------------------------------------------
John M. Jacobs
Chief Financial Officer
Dated: January 16, 2015 By: /s/ Mario J. Marra
------------------------------------------
Mario J. Marra
Director
Dated: January 16, 2015 By: /s/ C. David Thomas
------------------------------------------
C. David Thomas
Director
Dated: January 16, 2015 By: /s/ Bradley W. Tuckwiller
------------------------------------------
Bradley W. Tuckwiller
Director
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