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EXCEL - IDEA: XBRL DOCUMENT - JACOBS FINANCIAL GROUP, INC.Financial_Report.xls
EX-31.2 - JACOBS FINANCIAL GROUP, INC.ex312.txt
EX-31.1 - JACOBS FINANCIAL GROUP, INC.ex311.txt
EX-32.2 - JACOBS FINANCIAL GROUP, INC.ex322.txt
EX-32.1 - JACOBS FINANCIAL GROUP, INC.ex321.txt
EX-21 - JACOBS FINANCIAL GROUP, INC.ex211.txt


                                  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.
         -------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


======================================== =====================================
               DELAWARE                               84-0922335
                                                      ----------
---------------------------------------- -------------------------------------
    (State or other jurisdiction of       (IRS Employer Identification No.)
            incorporation)
======================================== =====================================


               300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
      --------------------------------------------------------------------
               (Address of principal executive offices) (Zip Code)

       Registrant's telephone number, including area code: (304) 343-8171
                                                           --------------

        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.

------------------------------------------- ------------------------------------
          Yes [_]                                             No [X]
------------------------------------------- ------------------------------------




Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ------------------------------------------- ------------------------------------ Yes [_] No [X] ------------------------------------------- ------------------------------------ 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. ------------------------------------------- ------------------------------------ Yes [X] No [_] ------------------------------------------- ------------------------------------ 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. -------------------------------------------------------------------------------- [X] -------------------------------------------------------------------------------- Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. ------------------------- --------- -------------------------------- ---------- Large accelerated filer [_] Accelerated filer [_] ------------------------- --------- -------------------------------- ---------- Non-accelerated filer [_] Smaller reporting company [X] ------------------------- --------- -------------------------------- ---------- Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ------------------------------------------- ------------------------------------ Yes [_] No [X] ------------------------------------------- ------------------------------------ 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 -3-
PART I ITEM 1. BUSINESS ---------------- 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. -4-
ITEM 1A.RISK FACTORS -------------------- As the Registrant qualifies as a small reporting company as defined by ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the information required by this item. ITEM 2. PROPERTIES ------------------ 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 ------------------------- None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------- 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. -5-
PART II ITEM 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES. -------------------------------------------------------------------------------- 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 ---- --- 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. -6-
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 ----------------------------- ------------------- --------------------- 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 -7-
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 ------------------------------- 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 -------------------------------------------------------------------------------- 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 -8-
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 -9-
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 -10-
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 -11-
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 -12-
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 -------- 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) -37-
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) --------- (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. -38-
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 -39