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, 2008
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 84-0922335
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
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300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 343-8171
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Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK $.0001 PAR VALUE
Indicate by check mark if registrant is a well-known seasoned insurer, as
defined in rule 405 of the Securities Act.
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]
Indicated 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 proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark 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, 2007: $942,737 (157,122,836 shares at $.006 / share)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 169,206,823 shares of common
stock as of August 20, 2008.
TABLE OF CONTENTS
PART I Page
Item 1 Business 4
Item 1A Risk Factors 7
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 7A Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 20
Item 9A(T) Controls and Procedures 20
Item 9B Other Information 21
PART III
Item 10 Directors, Executive Officers and Corporate Governance 22
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 26
Item 13 Certain Relationships and Related Transactions and Director
Independence 29
Item 14 Principal Accounting Fees and Services 30
PART IV
Item 15 Exhibits, Financial Statement Schedules 32
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. for the purpose of acquiring, dealing in, and if
warranted, developing oil and gas properties. In October 1993 the Company
changed its name to NELX, Inc. Prior to May 2001, the Company owned certain
non-producing oil and gas properties as well as various real estate properties.
Due to continuing lack of capital partners for oil and gas exploration and/or
real estate development, in fiscal year 1997 the Company turned its attention to
divesting its interests in said properties. For the next three years, the
principal activities of the Company involved disposing of assets, settling
claims and liabilities and considering potential business combinations with
related or complementary businesses. During fiscal year 2001, the Company's
principal assets consisted of a leasehold interest in an undeveloped mineral
spring in Arkansas and certain oil and gas properties located in West Virginia.
The oil and gas properties were sold in May 2001.
On May 29, 2001, the Company acquired two businesses, FS Investments, Inc.
("FSI") and Jacobs & Company ("Jacobs & Co." or "Jacobs"), in exchange for 75
million shares of common stock of NELX. The transaction was accounted for as a
recapitalization of FSI and Jacobs & Co. effected by a reverse acquisition. For
accounting purposes, NELX was treated as the acquiree, and no goodwill or other
intangible asset was recorded.
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 SEC 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, including the Jacobs & Company Mutual
Fund (the "J&C Fund" or the "Fund"), which was organized in June 2001 as a
series of the Advisors Series Trust. On June 27, 2005, the Fund was reorganized
as a series of Northern Lights Fund Trust.
Since the May 29, 2001 business combination, the Company has expanded its focus
to include the ongoing business and activities of FSI and Jacobs, namely the
surety business and investment management and related services.
On or about December 29, 2005, NELX was merged with and into its newly-formed
wholly-owned subsidiary, Jacobs Financial Group, Inc., 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.
4
On December 30, 2005, the Company acquired all of the outstanding stock of West
Virginia Fire and Casualty Company (WVFCC), an insurance company licensed to
engage in business in West Virginia, Ohio and Indiana. The acquisition followed
the approval of the transaction by the West Virginia Department of Insurance,
which included approval of the Company's business plan to operate the acquired
insurance company as a surety. The financing of the transaction consisted of a
combination of a private placement of preferred stock and warrants to acquire
common stock of the Company in exchange for cash totaling $3,335,000, of which
$2,900,000 was used for the acquisition of WVFCC. In addition, approximately
$3,668,000 of indebtedness of the Company was converted into preferred stocks
and warrants.
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 ("First Surety" or "FSC").
The acquisition of FSC allowed the Company to pursue its business plan to market
and issue surety bonds utilizing programs developed by the Company's subsidiary,
FSI. FSI's subsidiary, Triangle Surety, serves as the marketing agent for First
Surety, and collateralized accounts required as a condition of the issuance of
surety bonds under FSC's programs are managed by the investment advisory
subsidiary of the Company, Jacobs & Co. Implementation of this business plan
provides revenue streams to the Company in the form of insurance premium from
the issuance of surety bonds, investment advisory fees from the management of
the collateral accounts securing surety bonds and other investment accounts, and
investment income relating to investment of its insurance subsidiary's surplus
and reserves. The principal bonding programs offered are specialized in nature
and are targeted to the coal and oil & gas industries.
FSC currently writes only the surety line of business, is licensed to write
surety in West Virginia and Ohio (effective August 5, 2008) and has focused its
primary efforts towards coal permit bonds. Such business, including investment
advisory fees from managed collateral accounts, accounted for approximately 58%
and 50% of the Company's fiscal 2008 and 2007 revenues, respectively.
Furthermore, FSC provides surety bonds to companies that share common ownership
interests that constitute 48% and 42% of the Company's fiscal 2008 and
2007revenues, respectively.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. Regulatory approval and licensing is
required for each state in which FSC seeks to conduct business. 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 new
entry into this market.
In order to best position the Company to accomplish the larger financing
necessary to expand the Company's business and penetrate new markets, the
Company has contracted to accomplish two acquisitions that the Company expects
to substantially enhance the business and prospects of the Company.
On February 8, 2008, the Company entered into an agreement and plan of merger
with Reclamation Surety Holding Company ("RSH") pursuant to which the Company
will acquire by merger all of the business and assets of RSH, including the
stock of its subsidiaries Cumberland Surety, Inc. and NewBridge Services, Inc.
5
for a purchase price of $3,400,000, less certain indebtedness. RSH and
subsidiaries perform surety underwriting services and service surety bonding
programs and the acquisition is expected to add a substantial depth of
experience and expertise to the Company.
On August 20, 2008, the Company entered into a stock purchase agreement with
National Indemnity Company ("NICO"), pursuant to which the Company agreed to
acquire all of the outstanding stock of Unione Italiana Reinsurance Company of
America ("Unione"). Unione is a New York domiciled insurer licensed in 24 states
and has license applications pending with the Commonwealth of Kentucky and with
the Financial Management Service of the United States Department of Treasury.
The purchase price for the acquisition of Unione (the "Transaction") is equal to
the sum of (i) $2,750,000 plus (ii) an amount in cash equal to Unione's New York
statutory policyholders' surplus as of the closing date of the transaction. The
Company's acquisition of Unione, when coupled with a reinsurance agreement with
NICO that is to be executed simultaneously with closing, will consist of the
purchase of marketable investments and insurance licenses and will not include
any existing policies or customer base as the insurance lines of business
offered by Unione are not insurance lines that the Company intends to pursue.
The insurance licenses are expected to enable the Company to more rapidly enter
and penetrate the various state markets that it has targeted in its business
plan.
The acquisition of Unione remains contingent upon necessary regulatory
approvals, and both the acquisition of RSH and the acquisition of Unione are
contingent upon the Company's obtaining necessary financing.
During fiscal 2008, the Company completed two rounds of bridge financing
totaling an aggregate of $3,500,000 in order to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing. The 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 if such a qualified equity offering is not consummated
by September 10, 2008, accrued interest-to-date shall be payable, and quarterly
installments of principal and interest shall be payable over five years
commencing in December 2008. The interest rates on such notes are fixed at
10.00%. Upon issuance of the bridge notes, an aggregate of 7% of the outstanding
common stock of the Company was issued to the bridge lenders. Upon retirement of
the notes upon consummation of a qualified equity offering, the Company will
issue to the bridge lenders a percentage of the outstanding common stock of the
Company which, when added to the stock initially issued, may equal as much as
28% of the common stock of the Company that would otherwise have been retained
by the holders of the Company's common shares immediately prior to the
financing. Finally, if a qualified financing is not completed by September 10,
2008, the terms of the loan documents obligate the Company to issue a total of
2.8% of the Company's outstanding common shares at such date and shall issue an
additional 2.8% of the Company's outstanding common shares upon each six-month
anniversary date thereof until retirement of the notes.
The ability of the Company to consummate the acquisitions of RSH and Unione is
contingent upon the Company's completing its permanent financing. To date, no
commitment has been secured, and there remains substantial doubt regarding
whether the Company will be able to obtain the necessary financing within the
time frames provided in the acquisition agreements to complete the acquisitions.
The Company is headquartered in Charleston, West Virginia, and through its
wholly-owned subsidiaries, employs a total of nine (9) full-time employees.
6
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, Crystal Mountain Water, Inc. ("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 $170 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.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
7
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 JFG (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, 2008
4th Quarter .025 .00831
3rd Quarter .07 .006
2nd Quarter .03 .006
1st Quarter .03 .01
FISCAL YEAR ENDED MAY 31, 2007
4th Quarter .04 .011
3rd Quarter .04 .015
2nd Quarter .06 .02
1st Quarter .07 .025
As of May 31, 2008, there were approximately 856 holders of record of the
Company's common stock.
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.
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. 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, 2008, 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:
8
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
- -------------------------------------------- ------------------------------------------ ------------------------------------------
26,500,000 .06649 8,500,000
- -------------------------------------------- ------------------------------------------ ------------------------------------------
There are no other equity compensation plans not approved by stockholders of the
Company.
UNREGISTERED SALES OF EQUITY SECURITIES
In the three-month period ended May 31, 2008, 32 shares of Series A Preferred
Stock were issued pursuant to ongoing bonding programs of FSC in exchange for
cash in the amount of $32,000.
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 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 CONDITION AND RESULTS
OF OPERATIONS
During fiscal 2008, the Company has focused its primary efforts on the
development and marketing of its surety business in West Virginia, arranging for
strategic acquisitions to accelerate the progression of the Company's business
plan, and raising additional capital to increase the capital base of FSC and
facilitate entry into other state markets.
9
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2008
RESULTS OF OPERATIONS
The Company experienced a loss of $3,332,942 (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) in fiscal
2008 as compared with a loss of $2,661,431 in fiscal 2007. While total revenues
increased from approximately $823,000 in fiscal 2007 to approximately $957,000
in fiscal 2008, total expenses increased from approximately $2,042,000 in fiscal
2007 to approximately $2,465,000 in fiscal 2008, resulting in an increase in the
loss from operations of approximately $289,000.
The increase in revenues is largely attributable to new business acquired by FSC
and increased investment holdings of FSC. The increase in expenses is
attributable to increased expense related to the growth in business within the
insurance segment and increased general and administrative expense related to
professional fees incurred in the Company's ongoing efforts to raise additional
capital to expand its business.
Interest expense increased from approximately $153,000 in fiscal 2007 to
approximately $479,000 in fiscal 2008 due to additional borrowings incurred to
pay professional fees and expenses related to the Company's efforts to raise
additional capital financing and to provide financing of current operations.
Such increase was partially offset by the recognition of a gain of approximately
$115,500 relating to the settlement of the Company's delinquent pre-2006 payroll
tax obligations and largely represents the waiver of accrued penalties in
connection with payment of the obligation in full.
Accretion and accrued dividends on preferred stock increased from approximately
$1,333,000 in fiscal 2007 to approximately $1,471,000 in fiscal 2008. This
increase is attributable the accrual of dividends associated with the issuance
of the Company's Series A preferred stock in connection with its partially
collateralized bonding programs and the compounding of accrued dividends on
previously accrued but unpaid dividends.
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
preferred stock and 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 $167,000 as of December
30, 2005.
As an inducement to the initial preferred stock shareholders, warrants to
purchase 45,402,996 shares of common stock at an exercise price of one-tenth of
one cent ($.001) per share were issued with a five-year expiration period. Such
warrants were valued at approximately $533,000 using the Black-Scholes pricing
model. Additionally, 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
10
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. Accordingly, the recorded values of the Series
A and B preferred stock are being increased to their stated liquidation values
using the interest method over a period of five years and such amounts are
categorized as accretion of mandatorily redeemable preferred stock in the
consolidated statement of operations.
The preferred stock issued consisted of non-voting Series A and Series B
redeemable preferred stock; the Series A designation being entitled to receive
cumulative dividends at the rate of 4.00% per annum and the Series B designation
being entitled to receive cumulative dividends at the rate of 8.00% per annum,
with both the Series A and B designations having equal ranking and preference as
to dividends and liquidation rights and in priority to the Company's common
stockholders. At this time, management has chosen to defer payment of dividends
to the holders of the Series A and B preferred stock until the Company has
sufficient cash flow from operations to service the obligation.
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. In the fiscal year ended May 31, 2007, proceeds from the
sale of Series A preferred stock amounted to $318,000 of which $62,000 was used
to redeem Series B preferred shares, $79,000 was retained for use in funding of
on-going operations and $177,000 being down-streamed to FSC to increase its
capital and surplus. Effective June1, 2007, the Company agreed to the request by
the West Virginia Insurance Department to downstream all future proceeds from
the sale Series A preferred stock in order to build capital and surplus reserves
of the insurance subsidiary to more substantial levels. In fiscal 2008, proceeds
from the sale of Series A preferred stock amounted to $803,000 that was
contributed to the surplus and capital of FSC.
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. Furthermore, once redeemed, the principal will no
longer be eligible to participate in partially collateralized bonding programs
offered 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 evolve whereby outstanding bonds are periodically released as
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 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.
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
exercising its conversion privileges prior to the stated redemption date.
11
Management's ability to execute its business plan and increase the market value
of its common stock will largely determine whether the Series B preferred shares
are converted to common shares or eventually redeemed.
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 new entry into this market. Accordingly, management began
pursuing avenues that would provide additional capital to facilitate such
expansion.
Beginning in September 2007, the Company secured loans totaling $2.5 million to
provide interim bridge-financing until the Company was able to accomplish a
larger, more permanent financing, and engaged an investment bank to serve as
financial advisor to assist in accomplishing the larger financing. Additionally,
the Company entered into letters of intent to acquire two additional companies,
Unione Italiana Insurance Company ("Unione"), a New York domiciled insurance
company with licenses in 24 states for a purchase price of $2.75 million plus
the surplus of Unione; and Reclamation Surety Holding Company ("RSH") for a
purchase price of $3.4 million, an acquisition that would provide marketing,
underwriting and coal reclamation engineering capabilities. The proposed
acquisitions, when coupled with the proposed financing, would provide the
ability for the Company to enhance and accelerate its business plan. The
Company's accomplishing the permanent financing and consummation of the
acquisitions of Unione and RSH are mutually dependent and remain substantial
contingencies.
The terms of the bridge-financing arrangement, as revised (See Note H to
Financial Statements), provide for payment in full upon consummation by the
Company of a qualified equity offering providing net proceeds of at least $15
million by September 10, 2013; and if such a qualified equity offering is not
consummated by September 10, 2008, then accrued interest-to-date shall be
payable, with quarterly installments of principal and interest based on a
five-year term payout beginning in December 2008.
RESTRICTIONS ON USE OF ASSETS
- -----------------------------
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. Accordingly, cash, marketable investments, and other
receivables held by FSC are restricted from use to fund operations or meet cash
needs outside of the insurance company's domain. As of May 31, 2008, such assets
amounted to approximately $5.14 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
- -----------------
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the 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
12
loss. Impairment loss, if any, is measured by estimating future cash flows
attributable to such assets based on forecasts and projections and comparing
such discounted cash flow amounts to the carrying value of the asset. Should
actual results differ from such forecasts and projections, such assets may be
subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
- ------------------------------------
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of May 31, 2008.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability
limit surety bonds in West Virginia (and Ohio effective August 5, 2008). 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 such bonds, management obtains estimates of costs to reclaim
such 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 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.
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, the value of
the collateral accounts held for the benefit of FSC, along with industry
averages and historical experience. Management has estimated such losses based
on industry experience, adjusted for factors that are unique to the Company's
approach, and in consultation with consulting actuaries experienced in the
surety field.
LIQUIDITY AND GOING CONCERN
The Company has experienced operating losses of approximately $3,333,000 (after
accretion of mandatorily redeemable convertible preferred stock, including
13
accrued dividends) and $2,661,000 for the fiscal years ended May 31, 2008 and
2007, respectively. The Company continues to face significant working capital
deficiencies and has not had adequate funds to pay its preferred stock dividend
obligation. 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 until FSC is able to develop a substantial book of
business.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. 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 new entry into this
market. Management believes that if FSC's capital and surplus reserves were
significantly more substantial, 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.
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 until its capital and surplus reserves reach more substantial levels.
And while growth of the FSC business continues to provide additional cash flow
to the Company's other subsidiaries, Jacobs and Triangle Surety, it is
anticipated that working capital deficiencies will continue and will need to be
met either through the raising of additional capital or borrowings. However,
there can be no assurance that additional capital (or debt financing) will be
available when and to the extent required or, if available, on terms acceptable
to the Company. Accordingly, concerns as to the Company's ability to continue as
a going concern are substantial. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 2008 WITH 2007
The Company experienced a loss of $3,332,942 (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) in fiscal
2008 as compared with a loss of $2,661,431 in fiscal 2007.
REVENUES
- --------
Revenues in fiscal 2008 amounted to $957,142 as compared with $823,339 in fiscal
2007. The increase in revenues is largely attributable to new business acquired
by FSC and increased investment holdings of FSC.
Revenue from the investment management segment, net of advisory referral fees,
was $262,806 in fiscal 2008 as compared with $275,328 in fiscal 2007,
representing a decrease of $12,522. As investment advisory fees are based on the
market value of assets under management, some fluctuation will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively constant from year to year with any large fluctuations being
attributable to the growth or loss of assets under management. The decrease in
revenues is primarily attributable to a decrease in advisory fees received from
the J&C Fund resulting from a decline in assets under management. Investment
advisory fees for management of individual and corporate investment accounts
14
increased by approximately $11,000 from the addition of new clients and were
offset by a decrease of approximately $18,000 in advisory and distribution fees
received from the Fund. The remaining decrease is attributable to fees received
in fiscal year 2007 relating to other advisory services provided.
Revenue from the surety insurance segment, consisting of FSC and TSA, was
$694,336 for fiscal 2008 as compared with $548,011 for fiscal 2007. Revenues
attributable to the insurance segment are as follows:
Year Ended May 31,
2008 2007
----------- --------------
Premiums and commissions $ 465,286 $ 358,055
Net investment income 225,461 189,956
Net realized investment gains 3,589 -
----------- --------------
Total $ 694,336 $ 548,011
=========== ==============
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
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 increase in revenues reflected above is attributable to increased surety
business that has been secured in fiscal year 2008. Net premium written in
fiscal 2008 amounted to $586,498 as compared with $264,639 in fiscal 2007, and
is more reflective of the growth experienced in this segment of the business for
the comparable periods. Commission income earned for the placement of bonds with
outside insurers has remained relatively stagnant.
Additionally, in conjunction with the increased surety business written in
fiscal 2008, proceeds amounting to $803,000 from the sale of Series A preferred
stock, a requirement for issuing partially collateralized bonds, were
contributed to the surplus and capital of FSC. FSC's investment holdings in
fiscal 2008 averaged $4.553 million as compared with $3.837 for fiscal 2007 with
investment yields remaining relatively unchanged at just below 5.00%. Net
realized gains from investments resulted primarily from higher rate investment
bonds with call features being called and redeemed prior to maturity.
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 since its acquisition in December 2005. Incurred policy
losses for fiscal 2008 have been recorded as $135,867 or 30.0% of earned premium
as compared to $98,873 or 31.5% of earned premium for fiscal 2007. IBNR loss
estimates have been based on industry averages adjusted for factors that are
unique to the FSC's underwriting approach. FSC has experienced no claims for
losses as of May 31, 2008.
15
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 2008 such costs amounted to $126,386 or 27.9% of earned premium as
compared with $108,065 or 34.1% in fiscal 2007.
General and administrative expenses for fiscal 2008 were $2,037,178 as compared
with $1,641,237 for fiscal 2007, representing an increase of $395,941 and are
comprised of the following:
Year Ended May 31,
2008 2007 Difference
---------------- ----------------- ----------------
Salaries and related costs $ 727,219 $ 790,725 $ (63,506)
General office expense 111,739 112,991 (1,252)
Legal and other professional fees 804,512 305,908 498,604
Audit, accounting and related services 118,595 134,047 (15,452)
Travel, meals and entertainment 73,668 83,723 (10,055)
Other general and administrative 201,445 213,843 (12,398)
---------------- ----------------- ----------------
Total general and administrative $ 2,037,178 $ 1,641,237 $ 395,941
================ ================= ================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $63,500 and are comprised of the following:
Year Ended May 31,
2008 2007 Difference
---------------- ----------------- -----------------
Salaries and wages $ 567,522 $ 532,131 $ 35,391
Commissions 37,147 - 37,147
Payroll taxes 47,107 43,100 4,007
Stock option expense 98,972 206,681 (107,709)
Fringe benefits 61,764 56,075 5,689
Key-man life insurance 42,863 24,033 18,830
Deferred policy acquisition costs (128,156) (71,295) (56,861)
------------------ ------------------ ------------------
Total salaries and related costs $ 727,219 $ 790,725 $ (63,506)
================== ================== ==================
Increases in salaries and wages relate to increased sales staff, salary
increases and year-end bonuses paid to non-executive employees. The increase in
commissions and deferred policy acquisition costs is attributable to the
increase in insurance business written in fiscal 2008 as compared to fiscal
2007. The decrease in stock option expense is attributable to non-uniform
vesting schedules under which options vest for certain key employees. Group
health benefits increased approximately $8,300 or 16.46% from the previous year,
but were offset by a decrease in the Company's group life insurance cost of
approximately $2,600. The increase in key-man life insurance is attributable to
the increased debt the Company has incurred.
In fiscal 2008, legal and professional fees of approximately $804,500 included
approximately $748,000 relating to the Company's on-going efforts to raise
additional capital for the expansion of the surety business into other states.
In fiscal 2007, legal and professional fees of approximately $306,000 included
approximately $197,000 relating to the Company's on-going efforts to raise
16
additional capital for the expansion of the surety business into other states.
Other legal and professional fees incurred in the respective years were for
other corporate matters.
Other less significant decreases were experienced in audit, travel and other
general administrative expenses categories in fiscal 2008 as compared to fiscal
2007.
Jacobs & Co. is the investment advisor to the J&C Fund. While the Fund is
responsible for its own operating expenses, Jacobs & Co., as the advisor, has
agreed to limit the Fund's aggregate annual operating expenses to 2.00% of the
average net assets. Under this expense limitation agreement, Jacobs & Co.
absorbed $157,269 of the Fund's operating expenses in fiscal 2008 as compared to
$181,612 in fiscal 2007. As the Fund grows in size (of assets under management),
expenses (in excess of the 2% level) absorbed by Jacobs & Co. will decrease
until the Fund reaches sufficient size to support its on-going operating costs.
In contrast, as the Fund grows in size, revenues from investment advisory fees
will increase. Additionally, should the Fund's operating expense ratio fall
below the 2.00% level, the costs absorbed by the Company are now reimbursable to
it for a period of up to three years. In fiscal 2008, the Fund's investment
advisory and distribution fees amounted to $39,535 as compared to $58,055 in
fiscal 2007. The Fund's average assets under management declined from
approximately $4.68 million for fiscal 2007 to approximately $3.25 million for
fiscal 2008. As of May 31, 2008, assets under management were approximately $2.5
million.
The Fund was initially established by Jacobs to provide the ability to manage
funds for smaller accounts in a more efficient and diversified manner than could
be achieved on an individual account basis. Additionally, the Fund provided an
investment vehicle that would fit within the Company's broader business plan of
issuing smaller bonds under its collateralized surety programs. While the Fund's
lackluster performance has contributed to its gradual decline in size, and the
maintenance of the Fund continues to be a significant cost to the Company, it
remains a key component in the Company's broader business plan. Moreover, if
successful in these broader efforts, the opportunity exists to significantly
increase the assets under management within the Fund. Should the Company be
successful in increasing the size of the Fund to such a level that the Fund's
operating expense ratio falls below the 2.00% level, the costs absorbed by
Jacobs & Co. are currently reimbursable to it for a period of up to three years.
Management continually evaluates the cost/benefit of maintaining the Fund.
GAIN ON EXTINGUISHMENT OF DEBT
- ------------------------------
The Company had been delinquent in paying certain of its payroll tax obligations
for periods ending on or before December 31, 2005. In fiscal 2008, the Company
entered into negotiations for the repayment and settlement of this obligation
with the Internal Revenue Service. In conjunction with such negotiations, the
Company made payments of approximately $402,000 towards the tax and interest
portion of this obligation and requested abatement of all penalties relating to
this matter. In February 2008, the Company received notification from the
Internal Revenue Service granting its request for abatement of penalty with
respect to this matter. Accordingly, the Company recognized a gain of $115,470
upon final settlement of this matter.
In December 2006, the Company repaid an obligation to a creditor relating to
professional fees incurred in the Company's 2002 fiscal year in connection with
litigation resulting from a failed business combination transaction. Under the
terms of an agreement reached in October 2006, the creditor agreed to waive
payment of any accrued interest on the obligation provided the obligation was
17
paid by a certain agreed-upon date. At the time of repayment, accrued interest
on this obligation totaled $42,445, and accordingly, upon satisfaction of the
debt in accordance with such agreement, a gain on the extinguishment of debt was
recognized.
INTEREST EXPENSE AND INTEREST INCOME
- ------------------------------------
Interest expense for fiscal 2008 was $479,295 as compared with $153,020 in
fiscal 2007. The increase in interest expense is primarily attributable to the
additional borrowings under the bridge-financing arrangement undertaken by the
Company beginning in September 2007. Components of interest expense are
comprised of the following:
Year Ended May 31,
2008 2007 Difference
------------------ ------------------ ------------------
Interest expense on bridge financing $ 170,931 $ 110 $ 170,821
Expense of common shares issued or to be issued in
connection with bridge financing arrangements 238,943 - 238,943
Interest expense on demand and term notes 47,920 46,400 520
Interest expense accrued on debt obligations
subsequently settled and recorded as gain on debt
extinguishment 13,075 92,886 (79,811)
Other finance charges 8,426 13,624 (4,198)
------------------ ------------------ -------------------
Total interest expense $ 479,295 $ 153,020 $ 326,275
================== ================== ===================
Interest income for fiscal 2008 was $10,137 as compared with $1,176 for fiscal
2007. Interest income for fiscal 2008 is primarily related to the investment of
the unexpended proceeds from the bridge-financing arrangement in short-term
investment accounts. Interest income for fiscal 2007 relates to interest earned
on amounts due from a related party.
PREFERRED STOCK ACCRETION AND DIVIDENDS
- ---------------------------------------
Accretion of mandatorily redeemable convertible preferred stock is comprised of
accretion of discount, accrued but unpaid dividends on preferred stock and
amounts by which the redemption price exceeded the carrying value of redeemed
shares of Series B preferred stock as follows:
Year Ended May 31,
2008 2007
----------------- ----------------
Accretion of discount $ 529,273 $ 494,651
Accrued dividends 942,044 827,797
Excess redemption price 10,717
-
----------------- ----------------
$1,471,317 $1,333,165
================= ================
18
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-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily 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-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the audits for the years ended May 31, 2008 and May 31, 2007,
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, 2008. 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, 2008,
control deficiencies were identified that constitute a material weakness in
internal control over financial reporting. Such control deficiencies relate to
inadequate segregation of duties, lack of effective board of directors
oversight, use of internally developed non-integrated accounting systems, lack
of internal review of account reconciliations, and lack of internal review of
general journal entries, elimination entries and the financial statement
consolidation process. As a result, JFG's Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2008, JFG's disclosure controls
and procedures were ineffective.
Upon identification of the material weaknesses and under the direction of the
Chief Executive Officer and Chief Financial Officer, JFG developed a plan to
remediate the material weaknesses within the constraints of the Company's
limited financial resources and the size of its accounting staff.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness
previously identified. Additionally, management identified steps to be
implemented at both management and the board of directors' level to increase the
effectiveness of review as it relates to the financial reporting process. Such
changes will be implemented during the first fiscal quarter of the Company's
2008-2009 fiscal year. Other 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, 2008 and 2007, and the results of its
operations and cash flows for the years ended May 31, 2008 and 2007 in
conformity with U.S. generally accepted accounting principals (GAAP).
20
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
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, 2008. 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. Based on this assessment, management concluded that the
Company's internal control over financial reporting was not effective as of May
31, 2008. 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, 2008. Such control deficiencies relate to inadequate segregation of
duties, lack of effective board of directors oversight, use of internally
developed non-integrated accounting systems, lack of internal review of account
reconciliations, and lack of internal review of general journal entries,
elimination entries and the financial statement consolidation process.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness.
Additionally, management identified steps to be implemented at both management
and the board of directors' level to increase the effectiveness of review as it
relates to the financial reporting process. Such changes will be implemented
during the first fiscal quarter of the Company's 2008-2009 fiscal year. Other
changes are to be considered as additional financial resources and accounting
staff become available. Management believes that the successful implementation
of these changes will strengthen overall controls over financial reporting, 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 temporary 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
21
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 54 President and CEO
Director
Frederick E. Ferguson 74 Director
C. David Thomas 55 Director
Robert J. Kenney 61 Vice President
Robert L. Neal 52 Chief Financial Officer
JOHN M. JACOBS
Mr. Jacobs is the founder of Jacobs & Co., an independent SEC registered
investment advisor, a Certified Public Accountant, and is licensed as a property
and casualty insurance agent in fifteen (15) 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.
FREDERICK E. FERGUSON
Mr. Ferguson is retired coal operator who has a diverse experience with respect
to business and the coal industry. Mr. Ferguson spent the first half of his
career as a state and federal mine inspector. During the later half of his
career, Mr. Ferguson owned his own coal company and was involved in all facets
of mining production. 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.
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.
22
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. Previously, Mr.
Kenney served as Senior Vice President of Triangle Surety Agency, Inc. In
addition, he is a licensed resident insurance agent in West Virginia and also
holds Series 63 and 65 securities licenses. Prior to joining Triangle Surety and
Jacobs & Co., 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.
ROBERT L. NEAL
Mr. Neal re-joined JFG in January 2006 as Chief Financial Officer after
previously serving in a similar capacity from June 2000 to May 2002. Prior to
his re-joining JFG Mr. Neal served as President and CEO of West Virginia Capital
Corporation, a statewide community development corporation from June 2002 to
December 2005. Prior to that, Mr. Neal had over 20 years of management
experience in banking and public accounting. Mr. Neal is a Certified Public
Accountant.
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, judgement, 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.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
During the most recent fiscal year, the Company is not aware of any director,
officer or beneficial owner of more than 10 percent of the Company's common
stock at any time during the fiscal year that failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act.
23
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 November 2004 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.
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, 2008 and 2007 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 ($) ($) ($) ($) (1) ($) (2) ($)
- ------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
John M. 2008 $150,000 - - $ 49,164 $ 25,913 $225,077
Jacobs, CEO 2007 $150,000 $109,191 $ 16,647 $275,838
- ------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
Robert J. 2008 $ 75,000 - - $ 15,840 - $ 90,840
Kenney, VP 2007 $ 75,000 $ 34,849 $109,849
- ------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
Robert L. 2008 $ 90,000 - - $ 10,296 - $100,296
Neal, CFO 2007 $ 90,000 $ 19,800 $109,800
- ------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
24
(1) On May 25, 2006, the compensation committee of the board of directors
awarded 12,500,000, 5,000,000 and 2,000,000 of incentive stock options to
acquire common shares at an exercise price of seven cents ($.07) per share
to Mr. Jacobs, Mr. Kenney and Mr. Neal, respectively, which vest as set
forth in the table below. The term of the options is five years and expires
in May 2011.
- -------------------- -----------------------------------------------------------
Vesting date Incentive Stock Option Awards
- -------------------- -----------------------------------------------------------
JOHN M. JACOBS ROBERT J. KENNEY ROBERT L. NEAL
-------------- ---------------- --------------
- -------------------- -------------------- ---------------------- ---------------
May 25, 2006 2,500,000 2,000,000 -
- -------------------- -------------------- ---------------------- ---------------
January 1, 2007 2,500,000
- -------------------- -------------------- ---------------------- ---------------
May 25, 2007 1,000,000 500,000
- -------------------- -------------------- ---------------------- ---------------
January 1, 2008 2,500,000
- -------------------- -------------------- ---------------------- ---------------
May 25, 2008 1,000,000 500,000
- -------------------- -------------------- ---------------------- ---------------
January 1, 2009 2,500,000
- -------------------- -------------------- ---------------------- ---------------
May 25, 2009 1,000,000 500,000
- -------------------- -------------------- ---------------------- ---------------
January 1, 2010 2,500,000
- -------------------- -------------------- ---------------------- ---------------
May 25, 2010 500,000
- -------------------- -------------------- ---------------------- ---------------
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, 2008.
- ---------------- -----------------------------------------------------------------------------------
OPTION AWARDS
- ---------------- ---------------- ------------------ ---------------- -------------- ---------------
EQUITY
NUMBER OF INCENTIVE PLAN
NUMBER OF SECURITIES AWARDS; NUMBER
SECURITIES UNDERLYING OF SECURITIES
UNDERLYING UNEXERCISED UNDERLYING
UNEXERCISED OPTIONS (#) UNEXERCISED OPTION
OPTIONS (#) UNEXERCISABLE UNEARNED EXERCISE OPTION
NAME EXERCISABLE (1) OPTIONS (#) PRICE ($) EXPIRATION
DATE
- ---------------- ---------------- ------------------ ---------------- -------------- ---------------
John M. 7,500,000 5,000,000 - $.07 05/25/2011
Jacobs, CEO
- ---------------- ---------------- ------------------ ---------------- -------------- ---------------
Robert J. 4,000,000 1,000,000 - $.07 05/25/2011
Kenney, VP
- ---------------- ---------------- ------------------ ---------------- -------------- ---------------
Robert L. 1,000,000 1,000,000 - $.07 05/25/2011
Neal, CFO
- ---------------- ---------------- ------------------ ---------------- -------------- ---------------
25
(1) Non-vested options of Mr. Jacobs will vest evenly on January 1, 2009 and
2010, respectively. Non-vested options of Mr. Kenney will vest on May 25,
2009. Non-vested options for Mr. Neal will vest evenly on May 25, 2009 and
2010 respectively.
OTHER EXECUTIVE COMPENSATION PLANS
- ----------------------------------
The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
The Company has no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a named executive officer at,
following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.
DIRECTOR COMPENSATION
- ---------------------
The following table sets forth compensation received by our directors for the
fiscal year ended May 31, 2008.
- --------------------------- ---------------------------------------- -----------
NAME FEES EARNED OR PAID IN CASH ($) (1) TOTAL ($)
- --------------------------- ---------------------------------------- -----------
Frederick E. Ferguson $150 $150
- --------------------------- ---------------------------------------- -----------
C. David Thomas $150 $150
- --------------------------- ---------------------------------------- -----------
(1) Non-employee board members of JFG's wholly-owned subsidiary First
Surety Corporation, which include JFG board members, are compensated at
the rate of $150 per meeting.
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 August 22, 2008 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.
26
- ---------------------------------- ------------------------------- ------------------------------- -------------------------------
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership (1) Class (2)
- ---------------------------------- ------------------------------- ------------------------------- -------------------------------
MORE THAN 5.00% BENEFICIAL OWNERSHIP
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 26,548,127 (3) 14.97%
Charles L. Stout
Route 1, Box 41J
Common Bridgeport, WV 26330 13,175,000 (4) 7.79%
Fay S. Alexander
6318 Timarron Cove Lane
Common Burke, VA 22015-4073 13,256,041 (5) 7.74%
William D. Jones
513 Georgia Avenue
Common Chattanooga, TN 37403 10,827,694 (6) 6.34%
Sue C. Hunt
1508 Viewmont Drive
Common Charleston, WV 25302 8,611,589 (7) 5.05%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 26,548,127 (3) 14.97%
Frederick E. Ferguson
Route 3, Box 408
Common Fayetteville, WV 25840 1,600,000 (8) *
C. David Thomas
P. O., Box 5157
Common Charleston, WV 25361 992,295 *
Robert J. Kenney
809 Sherwood Drive
Common Charleston, WV 25314 4,920,000 (9) 2.84%
Robert L. Neal
101 Sunset Drive
Common Charleston, WV 25301 1,000,000 (10) *
ALL DIRECTORS AND EXECUTIVE
Common OFFICERS AS A GROUP 35,060,422 19.15%
* Represents beneficial ownership of less than one percent of the Company's
common stock.
27
(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
August 22, 2008 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 169,206,823 shares of common stock issued and outstanding as of
August 22, 2008.
(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 5,363,416 shares held in joint tenancy with spouse,
Kathleen M. Jacobs. Includes 7,500,000 in vested options to purchase
Company stock exercisable within 60 days of August 22, 2008. Includes the
right to convert Series B Preferred Stock holdings to 666,667 shares of
common stock exercisable within 60 days of August 22, 2008. John M. Jacobs
is the CEO and also a member of the board of directors for the Registrant.
(4) Includes 25,000 shares of common stock held in the name of Applied
Mechanics Corporation of which Charles L. Stout is President and a
director, 12,150,000 shares held in joint tenancy with spouse, Marilyn J.
Stout, and 1,000,000 shares beneficially owned by members of the immediate
family.
(5) Includes 9,900,000 shares of common stock held in the name of Graphite
Investment, LLC ("Graphite") and 1,000,000 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 August 22, 2008. Includes 214,700 shares held
in joint tenancy with spouse, Dan C. Alexander.
(6) Includes 9,060,000 shares of common stock held in joint tenancy with
spouse, Cynthia B. Jones. Includes the right to convert Series B Preferred
Stock holdings to 282,116 shares of common stock (182,116 in joint tenancy
with spouse) exercisable within 60 days of August 22, 2008. Includes the
right to purchase 1,410,578 shares of common stock (910,578 in joint
tenancy with spouse) pursuant to issued and outstanding stock warrants at
an exercise price of one-tenth of one cent per share ("stock warrants")
exercisable within 60 days of August 22, 2008.
(7) Includes 1,209,515 shares of common stock held in the Individual Retirement
Account ("IRA") of spouse, Douglas E. Hunt. Includes the right to convert
Series B Preferred Stock holdings to 200,000 shares of common stock and the
right to purchase 1,000,000 shares of common stock pursuant to issued and
outstanding stock warrants exercisable within 60 days of August 22, 2008
and held in the IRA of Douglas E. Hunt. Includes the right to convert
Series B Preferred Stock holdings to 33,679 shares of common stock and the
28
right to purchase 168,395 shares of common stock pursuant to issued and
outstanding stock warrants exercisable within 60 days of August 22, 2008
and held jointly with spouse.
(8) Includes 750,000 shares of common stock held in joint tenancy with spouse,
Sandra B. Ferguson. Includes 130,000 shares held in the name of The Party
Store, Inc. ("Party Store") of which Fred E. Ferguson is President and a
director. Includes the right to convert Series B Preferred Stock holdings
held in the name Party Store to 120,000 shares of common stock exercisable
within 60 days of August 22, 2008. Includes the right to purchase 600,000
shares of common stock pursuant to issued and outstanding stock warrants
held in the name of Party Store exercisable within 60 days of August 22,
2008.
(9) 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 4,000,000 in vested options to
purchase Company stock exercisable within 60 days of August 22, 2008.
(10) Includes 1,000,000 in vested options to purchase Company stock exercisable
within 60 days of August 22, 2008.
In accordance with the terms of the bridge-financing arrangement as set forth in
Note H of the Audited Financial Statements contained in Item 8. of Part II
herein, in the event that a qualified financing (as defined in said Note H) is
not completed and such bridge-financing is extended to September 2010 for
repayment, one of the participants providing part of the bridge-financing would
acquire common shares of the Registrant through such arrangement equal to 10.50%
of the common shares then outstanding. For each six-month period thereafter,
such holdings would be increased by 1.40% and if extended to maturity (September
2013), such holdings would amount to 18.90%.
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 the year ended May 31, 2006, the Company made net repayments of
$1,170,546 on the back-to-back loans which was $508,036 more than the original
29
loans and interest charges. In accordance with the Assumption Agreement, the
Company assigned to Mr. Jacobs and Mr. Jacobs assumed responsibility for payment
of certain debt totaling $101,326 and accounts payable totaling $365,000 during
the year ended May 31, 2006. The debt obligation was re-issued in the name of
Mr. Jacobs; and therefore the debt amount was relieved and offset against the
receivable from Mr. Jacobs. Although the Company assigned accounts payable
totaling $365,000 to Mr. Jacobs through the Assumption Agreement, for financial
reporting purposes under generally accepted accounting principles, the accounts
payable amount could not be derecognized until either paid or released by the
creditor. On September 13, 2006, the Company did receive a release from the
obligee of the $365,000 accounts payable that was assumed by Mr. Jacobs pursuant
to the Assumption Agreement. Accordingly, the assumption of the accounts payable
was offset against the balance due from Mr. Jacobs as of May 31, 2006 of
$361,009. The largest amount due from Mr. Jacobs in fiscal 2007 prior to
receiving the above mentioned release amounted to $425,423. Interest charged to
Mr. Jacobs in fiscal 2007 amounted to $12,222.
During fiscal 2007, advances to the Company from Mr. Jacobs amounted to $285,392
and repayments to Mr. Jacobs amounted to $273,620. As of May 31, 2007, the
balance due Mr. Jacobs was $15,763. The largest aggregate amount outstanding to
Mr. Jacobs in fiscal 2007 was $80,541. Interest on such obligations to Mr.
Jacobs in fiscal 2007 amounted to $6,146 and was netted against interest due
from Mr. Jacobs as stated above.
During fiscal 2008, advances to the Company from Mr. Jacobs amounted to $132,200
and repayments to Mr. Jacobs amounted to $146,963. As of May 31, 2008, the
balance due Mr. Jacobs was $1,000. The largest aggregate amount outstanding to
Mr. Jacobs in fiscal 2008 was $127,200. Interest paid on such obligations to Mr.
Jacobs in fiscal 2008 amounted to $1,387.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2007 and 2008 fiscal years.
As of August 22, 2008, no obligations were owed to Mr. Jacobs.
DIRECTOR'S INDEPENDENCE
- -----------------------
The board of directors ("Board") is comprised of three members, John M. Jacobs,
Frederick E. Ferguson and C. David Thomas. Only Mr. John M. Jacobs, who serves
as Chief Executive Officer for the Company, is not independent within the
meaning of The Nasdaq Stock Market, Inc. listing standards.
There were no transactions, relationships or arrangements that were considered
by the Board of Directors in determining that Mr. Ferguson or Mr. Thomas were
independent.
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-QSB, and services provided by the accountant in connection
with statutory and regulatory filings for the year ended May 31, 2008 amounted
to $70,173. Management estimates that additional amounts to be billed are
approximately $18,000.
30
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-QSB, and services provided by the accountant in connection
with statutory and regulatory filings for the year ended May 31, 2007 amounted
to $82,886.
AUDIT-RELATED SERVICES
- ----------------------
There were no 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 years ended May 31, 2008 and 2007.
TAX FEES
- --------
During fiscal 2008, billings for tax preparation services were $12,584. During
fiscal 2007, billings for tax preparation services were $14,250
ALL OTHER FEES
- --------------
Billings for other services related to potential financing transactions in
amounted to $11,708 and $5,675 in fiscal 2008 and 2007 respectively.
Billings for professional services related to the audit of the acquisition
target, RSH Holdings, Inc. amounted to $63,500.
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
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, with the exception of the billings for
other services related to potential financing transactions amounting to $11,708
in fiscal 2008 which were approved by the Board of Directors prior to the
completion of the audit for fiscal 2008 as provided by Rule 2-01(c)(7)(i)(C)(3)
of Regulation S-X.
31
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-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders
Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
Page
--------------------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
32
JACOBS FINANCIAL GROUP, INC.
TABLE OF CONTENTS
Page
--------------------
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders
Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
Page
--------------------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated balance sheets of Jacobs Financial
Group, Inc. and subsidiaries (the "Company") as of May 31, 2008 and 2007, and
the related consolidated statements of operations, comprehensive income (loss),
cash flows, and mandatorily redeemable preferred stock and stockholders' equity
(deficit) for each of the years in the two-year period ended May 31, 2008. Our
audits also included the financial statement schedules listed in the Index as
Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits 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 audits provide 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, 2008 and 2007, and the results of its operations and its
cash flows for each of the years in the two-year period ended May 31, 2008 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 statement 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
- -----------------------------
Pittsburgh, PA
September 8, 2008
F-2
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
MAY 31, 2008 MAY 31, 2007
------------------- ------------------
ASSETS
INVESTMENTS AND CASH:
Bonds available for sale, at market value $ 105,866 $ -
(amortized cost - 05/31/08 $98,774)
Bonds held to maturity, at amortized costs - 2,316,875
(market value - 05/31/07 $2,308,003)
Mortgage-back securities held to maturity, at amortized costs 3,826,688 1,369,411
(market value - 05/31/08 $3,800,909; 05/31/07 $1,367,365)
Short-term investments, at cost (approximates market value) 1,176,056 335,729
Cash 48,640 25,298
------------------- -----------------
TOTAL INVESTMENTS AND CASH 5,157,250 4,047,313
Investment income due and accrued 19,892 35,294
Premiums and other accounts receivable 47,353 38,668
Deferred policy acquisition costs 75,940 52,365
Furniture and equipment, net of accumulated depreciation of
$120,931 and $113,919, respectively 29,168 23,628
Other assets 298,163 22,801
Intangible assets 150,000 150,000
------------------- ------------------
TOTAL ASSETS $ 5,777,766 $ 4,370,069
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 246,651 $ 110,784
Reserve for unearned premiums 277,208 144,188
Advance premiums - 127,034
Accrued expenses and professional fees 412,039 547,965
Accounts payable 315,577 345,895
Notes payable 2,968,016 410,136
Accrued interest payable 71,483 16,095
Other liabilities 16,402 511,751
------------------- ------------------
TOTAL LIABILITIES 4,307,376 2,213,848
SERIES A PREFERRED STOCK, $.0001 par value per share;
1 million shares authorized; 2,230 and 1,427 shares issued
and outstanding at May 31, 2008 and 2007, respectively; stated
liquidation value of $1,000 per share 2,308,933 1,420,913
SERIES B PREFERRED STOCK, $.0001 par value per share;
9,941.341 shares authorized; 9,621.940 and 9,596,940 shares
issued and outstanding at May 31, 2008 and 2007, respectively;
stated liquidation value of $1,000 per share 9,936,866 8,526,059
------------------- ------------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 12,245,799 9,946,972
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value per share; 490 million shares
authorized; 166,091,242 and 156,997,836 shares issued and
outstanding at May 31, 2008 and 2007, respectively 16,609 15,700
Additional paid in capital 2,423,537 2,082,647
Accumulated deficit (13,222,038) (9,889,098)
Accumulated other comprehensive income (loss) 6,483 -
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (10,775,409) (7,790,751)
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 5,777,766 $ 4,370,069
=================== ==================
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
-------------------------------------
2008 2007
------------------- -----------------
REVENUES:
Investment advisory services $ 262,806 $ 270,133
Insurance premiums and commissions 465,286 358,055
Net investment income 225,461 189,956
Net realized investment gains (losses) 3,589 -
Other income - 5,195
------------------- -----------------
TOTAL REVENUES 957,142 823,339
EXPENSES:
Incurred policy losses 135,867 98,873
Insurance policy acquisition costs 126,386 108,065
General and administrative 2,037,178 1,641,237
Mutual fund costs 157,269 181,612
Depreciation 8,379 12,419
------------------- -----------------
TOTAL EXPENSES 2,465,079 2,042,206
------------------- -----------------
NET INCOME (LOSS) FROM OPERATIONS (1,507,937) (1,218,867)
Gain on debt extinguishment 115,470 42,445
Interest expense (479,295) (153,020)
Interest income 10,137 1,176
------------------- -----------------
NET INCOME (LOSS) (1,861,625) (1,328,266)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (1,471,317) (1,333,165)
------------------- -----------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,332,942) $ (2,661,431)
=================== =================
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ (0.02) $ (0.02)
=================== =================
WEIGHTED-AVERAGE SHARES OUTSTANDING 159,130,160 156,281,466
=================== =================
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR ENDED
MAY 31
---------------------------------------
2008 2007
------------------ -------------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $ (3,332,942) $ (2,661,431)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale investments
arising during period 7,318 -
Reclassification adjustment for realized (gain) loss included
in net income (835) -
------------------ -------------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized 6,483her comprehensive income 6,483 -
COMPREHENSIVE INCOME (LOSS) ATTRIBITUABLE TO COMMON STOCKHOLDERS $ (3,326,459) $ (2,661,431)
================== ===================
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED MAY 31
--------------------------------------
2008 2007
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,861,625) $ (1,328,266)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Unearned and advance premium 5,986 77,606
Stock option expense 98,972 206,682
Stock issued in connection with financing arrangements 242,003 -
Provision for loss reserves 135,867 98,873
Amortization of premium 23,496 29,745
Depreciation 8,379 12,419
Write-off of bad debts 985 -
Loss on disposal of furniture and equipment 684 -
Realized (gains) losses on sale of securities (3,589) -
Premium and other receivables (9,670) 9,106
Accretion of Discount (11,565) (5,024)
Investment income due and accrued 15,858 652
Deferred policy acquisition costs (23,575) 18,034
(Gain) on extinguishment of debt (115,470) (42,445)
Change in operating assets and liabilities:
Other assets (125,531) 11,062
Accounts payable and cash overdraft (30,318) (60,711)
Accrued expenses and other liabilities (460,417) 413,507
-------------------- -----------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (2,109,530) (558,760)
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to related party - (76,173)
Repayments from related party - 127,227
Short-term loan (50,000) -
Repayment of short-term loan 50,000 -
(Increase) decrease of short-term investments (835,305) 861,002
Repayment of mortgage-backed securities 476,400 431,064
Sale of securities held-to-maturity 169,330 -
Redemption of bonds upon call or maturity 2,155,000 500,000
Costs of bonds acquired (97,582) (1,793,901)
Costs of mortgage-backed securities acquired (2,956,145) (473,036)
Purchase of equity securities (25,438) -
Escow deposits for pending acquisitions (125,000)
Purchase of furniture and equipment (14,603) (6,007)
-------------------- -----------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (1,253,343) (429,824)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 132,200 158,166
Repayment of related party debt (146,963) (197,448)
Proceeds from issuance of Series A preferred stock and warrants 803,000 318,000
Proceeds from issuance of Series B preferred stock and warrants 25,000 542,258
Redemption of Series B preferred stock - (62,477)
Proceeds from issuance of common stock - 17,742
Proceeds from exercise of common stock warrants 335 1,500
Proceeds from borrowings 2,842,000 375,000
Repayment of borrowings (269,357) (138,859)
-------------------- -----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 3,386,215 1,013,882
NET INCREASE (DECREASE) IN CASH 23,342 25,298
CASH AT BEGINNING OF PERIOD 25,298 -
-------------------- -----------------
CASH AT END OF PERIOD $ 48,640 $ 25,298
===================- =================
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
YEAR ENDED MAY 31
--------------------------------------
2008 2007
-------------------- -----------------
SUPPLEMENTAL DISCLOSURES
Interest paid $ 171,889 $ 49,388
Income taxes paid - -
Non-cash investing and financing transactions:
Assumption of accounts payable by related party - 365,000
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MAY 31, 2007
-----------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B
SERIES A MANDATORILY REDEEMABLE -----------------------------------------------------------------
MANDATORILY REDEEMABLE CONVERTIBLE ADDITIONAL
PREFERRED STOCK PREFERRED STOCK PAID-IN ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ----------- --------- ---------- ----------- ------- ----------- ----------- -----------
------------------------------------------------- ---------------------------------------------------------------
BALANCE,
MAY 31, 2006 1,109 $1,035,841 9,095.599 $6,780,186 154,937,836 $15,494 $1,856,929 $(7,227,668) $(5,355,245)
Issuance of Series
A and B Preferred
Stock and common
stock 318 318,000 560.000 542,258 560,000 56 17,686 - 17,742
Issuance of common
stock upon exercise
of warrants - - - - 1,500,000 150 1,350 - 1,500
Accretion of
mandatorily redeem-
able convertible
preferred stock - 15,199 - 479,451 - - - (494,650) (494,650)
Accrued dividends
of mandatorily
redeemable convert-
ible preferred stock - 51,873 - 775,924 - - - (827,797) (827,797)
Redemption of Series
B Preferred Stock - - (58.659) (51,760) - - - (10,717) (10,717)
Common stock option
expense - - - - - - 206,682 - 206,682
Net income (loss)
from operations,
year ended
May 31, 2007 - - - - - - - (1,328,266) (1,328,266)
------ ----------- --------- ---------- ----------- ------- ----------- ----------- -----------
BALANCE,
MAY 31, 2007 1,427 $1,420,913 9,596.940 $8,526,059 156,997,836 $15,700 $2,082,647 $(9,889,098) $(7,790,751)
====== =========== ========= ========== =========== ======== =========== ============ ============
------------------------------------------------- ---------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
F-8
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MAY 31, 2008
-------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
ACCUM.
SERIES B OTHER
SERIES A MANDATORILY REDEEMABLE COMPRE-
MANDATORILY REDEEMABLE CONVERTIBLE ADDITIONAL HENSIVE
PREFERRED STOCK PREFERRED STOCK PAID-IN ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
------ ----------- --------- ---------- ----------- ------- ---------- ------------ ------ ------------
BALANCE,
MAY 31, 2007 1,427 $ 1,420,913 9,596.940 $8,526,059 156,997,836 $15,700 $2,082,647 $(9,889,098) $ - $(7,790,751)
Issuance of
Series A
and B Preferred
Stock and common
stock 803 803,000 25.000 24,510 25,000 2 488 - - 490
Issuance of
common stock as
additional
consideration for
financing arrange-
ments - - - - 8,735,304 874 223,330 - - 224,204
Issuance of common
stock upon exercise
of warrants - - - - 333,102 34 301 - - 335
Accretion of
mandatorily
redeemable
convertible
preferred stock - 16,045 - 513,228 - - - (529,273) - (529,273)
Accrued dividends
of mandatorily
redeemable
convertible
preferred stock - 68,975 - 873,069 - - - (942,044) - (942,044)
Expense of
common shares
to be issued
in connection
with financing
arrangements - - - - - - 17,799 - - 17,799
Common stock
option expense - - - - - - 98,972 - - 98,972
Unrealized net
gain on available
for sale
securities - - - - - - - - 6,483 6,483
Net income (loss),
year ended
May 31, 2008 - - - - - - - (1,861,624) - (1,861,624)
------ ----------- --------- ---------- ----------- ------- ---------- ------------- ------ -------------
BALANCE,
MAY 31, 2008 2,230 $ 2,308,933 9,621.940 $9,936,866 166,091,242 $16,610 $2,423,537 $(13,222,039) $6,483 $(10,775,409)
------ ----------- --------- ---------- ----------- ------- ---------- ------------- ------ -------------
------------------------------------------- -------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated
financial statements.
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. The Company incurred losses (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) of
approximately $3,333,000 and $2,661,000 for the years ended May 31, 2008 and
2007. Losses are expected to continue until FSC develops substantial business.
While improvement is anticipated as the Company's business plan is implemented,
restrictions on the use of FSC's assets (See Note C), 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
F-10
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
- ---------------------------
The consolidated financial statements include the accounts of Jacobs Financial
Group, Inc. and its majority owned subsidiaries, after the elimination of
intercompany transactions.
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 amounts reported in the financial
statements and accompanying notes. Significant areas requiring the use of
management estimates are loss reserves, stock options and the valuation of
deferred tax benefits. 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.
Surety premiums are recorded as receivables when due and are earned pro rata
over the term of the policies. Thereserve 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 representrenewal premiums paid in advance of the effective
renewal date.
F-11
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 is 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
market values, with changes in market value being recorded in current
operations.
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 current market values, with unrealized gains
and losses reflected as a separate component of other comprehensive income in
consolidated shareholders' equity currently.
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.
F-12
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
ALLOWANCE FOR UNCOLLECTIBLE PREMIUM AND OTHER RECEIVABLES
- ---------------------------------------------------------
The majority of our fee revenue is generated by services provided to companies
and individuals throughout the Eastern United States. We evaluate 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
- ----------
We evaluate 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, we are 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.
F-13
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 individual
case-basis valuations in conjunction with estimates derived from industry and
Company historical experience. These estimates and methods of establishing
reserves are continually reviewed and updated.
STOCK-BASED COMPENSATION
- ------------------------
We have adopted the fair value method of accounting for stock-based compensation
recommended by SFAS No. 123R, Accounting for 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 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. If
future market conditions are different than the assumptions used, stock-based
compensation expense could be significantly different.
INCOME TAXES
- ------------
We currently have 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, we have recorded a valuation
allowance against this deferred tax asset as we have determined that it is more
likely than not that we will not be able to fully utilize the NOLs. Should our
assumptions regarding the utilization of these NOLs change, we may reduce some
or all of this valuation allowance, which would result in the recording of a
deferred income tax benefit.
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.
F-14
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
- -----------------
Certain amounts in the 2007 Consolidated Financial Statements have been
reclassified to be consistent with the presentation in the Consolidated
Financial Statements as of May 31, 2008 and for the year then ended. These
reclassifications had no impact on previously reported net income, cash flow
from operations or changes in shareholder equity.
RECENT ACCOUNTING PRONOUNCEMENTS
- --------------------------------
In February 2006, FASB issued SFAS No. 155 "Accounting for Certain Hybrid
Financial Instruments-an amendment of FASB Statements No. 133 and 140". This
statement address accounting issues relating to beneficial interests in
securitized financial assets. This Statement is effective for all financial
instruments acquired or issued after the beginning of an entity's first fisyear
that begins after September 15, 2006. The adoption of the provisions of SFAS No.
155 did not have a material impact on the Company's results of operations or
financial position.
In March 2006, FASB issued SFAS No. 156 "Accounting for Servicing of Financial
Assets-an amendment of FASB Statement No. 140". This statement addresses
accounting for separately recognized servicing assets and servicing liabilities
when an entity undertakes a contract to service financial assets. This Statement
is to be adopted as of the beginning of the first fiscal year that begins after
September 15, 2006. The adoption of the provisions of SFAS No. 156 did not have
a material impact on the Company's results of operations or financial position.
In September 2006, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements" and SFAS No. 158 "Employers' Accounting for Defined Benefit
Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87,
88, 106 and 132(R)".
SFAS No. 157 defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands disclosures about
fair value measurements. The Statement does not require any new fair value
measurements, however, for some entities, the application of this Statement will
change current practice. This Statement is to be adopted for fiscal years
F-15
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
beginning after November 15, 2007, and interim periods within those fiscal
years. Management does not expect the adoption of the provisions of SFAS No. 157
to have a material impact on the Company's results of operations or financial
position.
SFAS No. 158 requires employers to recognize the overfunded or underfunded
status of a defined benefit postretirement plan (other than a multiemployer
plan) as an asset or liability in its statement of financial position and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income of a business entity. The Company does not provide
any defined benefit postretirement plans, and accordingly, the provisions of
SFAS No. 158 will have no material impact on the Company's results of operations
or financial position.
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities--Including an amendment oStatement
No. 115." This Statement permits entities to choose to measure many financial
instruments and certain other items at fair value. Such items include recognized
financial assets and financial liabilities, firm commitments that involve only
financial instruments, nonfinancial insurance contracts and warranties that the
insurer can settle by paying a third party to provide these goods or services
and host financial instruments resulting from separation of an embedded
nonfinancial derivative instrument from a nonfinancial hybrid instrument. The
objective of the Statement is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused
by measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. This Statement is effective for fiscal
years ending after November 15, 2007 although early adoption is permitted.
Management does not expect the application of SFAS No. 159 to have a material
impact on the Company's results of operations or financial position.
F-16
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2006, Financial Accounting Standards Board Interpretation (FIN) No. 48
"Accounting for Uncertainty in Income Taxes" was issued and interprets FASB
Statement No. 109 "Accounting for Income Taxes. FIN No. 48 establishes the
accounting for uncertain tax positions, including recognition and measurement of
their financial statement effects. FIN No. 48 is effective for fiscal years
beginning after December 15, 2006. The Company has significant operating loss
carryforwards, the benefits of which having been fully reserved by a valuation
allowance of the same amount due to uncertainty as to the likelihood of ultimate
realization. Management has evaluated the implications of FIN No. 48, and has
determined that the application of FIN 48 did not result in any material impact
on the Company's results of operations or financial position.
In December 2007, the FASB issued a revised Statement No. 141 (revised 2007)
"Business Combinations" and Statement No. 160 "Non-controlling Interests in
Consolidated Financial Statements - an amendment of Accounting Research Bulletin
No. 51".
Statement No. 141 was revised to improve the relevance, representational
faithfulness, and comparability of the information that a reporting entity
provides in its financial report about a business combination and its effects.
The Statement establishes principles and requirements for how the acquirer: a)
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree; b) recognizes and measures the goodwill acquired in the business
combination or a gain from a bargain purchase; and c) determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. While the
Statement retains the fundamental requirement that the acquisition or purchase
method of accounting be used for all business combinations, it replaces the
cost-allocation process that resulted in not recognizing some assets and
liabilities at the acquisition date and measuring some assets and liabilities at
amounts other than fair market value at the acquisition date. Among other
matters, the revised Statement requires that acquisition-related and
restructuring costs be recognized separately from the business combination as
expenses in the periods in which the costs are incurred and provides that
"bargain purchases" (those business combinations in which the total
acquisition-date fair value of the identifiable net assets acquired exceeds the
fair value of the consideration transferred plus any non-controlling, or
F-17
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
minority, interest in the acquiree) be recognized in the earnings of the
acquirer as a gain. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. Earlier
adoption is prohibited. Application of FAS 141R would be effective for any
acquisitions that are consummated by the Company after May 31, 2009.
Statement No. 160 was issued to improve the relevance, comparability, and
transparency of financial information for the reporting entity by establishing
accounting and reporting standards attributable to noncontrolling, or minority,
interests in subsidiaries included in the reporting entity's consolidated
financial statements. This Statement clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and requires
consolidated net income to be reported at amounts that include amounts
attributable to both the parent and the noncontrolling interest. The Statement
also provides a single method for accounting for changes in the parent's
ownership interest in a subsidiary that does not result in deconsolidation, as
well as recognition of gain or loss when a subsidiary is deconsolidated as a
result of an ownership change in which the parent ceases to have a controlling
financial interest in the subsidiary, and expanded disclosures to clearly
identify and distinguish between the interests of the parent's owners and the
interests of the noncontrolling owners of a subsidiary. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited. This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements, which shall be applied retrospectively for all periods
presented. Management does not expect the application of Statement No. 160 to
have a material impact on the Company's results of operations or
financial position.
In March 2008, the FASB issued Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133".
This Statement changes the disclosure requirements for derivative instruments
and hedging activities in order to provide improved transparency of financial
reporting with respect to derivative instruments and hedging activities. This
Statement is effective for financial statements issued for fiscal years and
F-18
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company does not currently employ the use of derivative
instruments or engage in hedging activities and thus the issuance of this
Statement is not expected to have any impact on the Company's current financial
statement disclosure requirements.
In May 2008, the FASB issued Statement No. 162 "The Hierarchy of Generally
Accepted Accounting Principles". This Statement identifies the sources of
accounting principles and the framework for selecting principles to be used in
the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles (GAAP) in
the United States (the GAAP hierarchy). This Statement shall be effective 60
days following the SEC's approval of the Public Company Accounting Oversight
Board (PCAOB) amendments to AU Section 411, THE MEANING OF Present Fairly in
Conformity With Generally Accepted Accounting Principles. Management does not
expect the application of Statement No. 162 to have a material impact on the
Company's results of operations or financial position.
In May 2008, the FASB issued Statement No. 163 "Accounting for Financial
Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60".
This Statement clarifies how Statement No. 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities. A financial guarantee
insurance contract within the scope of this Statement generally insures
investment securities in the form of municipal bonds or asset-backed securities.
FASB's intent in setting the scope of this Statement was to address the narrow
issue relating to those contracts for which diversity existed in the accounting
for claim losses. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and all interim periods
within those fiscal years, except for some disclosures about the insurance
enterprise's risk management activities, which are effective for the first
interim period after issuance to the Statement. Except for those disclosures,
earlier application is not permitted. Management does not expect the application
of Statement No. 163 to have a material impact on the Company's results of
operations or financial position.
F-19
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 109 "Written Loan Commitments Recorded at Fair Value Through
Earnings." SAB 109 provides that consistent with the guidance in SFAS No. 156
"Accounting for Servicing of Financial Assets" and SFAS No. 159 "The Fair Value
Option for Financial Assets and Financial Liabilitithe expected net future cash
flows related to the associated servicing of the loan should be included in the
measurement of all written loan commitments that are accounted for at fair value
through earnings. SAB 109 is to be applied on a prospective basis to derivative
loan commitments issued or modified in fiscal quarters beginning after December
15, 2007. The application of SAB 109 did not have a material impact on the
Company's results of operations or financial position.
In December 2007, the Securities and Exchange Commission issued Staff Accounting
Bulletin (SAB) No. 110 "Shared Based Payment". SAB 110 expresses the views, that
under certain circumstances, the staff will continue to accept the use of a
"simplified method" in developing an estimate of the expected term of "plain
vanilla" share options in accordance with SFAS No. 123 "Shared- Based Payment"
for share option grants issued after December 31, 2007. Examples of such
circumstances might include those in which the company does not have sufficient
historical share option exercise experience upon which to estimate an expected
term, situations where historical exercise data may no longer provide a
reasonable basis upon which to estimate an expected term, or situations where
more relevant detailed information (employee exercise patterns by industry
and/or other categories of companies) is not widely available. The application
of SAB 110 is not expected to have a material impact on the Company's results of
operations or financial position.
NOTE C - INVESTMENTS
The Company held the following investments, by security type, that have been
classified as available-for-sale and carried at market value at May 31, 2008:
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
---------------------- ---------------------- ---------------------- ----------------------
State and municipal $ 98,774 $ 7,092 $ - $ 105,866
securities
Equity securities 25,438 - 609 24,829
---------------------- ---------------------- ---------------------- ----------------------
$ 124,212 $ 7,092 $ 609 $ 130,695
====================== ====================== ====================== ======================
F-20
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In September, 2007, an equity investment in the amount of $25,000 was made in
the Jacobs & Company Mutual Fund by its investment advisor, Jacobs & Company,
and is recorded in other assets at market value. Dividends paid by the Fund at
calendar year-end were reinvested.
The Company held the following investments, by security type, with the positive
intent and ability to hold to maturity:
MAY 31, 2008
-------------------------------------------------------------------------------------------
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
---------------------- ---------------------- ---------------------- ----------------------
U.S Government agency
mortgage-backed
securities $ 3,826,688 $ 23,206 $ 48,985 $ 3,800,909
====================== ====================== ====================== ======================
MAY 31, 2007
-------------------------------------------------------------------------------------------
U.S. Government and $ 2,216,875 $ 199 $ 9,071 $ 2,208,003
government agencies
U.S Government agency
mortgage-backed
securities 1,369,411 1,728 3,774 1,367,365
Certificate of deposit 100,000 - - 100,000
---------------------- ---------------------- ---------------------- ----------------------
$ 3,686,286 $ 1,927 $ 12,845 $ 3,675,368
====================== ====================== ====================== ======================
Statutory deposits consisting of securities with a carrying value of $1,056,245
were deposited by the Company's insurance subsidiary under requirements of
regulatory authority. 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 Insurance Commissioner. Accordingly, investments and cash in the amount of $
5,142,101 and $4,034,630 as of M2008 and 2007, respectively, are restricted to
the use of FSC.
F-21
The amortized cost and estimated market values of investments with fixed-
maturities available-for-sale as of May 31, 2008, by contractual maturity, are
as follows:
Amortized Cost Fair Market Value
---------------------- ----------------------
Due after ten years $ 98,774 $ 105,866
====================== ======================
Principal repayments on U.S. government agency mortgaged-backed securities held
by the Company as of May 31, 2008 are estimated as follows:
Amortized Cost Fair Market
Value
--------------- ---------------
Due in one year or less $ 589,507 $ 587,384
Due after one year through five years 1,675,400 1,664,470
Due after five years through ten years 971,209 963,453
Due after ten years 590,572 585,602
--------------- ---------------
$ 3,826,688 $ 3,800,909
=============== ===============
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:
2008 2007
----------------- ---------------
Bonds - fixed maturities $ 76,185 $ 55,836
Mortgage-backed securities 111,115 71,132
Short-term investments 39,377 63,779
----------------- ---------------
Total investment income 226,677 190,747
----------------- ---------------
Investment expense 1,216 791
----------------- ---------------
Net investment income $ 225,461 $ 189,956
================= ===============
In the three-month period ended November 30, 2007, the Company sold one of its
investments in debt securities of Federal National Mortgage Association ("FNMA"
or "Fannie Mae") previously classified as held-to-maturity (carrying value of
F-22
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$169,881) and reclassified its remaining FNMA securities aggregating $828,653 to
the available-for-sale classification in response to uncertainties attributable
to the slumping U.S. mortgage and housing markets and its potential effect on
the issuer's financial condition. Such remaining FNMA securities, which were
subject to call by the issuer, were called in the three-month period ended
February 29, 2008.
Realized gains from held-to-maturity securities resulted from certain securities
subject to call being called by the issuer. Net realized investment gains
(losses) were as follows:
2008 2007
----------------- ----------------
Bonds-fixed maturities $ 2,754 $ -
Mortgage-backed securities - -
Equity securities - -
Short-term investments - -
----------------- -----------------
Net realized gain $ 2,754 $ -
================= =================
The increases (decrease) in unrealized appreciation of investments were as
follows:
2008 2007
------------------ ----------------
Bonds-fixed maturities $ 15,964 $ (3,061)
Mortgage-backed securities (23,732) 15,624
Equity securities (609) -
------------------ ----------------
Increase (decrease) in unrealized
appreciation $ (8,377) $ 12,563
================== ================
F-23
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gross gains and gross losses realized on available-for-sale securities were
as follows:
Gross Gross
Gross Realized Realized
Proceeds Gains Losses
------------------- ------------ ---------------
2008
Bonds-fixed maturities $ 830,000 $ 835 $ -
Mortgage-backed securities - - -
Equity securities - - -
------------------- ------------ ---------------
Total $ 830,000 $ 835 $ -
=================== ============ ===============
2007
Bonds-fixed maturities $ - $ - $ -
Mortgage-backed securities - - -
Equity securities - - -
------------------- ------------ ---------------
Total $ - $ - $ -
=================== ============ ===============
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,
2008 and May 31, 2007.
Less than 12 Months 12 Months or More Total
------------------------------- ---------------------------- --------------------------------
Cost Unrealized Cost Unrealized Fair Unrealized
(a) Losses (a) Losses Value Losses
--------------- --------------- ------------ --------------- --------------- ----------------
2008
Mortgage-backed
securities $ 2,525,173 $ 48,985 $ - $ - $ 2,476,188 $ 48,985
Equity securities
25,438 609 - - 24,829 609
--------------- --------------- ------------ --------------- --------------- ----------------
Total $ 2,550,611 $ 49,594 $ - $ - $ 2,501,217 $ 49,594
=============== =============== ============ =============== =============== ================
(a) For bonds-fixed maturities and mortgage-backed securities, represents
amortized costs.
F-24
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Less than 12 Months 12 Months or More Total
------------------------------- ---------------------------- --------------------------------
Cost Unrealized Cost Unrealized Fair Unrealized
(a) Losses (a) Losses Value Losses
--------------- --------------- ------------ --------------- --------------- ----------------
2007
Bonds-fixed maturities
$1,694,084 $ 7,848 $350,692 $ 1,223 $2,035,705 $ 9,071
Mortgage-backed
securities 178,576 1,645 245,013 2,129 419,815 3,774
--------------- --------------- ------------ --------------- --------------- ----------------
Total $1,872,660 $ 9,493 $595,705 $ 3,352 $2,455,520 $ 12,845
=============== =============== ============ =============== =============== ================
(a) For bonds-fixed maturities and mortgage-backed securities, represents
amortized costs.
As of May 31, 2008, the company held 17 mortgage-backed securities with gross
unrealized losses of $48,985, all of which have been in a continuous loss
position for less 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. The unrealized losses are
considered temporary since the Company has the ability and intent to hold the
securities until maturity.
Equity securities consist of the company's investment in the Jacobs & Company
Mutual Fund with an unrealized loss of $609 which has been in a continuous loss
position for less than 12 months. The fair value of such investment will
fluctuate based on the underlying values of the investments held within the
mutual fund, which are sensitive to overall economic market conditions.
Accordingly, the unrealized loss was considered temporary at May 31, 2008 and
has not been reduced to their fair value through the income statement.
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.
2008 2007
--------------- ---------------
Balance at beginning of year $ 52,365 $ 70,399
Acquisition costs deferred 149,961 90,031
Amortization charged to operations (126,386) (108,065)
--------------- ---------------
Total $ 75,940 $ 52,365
=============== ===============
F-25
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE E - OTHER ASSETS
Included in other assets are escrow deposits relating to pending acquisitions
and advance deposits for professional fees relating to such acquisitions and
certain equity financing matters (see Note P-Commitments) the Company has
endeavored to undertake in fiscal 2008. As of May 31, 2008 and 2007, such
balances are comprised of the following:
2008 2007
------------- ----------
Advance deposits for professional fees $133,498 $ -
Escrow deposits for proposed acquisitions 125,000 -
Mutual fund investment at market 24,829 -
Prepaid expense and other deposits 14,836 22,801
------------- ----------
Total $298,163 $ 22,801
============= ==========
NOTE F - INTANGIBLES
As the result of the acquisition of the stock 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 market 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, 2008 and 2007.
NOTE G-RESERVE FOR LOSSES AND LOSS EXPENSE
Reserves for unpaid losses and loss adjustment expenses are estimated using
individual case-basis valuations in conjunction with estimates derived from
industry and Company historical experience. As of May 31, 2008, the Company's
insurance subsidiary, FSC, is only licensed to write surety in West Virginia and
has focused its primary efforts towards coal permit bonds while also providing
other miscellaneous surety bonds that are substantially secured by collateral
consisting of investment accounts that are managed by Jacobs. Reclamation of
land that has been disturbed by mining operations is a highly regulated by
federal and state agencies and the required bonds are generally long-term in
nature with mining operations and reclamation work being conducted in unison as
the property is being mined. Additionally, no two principals or properties are
F-26
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
alike due to varied company structures and unique geography and geology of each
site. In underwriting such bonds, management obtains estimates of costs to
reclaim the properties subject of the permit(s) in accordance with those mining
permit(s), as prepared by independent outside professionals experienced in this
field of work, and hired by FSC, in addition to other underwriting and financial
risk considerations. FSC requires the principal to provide cash in amounts
deemed to be sufficient to reclaim the disturbed land and thus mitigate the
exposure to significant loss. Such cash is invested in investment collateral
accounts managed by Jacobs utilizing conservative investment strategies.
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,
2008 and thus provisions for losses and loss adjustment expense have been based
on industry averages adjusted for other factors unique to the Company's
approach, and in consultation with consulting actuaries experienced in the
surety field.
At December 31, the reserve for losses and loss expenses consisted of:
2008 2007
------------------ ------------------
Balance at beginning of year $ 110,784 $ 11,911
Incurred policy losses-current year 135,867 98,873
Incurred policy losses-prior year -
Amounts paid-current year losses - -
Amounts paid-prior year losses - -
------------------ ------------------
Balance at end of year $ 246,651 $ 110,784
================== ==================
F-27
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NOTES PAYABLE
At May 31, 2008 and 2007, the Company had the following unsecured notes payable
to individuals and a commercial bank:
2008 2007
------------------ ------------------
Unsecured demand notes payable to individuals and
others; interest rate fixed @ 10.00% $ 127,000 $ 75,000
Unsecured short-term advances from principal
shareholder and chief executive officer; interest rate
fixed @ 12.00% (Also See Note T -
Related Party Transactions) 1,000 15,762
Unsecured notes payable to individuals maturing
December 31, 2007; interest payable calendar
quarterly; interest rate fixed @ 10.00% - 49,985
Unsecured note(s)payable to individual(s) under a
bridge- financing arrangement described below 2,635,000 25,000
Unsecured term note payable to commercial bank in the
original amount of $250,000 and payable in equal
monthly payments of $5,738; interest rate
fixed @ 13.25% 205,016 244,389
------------------ ------------------
Total $ 2,968,016 $ 410,136
================== ==================
In September 2007, the Company borrowed $2,100,000 in the aggregate from a group
of individuals to provide interim bridge-financing of operations until a larger,
more permanent financing the Company endeavored to undertake was consummated and
to pay fees and expenses in connection with the larger financing. Additionally,
terms of the $25,000 note payable outstanding as of May 31, 2007 were modified
to correspond to the terms of the $2,100,000 bridge-financing. Additional
borrowings with similar terms were transacted in November 2007 in the amount of
$275,000 and in February 2008 for $100,000. Such borrowings totaling $2,500,000
are referred to as the "first round" bridge-financing.
F-28
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Additional borrowings in the amount of $75,000 and $60,000 were transacted in
April and May 2008, respectively, in conjunction with additional bridge-
financing (referred to as "second round" bridge-financing in the aggregate
amount of $1,000,000) that was finalized subsequent to May 31, 2008. Terms of
the bridge-financing arrangements were amended (first round) and structured
(second round) to provide similar terms and conditions.
The terms of the bridge-financing arrangement, as revised, 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 if such a qualified equity offering is not consummated by September 10,
2008, accrued interest-to-date shall be payable, with quarterly installments of
principal and interest in the aggregate amount of $169,028 ($224,515 based on
the full $3.5 million bridge-financing) commencing in December 2008. The
interest rates on such notes are fixed at 10.00%.
In accordance with the terms of the first round bridge-financing, 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 receive 2.00% of the Company's common shares. Upon retirement of
the notes upon consummation of a qualified equity offering, the Company shall
issue to the holders of the bridge financing notes additional Company common
stock that, when added to the stock initially issued to the holders of the
notes, will equal the noteholder's pro rata share of the applicable percentage
of the outstanding common stock of the Company as follows: If the qualified
financing consists of $50 million or more, the holders of such notes will
receive 28% of the common stock of the Company that would otherwise be retained
by the holders of the Company's common shares immediately prior to the
financing; if the qualified financing is for an amount less than $50 million,
the percentage will be reduced on a sliding scale to a fraction of 28% of the
amount retained by the holders of the Company's common shares (where the
numerator is the amount of financing and the denominator is $50 million).
In the event that a qualified financing is not completed by September 10, 2008,
then the Company shall issue a total of 2.108% (2.80% based on the full $3.5
million bridge-financing) of the Company's outstanding common shares at such
date and shall issue a total of 2.108% (2.80% based on the full $3.5 million
F-29
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
bridge-financing) of the Company's outstanding common shares upon each six-month
anniversary date thereof until retirement of the notes.
Scheduled maturities and principal payments for each of the next six years are
as follows:
2008
------------------
Fiscal year 2008-2009 (including demand notes) $ 385,321
Fiscal year 2009-2010 501,382
Fiscal year 2010-2011 555,411
Fiscal year 2011-2012 594,876
Fiscal year 2012-2013 605,238
Fiscal year 2013-2014 325,788
-------------------
Total $ 2,968,016
==================
NOTE I - OTHER LIABILITIES
The Company had been delinquent in paying certain of its payroll tax obligations
for periods ending on or before December 31, 2005. The Company's accrued
liability, including estimates for penalties and interest, approximated $517,600
of which $500,625 was recorded as of May 31, 2007. In September, 2007, the
Company entered into negotiations for the repayment and settlement of this
obligation with the Internal Revenue Service. In conjunction with such
negotiations, the Company made payments of approximately $402,130 towards the
tax and interest due and requested abatement of all penalties relating to this
matter. In February 2008, the Company received notification from the Internal
Revenue Service granting its request for abatement of penalty with respect to
this matter. Accordingly, the Company recognized a gain of $115,470 upon final
settlement of this matter.
NOTE J - 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. The purchase of Series A Preferred Stock
is a condition of the qualification of such purchasers to participate in certain
surety bonding programs of FSC under which the participant's obligations to FSC
are not fully secured. Holders of Series A Preferred Stock are entitled to
participate in the FSC's partially collateralized bonding programs, subject to
F-30
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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, 2008, the Company has issued an additional 1,880 shares of Series
A Preferred Stock in exchange for cash investments in the amount of $1,880,000,
of which 803 shares were issued in fiscal 2008 and 318 shares in fiscal 2007. As
of May 31, 2008 the Company has chosen to defer payment of dividends on the
Series A Preferred Stock with such accrued and unpaid dividends amounting to
$124,638 through March 31, 2008.
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
F-31
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 4,890.599 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 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 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
nonassessable 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. As of May 31, 2008, the Company has
issued an additional 810 shares of Series B Preferred Stock and 810,000 shares
of the Company's common stock as additional consideration, in exchange for cash
investments in the amount of $810,000; of which 25 shares of Series B Preferred
Stock and 25,000 shares of the Company's common stock were issued in fiscal 2008
and 560 shares of Series B Preferred Stock and 560,000 shares of the Company's
common stock were issued in fiscal 2007. Additionally the .Company has redeemed
58.659 shares at a redemption price of $62,477. As of May 31, 2008 the Company
has chosen to defer payment of dividends on the Series B Preferred Stock with
such accrued and unpaid dividends amounting to $1,826,246 through March 31,
2008.
F-32
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management consulted Statement of Financial Accounting Standards (SFAS) Number
133, "Accounting for Derivative Instruments and Hedging Activity", Emerging
Issues Task Force (EITF) Number 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock", and
SFAS 150, "Accounting for Certain Instruments with Characteristics of Both
Liabilities and Equity" in evaluating the accounting for preferred securities.
Management determined that SFAS 150 is the appropriate accounting literature.
SFAS 150 requires that an entity classify as liabilities certain financial
instruments with characteristics of both liabilities and equity. SFAS 150
applies to certain freestanding financial instruments that embody an obligation
for the entity that may require the entity to issue shares, redeem or repurchase
its shares.
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. In
accordance with SFAS 150, 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, in accordance with SFAS 150, 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 both the Series A and B preferred
stocks 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 (i.e.,
the shares are not within the scope of SFAS 150 because there is no
unconditional obligation to redeem the shares at a specified or determinable
date or upon an event certain to occur) 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.
F-33
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE K - STOCK WARRANTS
At May 31, 2008, the Company had issued and outstanding warrants to purchase
15,071,564 shares of common stock.
On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares
of common stock in connection with the Series A and B Preferred Stock private
placements of which 13,071,564 remain outstanding. The exercise price of the
warrants is one-tenth of one cent ($.001) per share. The warrants expire on
December 30, 2010. The warrants were valued using the Black-Scholes pricing
model. The warrants issued in connection with the Series A Preferred Stock were
valued at $.08 per share or $83,043. The warrants issued in connection with the
Series B Preferred Stock were valued at $.01 per share or $449,972.
On September 29, 2003, the Company issued warrants to purchase 2 million common
shares to a principal vendor in connection with financing and forbearance in
payment of certain trade obligations. The exercise price of the warrants is $.04
per share and expire September 30, 2008. The warrants were valued using the
Black-Scholes pricing model at $.02 per share or $39,966.
NOTE L-STOCK-BASED COMPENSATION
On October 12, 2005, the board of directors adopted its 2005 Stock Incentive
Plan (the "Plan") to allow the Company to make awards of stock options as part
of the Company's compensation to key employees, non-employee directors,
contractors and consultants. The Plan was approved by the stockholders on
December 8, 2005. The aggregate number of shares of Common Stock issuable under
all awards under the Plan is 35,000,000. No awards may be granted under the Plan
after December 8, 2015.
On October 12, 2005, the board of directors approved a severance arrangement for
a long-time employee of the Company terminated by reason of disability. The
arrangement included an award of 1,000,000 options to acquire common shares at
an exercise price of four cents ($.04) per share. The estimated value of the
options awarded was approximately $13,500. The term of the options is five years
and expires in October 2010.
F-34
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 25, 2006, the compensation committee of the board of directors awarded
23,400,000 of incentive stock options to acquire common shares at an exercise
price of seven cents ($.07) per share, of which 5,500,000 shares vested
immediately and the remaining 17,900,000 options vesting over the next four
years ending in May 2010. The term of the options is five years and expires in
May 2011.
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 four cents ($.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. The term of the options is five years and expires
in December 2011.
The following table summarizes option activity under the Plan for the fiscal
year ended May 31, 2008.
2008
Number Weighted-Avg.
Weighted-Avg. Of Shares Remaining Aggregate
Exercise Under Life Intrinsic
Price Option (Years) Value
-------------- ---------------- ------------- ------------
Balance at June 1, 2007 $ .06649 26,500,000
Options granted - -
Options exercised - -
Options canceled/expired - -
-------------- ----------------
Balance, May 31, 2008 $ .06649 26,500,000
============== ================
Exercisable at May 31, 2008 $ .06633 17,583,334 2.99 $ -
============== ================
Expected to vest $ .06680 8,916,666 3.05 $ -
============== ================
F-35
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity and pricing information for the non-
vested shares under the Plan for the year ended May 31, 2008.
2008
Weighted-Avg. Number
Grant Date Of
Fair Value Non-vested
Shares
------------------ ----------------
Balance at June 1, 2007 $ .01798 14,583,333
Options granted - -
Options vested .01789 ( 5,666,667)
Options canceled/expired - -
------------------ ----------------
Balance at May 31, 2008 $ .01804 8,916,666
================== ================
The weighted-average grant-date fair value of options was $.00993 cents for
options granted during fiscal 2007. No options were granted in fiscal 2008.
There were no options exercised in fiscal 2008 or 2007. The total fair value of
shares vested amounted to approximately $101,000 and $99,000 in fiscal 2008 and
2007 respectively.
Stock-based compensation expense attributable to such awards amounted to
approximately $99,000 and $206,700 in fiscal years ended May 31, 2008 and 2007
respectively. Unrecognized compensation expense related to non-vested awards at
May 31, 2008 was approximately $55,500 and is expected to be recognized over the
next two years.
The company estimates the fair value of stock options using a Black-Scholes
valuation model, consistent with the provisions of SFAS 123R. 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. The following
table presents the weighted-average assumptions used for the options granted.
Option term (years) 4.76
Volatility 100%
Risk-free interest rate 4.93%
Dividend yield 0.00%
Weighted-average fair
value per option granted $0.018
F-36
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 statement. Such differences include the
income recognition of a portion of the unearned premium reserve, 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, 2008, the Company had operating loss carryforwards of approximately
$14.4 million. These carryforwards 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 carryforwards
are substantially limited.
The Company has fully reserved the $4.9 million tax benefit of the operating
loss carryforward, 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 2008, the Company has issued 25,000 of the Company's common stock as
additional consideration in connection with the sale of 25 shares of Series B
Preferred Stock, in exchange for a cash investment in the amount of $25,000. The
shares were valued at approximately $.0196 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 $490.
In fiscal 2008, the Company issued 270,000 shares of the Company's common stock
as additional consideration in connection with short-term and demand borrowing
arrangements totaling $145,000. The shares were valued at approximately $.0171
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 $4,610.
In fiscal 2008, the Company issued 8,266,437 shares of the Company's common
stock in connection with the first round of bridge-financing arrangements (see
Note H) totaling $2,500,000. The shares were valued at approximately $.0263 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 $217,314.
F-37
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In fiscal 2008, the Company issued 198,867 shares of the Company's common stock
in connection with the second round of bridge-financing arrangements (see Note
H) totaling $60,000. The shares were valued at approximately $.0115 per share
based on the average quoted closing price of the Company's stock for the 20-day
period proceeding the date of the transaction and totaled $2,280.
In fiscal 2007, the Company has issued an additional 560,000 of the Company's
common stock as additional consideration in connection with the sale of 560
shares of Series B Preferred Stock, in exchange for cash investments in the
amount of $560,000. The shares were valued at approximately $.0317 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 $17,742.
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 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, 2008 and 2007 and net income for the Company's
insurance subsidiary the calendar year ended December 31, 2007 and 2006 and
five-month periods ended May 31, 2008 and 2007 are as follows:
Statutory Surplus May 31, 2008 $ 4,564,352
Statutory Surplus May 31, 2007 3,556,077
Net Income Calendar year 2007 54,173
Net Income (loss) Calendar year 2006 (100,851)
Net Income Five-month period 2008 108,957
Net Income (loss) Five-month period 2007 (9,301)
F-38
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory surplus exceeds the minimum capital requirements provided by West
Virginia state law of $2.0 million.
Under the Consent Order issued by the Commissioner of the State of West Virginia
for the acquisition of the insurance subsidiary by the Company, no dividends can
be declared or paid from the insurance subsidiary without the prior written
approval of the Insurance Commissioner.
NOTE P - COMMITMENTS
ACQUISITION COMMITMENTS AND MATERIAL AGREEMENTS
- -----------------------------------------------
On December 3, 2007, the Company entered into an agreement (the "December 3
Agreement) with National Indemnity Company ("National Indemnity") to purchase
all of the outstanding shares of Unione Italiana Insurance Company of America
("Unione") for a purchase price of $2.75 million plus the surplus of Unione on
the date of the closing. Unione is a New York Corporation with insurance
licenses in 26 states. Prior to closing, National Indemnity will enter into a
reinsurance agreement with Unione under which National Indemnity will reinsure
all liabilities of Unione under contracts of insurance and reinsurance arising
prior to closing. Among other conditions, closing is subject to applicable
regulatory approvals, including approval by the New York Superintendent of
IInsurance. Either party may terminate the December 3 Agreement if the closing
does not take place on or prior to June 30, 2008. The Company has made a
nonrefundable deposit (except for failure by National Indemnity or Unione to
meet certain required conditions for closing) to National Indemnity in the
amount of $75,000 which amount will be applied towards the purchase price at
closing.
By Agreement dated December 5, 2007 (the "Engagement Agreement"), the Company
engaged an investment bank (the "Bank") to act as placement agent/financial
advisor with respect to certain equity financing matters. The agreement provided
for a retainer of $250,000 and fees equal to 7% of the gross proceeds raised,
against which the retainer will be credited, as well as reimbursement for
expenses. The agreement was terminated with an effective date of June 9, 2008
(see Subsequent Event Note U).
F-39
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On February 8, 2008, the Company entered into an agreement (the "Merger
Agreement") with Reclamation Surety Holding Company, Inc. ("RSH") to acquire by
merger (the "Merger") all of the business and assets of RSH, including the stock
of RSH's subsidiaries, Cumberland Surety, Inc. ("Cumberland") and NewBridge
Services, Inc. ("NewBridge") for a purchase price of $3,400,000, less certain
indebtedness of RSH (the "Merger Consideration"). The Merger Consideration is
payable in stock of the Company or, at the election of certain non-employee
shareholders, cash. Currently, NewBridge performs certain surety underwriting
services for the Company's subsidiary, First Surety Corporation. Among other
conditions, closing is subject to, and will take place following, the closing by
the Company of an equity financing. Either party may terminate the Merger
Agreement if the closing does not take place on or prior to June 30, 2008
(extended to October 31, 2008--see Subsequent Event Note U). Upon execution of
the Merger Agreement, the Company made a nonrefundable deposit in the amount of
$50,000 for the benefit of the RSH shareholders, which amount will be applied
toward the Merger Consideration at closing.
By agreement dated April 15, 2008, the Company engaged a financial advisor to
act on behalf of the Company in connection with a transaction with a strategic
partner. The financial advisor will be entitled to a fee of $250,000 upon the
successful completion of a transaction that meets the Company's requirements
within the one year engagement period.
LEASE COMMITMENTS
- -----------------
The Company leases certain office equipment with combined monthly payments of
approximately $840 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 $3,965 each month.
The Company leases an apartment for corporate use that has a remaining term of
18 months at a monthly rate of $545.00 plus electric utilities.
The Company 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 $170 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 $65,650 and
$62,250 during 2008 and 2007.
F-40
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Minimum future lease payments under non-cancelable operating leases having
remaining terms in excess of one year as of May 31, 2008 are:
Fiscal year 2008-2009 $ 16,270
Fiscal year 2009-2010 11,839
Fiscal year 2010-2011 6,944
Fiscal year 2011-2012 6,944
-----------
Total $ 41,997
===========
NOTE Q - FINANCIAL INSTRUMENTS
FAIR VALUE
- ----------
The following methods and assumptions were used to estimate fair market 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 and
held-to-maturity) 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.
F-41
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The carrying values and fair values of the Company's financial instruments at
May 31, 2008 and 2007 are as follows:
2008 2007
------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------------ ----------------- -----------------
ASSETS
Bonds available for sale $ 105,866 $ 105,866 $ - $ -
Bonds held to maturity - - 2,316,875 2,308,003
Mortgage-backed securities held to maturity 3,826,688 3,800,909 1,369,411 1,367,365
Cash and short-term investments 1,224,696 1,224,696 361,027 361,027
Premiums and other receivables 67,245 67,245 73,962 73,962
Equity securities (included in other assets) 24,829 24,829 - -
LIABILITIES
Notes payable 2,968,016 2,968,016 410,136 410,136
Accounts payable and advance premiums 315,577 315,577 472,929 472,929
Accrued expenses and other liabilities 499,924 499,924 1,075,811 1,075,811
NOTE R - OTHER RISKS, UNCERTAINTIES AND CONCENTRATIONS
CONCENTRATION OF CREDIT RISK
- ----------------------------
Statement of Financial Accounting Standards No. 105, "Disclosure of Information
about Financial Instruments with Off-Balance-Sheet Risk and Financial
Instruments with Concentrations of Credit Risk", requires disclosure of
significant concentration of credit risk regardless of the degree of such risk.
As of May 31, 2008 the Company's investment securities of approximately
$5,109,000 are solely comprised of mortgage-backed securities and defeased
municipal bonds that are guaranteed by U.S government agencies, certificates of
deposit fully insured by the Federal Deposit Insurance Corporation 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.
F-42
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company transacts the majority of its business with four financial
institutions, two 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 $100,000
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 has focused its
primary efforts towards coal permit bonds. Such business, including investment
advisory fees from managed collateral accounts, accounted for approximately 58%
and 50% of the Company's fiscal 2008 and 2007 revenues, respectively.
Furthermore, the Company provides surety bonds to companies that share common
ownership interests that constitute 48% and 42% of the Company's fiscal 2008 and
2007 revenues, respectively, as follows:
2008 2007
------------------------------------------------------------------
Investment Investment
Surety Advisory Surety Advisory
Premium Fees Premium Fees
------------------ ------------- --------------- -----------------
Customer group # 1 $ 270,000 $ 80,000 $ 263,000 $ 80,000
Customer group # 2 96,000 11,000 - -
------------------ ------------- --------------- -----------------
TOTAL 366,000 91,000 263,000 80,000
================== ============= =============== =================
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.
F-43
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED
INDUSTRY SEGMENT MAY 31, 2008 MAY 31, 2007
- ---------------- ------------------- -----------------
REVENUES:
Investment advisory $ 263,250 $ 275,328
Surety insurance 694,336 548,011
Corporate 9,693 1,176
------------------- -----------------
Total revenues $ 967,279 $ 824,515
=================== =================
OPERATING INCOME (LOSS):
Investment advisory $ (200,009) $ (372,839)
Surety insurance 92,368 93,759
Corporate (1,753,984) (1,049,186)
------------------- -----------------
Total operating income (loss) $ (1,861,625) $ (1,328,266)
=================== =================
IDENTIFIABLE ASSETS:
Investment advisory $ 69,112 $ 45,555
Surety insurance 5,420,727 4,298,295
Corporate 287,927 26,219
------------------- -----------------
Total assets $ 5,777,766 $ 4,370,069
=================== =================
CAPITAL ACQUISITIONS:
Investment advisory $ - $ -
Surety insurance 13,093 -
Corporate 1,510 6,007
------------------- -----------------
Total capital acquisitions $ 14,603 $ 6,007
=================== =================
DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
Investment advisory $ 45 $ 4,800
Surety insurance 3,311 3,310
Corporate 5,023 4,309
------------------- -----------------
Total Depreciation $ 8,379 $ 12,419
=================== =================
INTEREST EXPENSE:
Investment advisory $ 13,892 $ 91,487
Surety insurance - 4,362
Corporate 465,403 57,171
------------------- -----------------
Total interest expense $ 479,295 $ 153,020
=================== =================
F-44
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,
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 the year ended May 31, 2006, the Company made net repayments of
$1,170,546 on the back-to-back loans which was $508,036 more than the original
loans and interest charges. In accordance with the Assumption Agreement, the
Company assigned to Mr. Jacobs and Mr. Jacobs assumed responsibility for payment
of certain debt totaling $101,326 and accounts payable totaling $365,000 during
the year ended May 31, 2006. The debt obligation was re- issued in the name of
Mr. Jacobs; and therefore the debt amount was relieved and offset against the
receivable from Mr. Jacobs. Although the Company assigned accounts payable
totaling $365,000 to Mr. Jacobs through the Assumption Agreement, for financial
reporting purposes under generally accepted accounting principles, the accounts
payable amount could not be derecognized until either paid or released by the
creditor. On September 13, 2006, the Company did receive a release from the
obligee of the $365,000 accounts payable that was assumed by Mr. Jacobs pursuant
to the Assumption Agreement. Accordingly, the assumption of the accounts payable
was offset against the balance due from Mr. Jacobs as of May 31, 2006 of
$361,009.
During fiscal 2007, advances to the Company from Mr. Jacobs amounted to $285,392
and repayments to Mr. Jacobs amounted to $273,620. As of May 31, 2007, the
balance due Mr. Jacobs was $15,763.
F-45
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2008, advances to the Company from Mr. Jacobs amounted to $132,200
and repayments to Mr. Jacobs amounted to $146,962. As of May 31, 2008, the
balance due Mr. Jacobs was $1,000.
NOTE U - EVENTS SUBSEQUENT TO MAY 31, 2008
Subsequent to May 31, 2008, the Company finalized its "second round" of
bridge-financing to provide interim financing of operations until a larger, more
permanent financing that the Company has endeavored to undertake is consummated
and to pay fees and expenses in connection with the larger financing. In total,
additional borrowings under such bridge-financing arrangement aggregated
$865,000, with 3,115,581 shares of the Company's common stock being issued in
connection with said borrowings, bringing total borrowings under the
bridge-financing arrangements (first and second round combined) to $3,500,000.
Terms of the bridge-financing arrangement are set forth in Note H to the
financial statements.
Additionally, advances to the Company from its largest shareholder and CEO
amounting to $28,000, with repayments totaling $29,000.
Effective June 9, 2008, the Company terminated its engagement agreement of
December 5, 2007 with an investment bank to act as placement agent/financial
advisor with respect to certain equity financing matters.
On June 24, 2008, the Company amended its Merger Agreement with Reclamation
Surety Holding Company, Inc. to extend the date for closing until October 31,
2008 at which time either party may terminate the Merger Agreement. All other
terms and conditions of the Merger Agreement remained unchanged.
On June 30, 2008, the Company elected to continue to defer payment of dividends
on its Series A Preferred Stock and Series B Preferred stock with such
accumulated accrued and unpaid dividends amounting to $147,991 and $2,053,992 as
of June 30, 2008.
In July 2008, First Surety Corporation (FSC), a wholly-owned subsidiary of the
Company, filed its application with the Insurance Commissioner of Ohio to
reactivate its insurance license in Ohio and to obtain authority to issue surety
bonds in that state. On August 5, 2008, FSC received approval to write the
surety line of business in Ohio from the Ohio Department of Insurance.
F-46
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On August 20, 2008, the Company entered into a definitive Stock Purchase
Agreement (the "Purchase Agreement") with National Indemnity Company ("NICO"),
pursuant to which the Company agreed to acquire 100% of the outstanding stock of
Unione Italiana Reinsurance Company of America ("Unione"). Unione is a New York
domiciled insurer licensed in 24 states and has license applications pending
with the Commonwealth of Kentucky and with the Financial Management Service of
the United States Department of Treasury. The purchase price for the acquisition
of Unione (the "Transaction") is equal to the sum of (i) $2,750,000 plus (ii) an
amount in cash equal to Unione's New York statutory policyholders' surplus as of
the closing date of the Transaction less (iii) $75,000 (which amount is equal to
a good faith deposit previously provided to NICO. The Company's acquisition of
Unione, when coupled with a reinsurance agreement with NICO that is to be
executed simultaneously with closing, will consist of the purchase of marketable
investments and insurance licenses and will not include any existing policies or
customer base as the insurance lines of business offered by Unione are not
insurance lines that the Company intends to pursue. The Transaction remains
contingent upon necessary regulatory approvals and the Company's obtaining
necessary financing.
F-47
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES SCHEDULE I
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT
AT WHICH
AT MAY 31, 2008 SHOWN IN THE
COST* VALUE BALANCE SHEET
-------------- -------------- ---------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ - $ - $ -
States, municipalities, and political subdivisions 98,774 105,866 105,866
-------------- -------------- ---------------
Total fixed maturities 98,774 105,866 105,866
Equity securities:
- - -
-------------- -------------- ---------------
Total equity securities - - -
Mortgage-backed securities guaranteed by U.S. government agency 3,826,688 3,800,909 3,826,688
Short-term investments, at cost (approximates market value) 1,176,056 1,176,056 1,176,056
-------------- -------------- ---------------
Total investments $ 5,101,518 $ 5,082,831 $ 5,108,610
============== ============== ===============
* 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-48
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEETS - PARENT COMPANY ONLY
MAY 31, 2008 MAY 31, 2007
------------- ------------
ASSETS:
Cash $ 12,385 $ 12,378
Accounts receivable from affiliates 2,740 2,656
Prepaid expense and other assets 264,816 1,656
Furniture and equipment, net 7,987 12,184
Investment in subsidiaries, equity method 3,807,434 2,995,605
Due from affiliates, net 772,966 113,589
------------- ------------
Total assets $ 4,868,328 $ 3,138,068
============= ============
LIABILITIES:
Accounts payable $ 15,956 $ 83,121
Accrued expenses and professional fees 334,159 462,640
Notes payable 2,968,017 410,136
Other liabilities 86,289 25,950
------------- ------------
Total liabilities 3,404,421 981,847
MANDATORILY REDEEMABLE PREFERRED STOCK 12,245,799 9,946,972
STOCKHOLDERS EQUITY:
Common stock 16,609 15,700
Additional paid in capital 2,423,537 2,082,647
Accumulated deficit (13,222,038) (9,889,098)
------------- ------------
Total stockholders equity (deficit) (10,781,892) (7,790,751)
------------- ------------
Total liabilities and stockholders equity $ 4,868,328 $ 3,138,068
============= ============
STATEMENTS OF INCOME - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2008 2007
------------- ------------
REVENUES
Equity in undistributed net income (loss) of consolidated subsidiaries $ 7,829 $ (279,080)
Tax benefit to parent from subsidiary attributable to utilization of net
operating loss carryforwards 47,000 -
Interest income 9,693 -
------------- ------------
Total revenues 64,522 (279,080)
EXPENSES:
General and administrative 1,455,721 987,734
Interest 465,403 57,143
Depreciation 5,023 4,309
------------- ------------
Total expenses 1,926,147 1,049,186
------------- ------------
Net income (loss) (1,861,625) (1,328,266)
Accretion of mandatorily redeemable convertible preferred stock,
including accrued dividends (1,471,317) (1,333,165)
------------- ------------
Net income (loss) attributable to common stockholders $ (3,332,942) $(2,661,431)
============= ============
F-49
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- ------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2008 2007
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(1,861,625) $(1,328,266)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Equity in undistributed net loss of consolidated subsidiaries (7,829) 279,080
Stock option compensation expense 98,972 206,682
Stock issued in connection with financing arrangements 242,003 -
Depreciation 5,023 4,309
Loss on disposal of equipment 684 -
Change in other assets, accounts payable and accrued expense, net (398,549) 261,850
------------- ------------
TOTAL CASH USED IN OPERATIONS (1,921,321) (576,345)
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to insurance company subsidiary (804,000) (191,000)
Funds provided to affiliates for operations (659,377) (209,655)
Purchase of furniture and equipment (1,510) (6,007)
------------- ------------
TOTAL CASH USED IN INVESTING ACTIVITIES (1,464,887) (406,662)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable preferred stock 828,000 878,000
Proceeds from exercise of stock warrants 335 1,500
Redemption of mandatorily redeemable preferred stock - (62,477)
Proceeds from borrowings 2,842,000 375,000
Repayment of borrowings (269,357) (138,859)
Proceeds from short-term borrowings from related party 132,200 79,616
Repayment of short-term borrowings to related party (146,963) (137,395)
------------- ------------
TOTAL CASH PROVIDED BY FINANCING ACTIVITIES 3,386,215 995,385
------------- ------------
CHANGE IN CASH 7 12,378
Cash at beginning of year 12,378 -
------------- ------------
Cash at end of year $ 12,385 $ 12,378
============= ============
F-50
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INSURANCE INFORMATION
AS OF MAY 31, 2008 AND 2007 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
- ------------- ----------- ------------- --------- -------- -------- ---------- ---------- ----------- --------- ---------
2008
Surety $75,940 $246,651 $277,208 $ - $453,478 $225,461 $135,867 $126,386 $ - $586,498
- ------------------------------------------------------------------------------------------------------------------------------------
2007
Surety $52,365 $110,784 $271,222 $ - $314,067 $189,956 $98,873 $108,065 $ - $264,639
F-51
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
AS OF MAY 31, 2008 AND 2007 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 SETTELMENT AMORTIZATION PAID
LOSS IF ANY, EXPENSES OF CLAIMS
DEFERRED EXPENSES, DEDUCTED INCURRED RELATED DEFERRED AND CLAIMS
AFFILIATION POLICY FUTURE IN NET TO POLICY ADJUST- NET
WITH ACQUISITION POLICY COLUMN UNEARNED PREMIUM INVESTMENT CURRENT PRIOR ACQUISITION MENT PREMIUMS
REGISTRANT COSTS CLAIMS C PREMIUMS REVENUE INCOME YEAR YEARS COSTS EXPENSES WRITTEN
- --------------- ----------- ---------- -------- -------- ------- ---------- ------- ----- ----------- ---------- -------
2008
Consolidated
property-
casualty
entities $75,940 $246,651 $ - $277,208 $453,478 $225,461 $135,867 $ - $126,386 $ - $586,498
- ------------------------------------------------------------------------------------------------------------------------------------
2007
Consolidated
property-
casualty
entities $52,365 $110,784 $ - $271,222 $314,067 $189,956 $98,873 $ - $108,065 $ - $264,639
F-52
(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)
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)
- ----------------------------
(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 20, 2008
33
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.
Dated: September 08, 2008 JACOBS FINANCIAL GROUP, INC.
By:
/s/John M. Jacobs
-----------------------------------
John M. Jacobs
President and CEO
Director
34
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: September 08, 2008 By:/s/John M. Jacobs
-----------------------------
John M. Jacobs
President and CEO
Director
Dated: September 08, 2008 By: /s/Robert L. Neal
-----------------------------
Robert L. Neal
Chief Financial Officer
Dated: September 08, 2008 By: /s/Frederick E. Ferguson
-----------------------------
Frederick E. Ferguson
Director
Dated: September 08, 2008 By: /s/ C. David Thomas
-----------------------------
C. David Thomas
Director
35