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, 2009
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
======================================== =====================================
DELAWARE 84-0922335
- ---------------------------------------- -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
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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, 2008: $783,348 (174,077,272 shares at $.0045 /
share)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 186,028,413 shares of common
stock as of September 9, 2009.
2
TABLE OF CONTENTS
PAGE
PART I
Item 1 Business 4
Item 1A Risk Factors 5
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 6
Item 6 Selected Financial Data 7
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 7A Quantitative and Qualitative Disclosures About Market Risk 18
Item 8 Financial Statements and Supplementary Data 18
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 19
Item 9A(T) Controls and Procedures 19
Item 9B Other Information 20
PART III
Item 10 Directors, Executive Officers and Corporate Governance 21
Item 11 Executive Compensation 23
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 25
Item 13 Certain Relationships and Related Transactions and Director
Independence 28
Item 14 Principal Accounting Fees and Services 29
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
The Company is headquartered in Charleston, West Virginia, and through its
wholly-owned subsidiaries, employs a total of seven (7) full-time employees.
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 $180 per month with
automatic options to extend the leasehold through October 2026. CMW has the
right to cancel the lease upon sixty (60) days written notice at any time. The
property is presently not being actively explored or developed. During the 2002
fiscal year, management evaluated the lease and determined the development was
not currently feasible. Accordingly, the Company recorded an impairment of
$116,661 to its investment in the lease. Opportunities will continue to be
explored as they arise with respect to the development or sale of the leasehold
interest.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
5
PART II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES.
The Company's common stock is traded in the over-the-counter market under the
symbol JFGI (OTC Bulletin Board Symbol). The table below sets forth the high and
low price information for the Company's common stock for the periods indicated.
Such prices are inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions.
HIGH LOW
---- ---
FISCAL YEAR ENDED MAY 31, 2009
4th Quarter .045 .001
3rd Quarter .01 .003
2nd Quarter .01 .003
1st Quarter .01 .003
FISCAL YEAR ENDED MAY 31, 2008
4th Quarter .025 .00831
3rd Quarter .07 .006
2nd Quarter .03 .006
1st Quarter .03 .01
As of May 31, 2009, there were approximately 882 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.
6
As of May 31, 2009, shares of the Company's common stock authorized for issuance
under the Registrant's 2005 Stock Incentive Plan, that was approved by the
stockholders of the Company on December 8, 2005, are as follows:
EQUITY COMPENSATION PLAN INFORMATION
- -------------------------------------------- ------------------------------------------ ------------------------------------------
Number of Shares to be Issued Weighted-Average Number of Shares
Upon Exercise of Exercise Price of Remaining Available
Outstanding Options Outstanding Options For Future Issuance
- -------------------------------------------- ------------------------------------------ ------------------------------------------
23,100,000 .06652 11,900,000
- -------------------------------------------- ------------------------------------------ ------------------------------------------
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, 2009, 232 shares of Series A Preferred
Stock were issued pursuant to ongoing bonding programs of FSC in exchange for
cash in the amount of $232,000.
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 2009, the Company has focused its primary efforts on the
development and marketing of its surety business in West Virginia and Ohio,
arranging for an increase in FSC's bonding capacity through a reinsurance
relationship, raising additional capital to increase the capital base of FSC and
facilitate entry into other state markets and other means of accelerating the
progression of the Company's business plan.
7
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2009
RESULTS OF OPERATIONS
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, including accrued dividends) of $3,057,687 in
fiscal 2009 as compared with a loss (after accretion of mandatorily redeemable
convertible preferred stock, including accrued dividends) of $3,332,942 in
fiscal 2008. While total revenues increased from approximately $957,000 in
fiscal 2008 to approximately $1,194,000 in fiscal 2009, total expenses decreased
from approximately $2,465,000 in fiscal 2008 to approximately $2,039,000 in
fiscal 2009, resulting in a decrease in the loss from operations of
approximately $663,000.
The increase in revenues is largely attributable to new business acquired by FSC
and increased investment holdings of FSC. The decrease in expenses is
attributable to decreased general and administrative expense related to
reduction in personnel and reduction in professional fees incurred in the
Company's negotiating and entering into acquisition agreements with respect to
RSH and Unione in fiscal 2008 and ongoing efforts to raise additional capital to
expand its business.
Interest expense increased from approximately $479,000 in fiscal 2008 to
approximately $605,000 in fiscal 2009 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.
Accretion and accrued dividends on preferred stock increased from approximately
$1,471,000 in fiscal 2008 to approximately $1,609,000 in fiscal 2009. 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
8
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
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. Effective June 1, 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.
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 evolving 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.
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.
9
BRIDGE-FINANCING, COMMITMENTS AND MATERIAL AGREEMENTS
Of primary importance to the Company's ability to fully implement its business
plan is the expansion of that business into additional states. Regulatory
approval and licensing is required for each state where FSC seeks to conduct
business. Management found entry into additional states (as a surety) was
proving difficult without the benefit of more substantial capital and reserves
due to FSC's status as a recent entry into this market. Accordingly, management
began pursuing avenues that would provide additional capital to facilitate such
expansion.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009,
the Company obtained two rounds of bridge financing totaling an aggregate of
$3,500,000. The purpose of the financing was to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing and, in addition, to increase the capital surplus
of FSC to make possible the reactivation of FSC's surety license in the state of
Ohio. The terms of the bridge-financing arrangement provide for payment in full
upon consummation by the Company of a qualified equity offering providing net
proceeds of at least $15 million on or before September 10, 2013; and because
such a qualified equity offering was not consummated by September 10, 2008,
accrued interest-to-date was payable, and quarterly installments of principal
and interest became payable over five years commencing in December 2008. The
interest rates on such notes are fixed at 10.00%. Payments due December 2008 and
March 2009 were not made by the Company as scheduled, but an agreement was
subsequently entered into with the bridge lenders on June 5, 2009, modifying
payment terms to cure the default and pledging the stock of the Company's
subsidiary, CMW, as security for repayment of the loans.
Certain equity inducements in the form of common stock of the Company were
provided under the terms of the bridge loan documents. Upon issuance of the
bridge notes, an aggregate of 7% of the outstanding common stock of the Company
was issued to the bridge lenders. Upon retirement of the notes upon consummation
of a qualified equity offering, the Company will issue to the bridge lenders a
percentage of the outstanding common stock of the Company which, when added to
the stock initially issued, may equal as much as 28% of the common stock of the
Company that would otherwise have been retained by the holders of the Company's
common shares immediately prior to the financing. Finally, because a qualified
financing was not completed by September 10, 2008, the Company was required to
issue to the bridge lenders under the terms of the loan documents a total of
2.8% of the Company's outstanding common shares at such date. An additional 2.8%
of the Company's outstanding common shares are required to be issued upon each
six-month anniversary date thereof until retirement of the notes.
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, 2009, such assets
amounted to approximately $6.78 million.
10
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
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, 2009.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability
limit surety bonds in West Virginia and Ohio. Coal permit bonds are required by
regulatory agencies to assure the reclamation of land that has been disturbed by
mining operations, and accordingly, is a highly regulated process by federal and
state agencies. Such bonds are generally long-term in nature with mining
operations and reclamation work being conducted in unison as the property is
mined. Additionally, no two principals and properties are alike due to varied
company structures and unique geography and geology of each site.
In underwriting coal reclamation bonds, management obtains estimates of costs to
reclaim the properties in accordance with the specifications of the mining
permit, prepared by independent outside professionals experienced in this field
of work. Such estimates are then periodically updated and compared with
marketable securities pledged, and held for the benefit of FSC as collateral for
the surety bond, to mitigate the exposure to significant loss. Should the
principal default in its obligation to reclaim the property as specified in the
mining permit, FSC would then use the funds held in the collateral account to
reclaim the property or forfeit the face amount of the surety bond. Losses can
occur if the costs of reclamation exceed the estimates obtained at the time the
bond was underwritten or upon subsequent re-evaluations, if sufficient
collateral is not obtained, or if the collateral held has experienced
significant deterioration in value and if FSC is not otherwise able to recover
under its contractual rights to indemnification.
Miscellaneous fixed-liability limit surety bonds are generally fully
collateralized by the principal's cash investment into a collateral investment
account, managed by the Company's investment advisory subsidiary (Jacobs & Co.)
that mitigates FSC's exposure to loss. Losses can occur should the principal
default on the performance required by the bond and the collateral held in the
investment account experience deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided in
conjunction with the periodic monitoring and inspections performed, the value of
11
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 (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) of
approximately $3,058,000 and $3,333,000 for the fiscal years ended May 31, 2009
and 2008, respectively. The Company continues to face significant working
capital deficiencies and cash flow concerns. This has resulted in the deferral
of payments to professionals and others and an inability to pay its preferred
stock dividend obligation. A substantial portion of the Company's cash flow is
generated by its insurance subsidiary and is subject to certain withdrawal
restrictions. While management expects revenue growth and cash flow to increase
significantly as its business plan is fully implemented, it is anticipated that
losses will continue and the Company will be cash constrained until FSC is able
to develop a substantial book of business.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to allow FSC to expand its market share and
to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. In fiscal 2009, the Company was able
to increase the capital of FSC and reactivate FSC's insurance license in Ohio
and obtain authority to issue surety bonds in that state. However, management
has found that entry into other states (as a surety) has been difficult without
the benefit of more substantial capital and reserves due to FSC's status as a
recent entry into this market and the financial condition of the Company. This
is the case notwithstanding the reinsurance agreement entered into by FSC with
Lloyd's of London and the resulting increase in bonding capacity. Management
believes that if FSC's capital and surplus reserves were significantly more
substantial and the financial condition of the Company was stabilized, entry
into other states would be less challenging. Accordingly, management continues
to pursue avenues that can provide additional capital to increase the capacity
of its insurance subsidiary and to fund continuing operations as the business is
being fully developed. In addition, as an alternative means of addressing access
to markets, management is seeking to establish a relationship with any one of
several possible sureties that are licensed in those states other than West
Virginia and Ohio that comprise significant markets for the bonding programs of
FSC and could issue surety bonds that are underwritten and reinsured by FSC.
Under such a "fronting" arrangement, the need for additional capital at the
level of FSC to facilitate entry to other state markets would become secondary,
since the payment of a fronting fee to the insurance company with active
licenses would provide access to the state market without formal entry.
As a means of alleviating obligations associated with the Company's Series B
Preferred Stock, which by its terms matures at the end of 2010, management is
considering a recapitalization. The goal of any such recapitalization will be to
stabilize the financial position of the Company, which management believes will
improve the Company's prospects for a relationship with potential capital
sources, assist FSC as it applies to enter other state markets and be an impetus
to the growth of the Company's business. Any such recapitalization is expected
12
to involve the voluntary participation of the holders of Series B Preferred
Stock, and no assurance can be given that a recapitalization will be
accomplished.
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 2009 WITH 2008
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, including accrued dividends) of $3,057,687 in
fiscal 2009 as compared with a loss of $3,332,942 (after accretion of
mandatorily redeemable convertible preferred stock, including accrued dividends)
in fiscal 2008.
REVENUES
Revenues in fiscal 2009 amounted to $1,194,077 as compared with $957,142 in
fiscal 2008. 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 $233,298 in fiscal 2009 as compared with $262,806 in fiscal 2008,
representing a decrease of $29,503. 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.
Revenue from the surety insurance segment, consisting of FSC and TSA, was
$957,067 for fiscal 2009 as compared with $694,336 for fiscal 2008. Revenues
attributable to the insurance segment are as follows:
Year Ended May 31,
2009 2008
--------------- --------------
Premiums and commissions $ 660,222 $ 465,286
Net investment income 288,747 225,461
Net realized investment gains 8,098 3,589
--------------- --------------
Total $ 957,067 $ 694,336
=============== ==============
13
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 2009. However, net premium written
(written premium less deductions for ceded reinsurance) in fiscal 2009 amounted
to $813,345 as compared with $586,498 in fiscal 2008, 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, during fiscal 2009, in conjunction with the increased surety
business written, proceeds amounting to $259,000 from the sale of Series A
preferred stock were contributed to the surplus and capital of FSC. $176,000 in
proceeds have been collected but not yet contributed to the surplus and capital
of FSC. FSC's investment holdings in fiscal 2009 averaged $5.986 million as
compared with $4.553 million for fiscal 2008, with investment yields remaining
relatively unchanged at just below 5.00%.
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 2009 have been recorded as $186,007 or 28.5% of earned premium
as compared to $135,867 or 30.0% of earned premium for fiscal 2008. 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, 2009.
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 2009 such costs amounted to $153,263 or 23.5% of earned premium as
compared with $126,386 or 27.9% in fiscal 2008.
General and administrative expenses for fiscal 2009 were $1,564,224 as compared
with $2,037,178 for fiscal 2008, representing a decrease of $472,954 and are
comprised of the following:
14
Year Ended May 31,
2009 2008 DIFFERENCE
---------------- ----------------- ----------------
Salaries and related costs $ 550,646 $ 727,219 $ (176,573)
General office expense 103,830 111,739 (7,909)
Legal and other professional fees 486,878 804,512 (317,634)
Audit, accounting and related services 126,359 118,595 7,764
Travel, meals and entertainment 58,589 73,668 (15,079)
Other general and administrative 237,922 201,445 36,477
---------------- ----------------- ----------------
Total general and administrative $ 1,564,224 $ 2,037,178 $ (472,954)
================ ================= ================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $176,573 and are comprised of the following:
Year Ended May 31,
2009 2008 DIFFERENCE
------------------ ------------------ ---------------
Salaries and wages $ 528,699 $ 567,522 $ (38,823)
Commissions 26,131 37,147 (11,016)
Payroll taxes 45,262 47,107 (1,845)
Stock option expense 11,462 98,972 (87,510)
Fringe benefits 63,531 61,764 1,767
Key-man life insurance 57,522 42,863 14,659
Deferred policy acquisition costs (181,961) (128,156) (53,805)
------------------ ------------------ ---------------
Total salaries and related costs $ 550,646 $ 727,219 $(176,573)
================== ================== ===============
Decreases in salaries and wages relate to decreased staff and year-end bonuses
paid to non-executive employees. The decrease in stock option expense is
attributable to non-uniform vesting schedules under which options vest for
certain key employees as well as the expiration of options for employees
terminated in 2009. Group health benefits remained consistent with the previous
year, but were offset by an increase in the Company's group life insurance cost
of approximately $2,000. The increase in key-man life insurance is attributable
to the increased debt the Company has incurred.
In fiscal 2009, legal and professional fees of approximately $486,900 included
approximately $305,500 relating to the Company's on-going efforts to raise
additional capital for the expansion of the surety business into other states.
Other less significant increases and decreases were experienced in audit, travel
and other general administrative expenses categories in fiscal 2009 as compared
to fiscal 2008.
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 $122,758 of the Fund's operating expenses in fiscal 2009 as compared to
$157,269 in fiscal 2008. As the Fund grows in size of assets under management,
expenses (in excess of the 2% level) absorbed by Jacobs & Co. will decrease
15
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 reimbursable to it
for a period of up to three years. In fiscal 2009, the Fund's investment
advisory and distribution fee revenue amounted to $24,143 as compared to $39,535
in fiscal 2008. The Fund's average assets under management declined from
approximately $3.25 million in fiscal 2008 to approximately $1.95 million in
fiscal 2009. As of May 31, 2009, assets under management were approximately
$1.81 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.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense for fiscal 2009 was $605,045 as compared with $479,295 in
fiscal 2008. 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:
16
Year Ended May 31,
2009 2008 DIFFERENCE
------------------ ------------------ -----------------
Interest expense on bridge financing $ 349,016 $ 170,931 $ 178,085
Expense of common shares issued or to be issued in
connection with bridge financing arrangements 149,738 238,943 (89,205)
Expense of common shares issued or to be issued in
connection with issued debt 14,733 - 14,733
Interest expense on demand and term notes 77,460 47,920 29,540
Interest expense accrued on debt obligations
subsequently settled and recorded as gain on debt
extinguishment - 13,075 (13,075)
Other finance charges 14,098 8,426 5,672
------------------ ------------------ -------------------
Total interest expense $ 605,045 $ 479,295 $ 125,750
================== ================== ===================
Interest income for fiscal 2009 was $4,819 as compared with $10,137 for fiscal
2008. Interest income for fiscal 2009 and 2008 is primarily related to the
investment of the unexpended proceeds from the bridge-financing arrangement in
short-term investment accounts
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,
2009 2008
----------------- ----------------
Accretion of discount $ 567,811 $ 529,273
Accrued dividends 1,041,499 942,044
Excess redemption price - -
----------------- ----------------
$ 1,609,310 $ 1,471,317
================= ================
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.
17
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-7
Notes to Consolidated Financial Statements F-8
SCHEDULES
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-48
Schedule IV - Supplemental Insurance Information - Reinsurance F-49
Schedule VI - Supplemental Information F-50
18
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the audits for the years ended May 31, 2009 and May 31, 2008,
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, 2009. 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, 2009,
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, 2009, 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 were implemented during the first fiscal quarter of the Company's
2008-2009 fiscal year. Management continues to monitor changes made in fiscal
2008 and 2009 and will continue to implement improvements. 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, 2009 and 2008, and the results of its
operations and cash flows for the years ended May 31, 2009 and 2008 in
conformity with U.S. generally accepted accounting principals (GAAP).
19
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, 2009. 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, 2009. 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, 2009. 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 were 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
20
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 55 President and CEO/CFO
Director
Frederick E. Ferguson 75 Director
C. David Thomas 56 Director
Robert J. Kenney 62 Vice President
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.
21
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.
There are no family relationships among any of the Company's directors and
executive officers.
During the past five years, there have been no filings of petitions under
federal bankruptcy laws, or any state insolvency laws, by or against any
business of which any director or executive officer of the Company was a general
partner or executive officer at the time or within two years before the time of
such filing.
During the past five years, no director or executive officer of the Company has
been convicted in a criminal proceeding or been subject to a pending criminal
proceeding.
During the past five years, no director or executive officer of the Company has
been the subject of any order, judgment, or decree, not subsequently reversed,
suspended or vacated by a court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities.
During the past five years, no director or executive officer of the Company has
been found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
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.
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:
22
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, 2009 and 2008 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. Jacobs, 2009 $150,000 - - $ 10,731 $ 23,235 $183,966
CEO 2008 $150,000 $ 49,164 $ 25,913 $225,077
- ------------------ ------- -------------- --------- ----------- -------------- ----------------- -------------------
Robert J. 2009 $ 75,000 - - $ 6,336 - $ 81,336
Kenney, VP 2008 $ 75,000 $ 15,840 $ 90,840
- ------------------ ------- -------------- --------- ----------- -------------- ----------------- -------------------
(1) On May 25, 2006, the compensation committee of the board of directors
awarded 12,500,000, and 5,000,000 of incentive stock options to acquire
common shares at an exercise price of seven cents ($.07) per share to Mr.
Jacobs and Mr. Kenney, respectively, which vest as set forth in the table
below. The term of the options is five years and expires in May 2011.
23
- ------------------------- -------------------------------------------------
Vesting date Incentive Stock Option Awards
- ------------------------- ---------------------- -------------------------
John M. Jacobs Robert J. Kenney
- ------------------------- ---------------------- -------------------------
May 25, 2006 2,500,000 2,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2007 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2007 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2008 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2008 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2009 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2009 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2010 2,500,000
- ------------------------- ---------------------- -------------------------
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, 2009.
- ---------------- -----------------------------------------------------------------------------------
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 OPTIONS (#) PRICE ($) EXPIRATION
DATE
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
John M. 10,000,000 2,500,000 - $.07 05/25/2011
Jacobs, CEO
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
Robert J. 5,000,000 - - $.07 05/25/2011
Kenney, VP
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
OTHER EXECUTIVE COMPENSATION PLANS
The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
24
The Company has no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a named executive officer at,
following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.
DIRECTOR COMPENSATION
The following table sets forth compensation received by our directors for the
fiscal year ended May 31, 2009.
- --------------------------- ---------------------------------------- -----------
NAME FEES EARNED OR PAID IN CASH ($) (1) TOTAL ($)
- --------------------------- ---------------------------------------- -----------
Frederick E. Ferguson $750 $750
- --------------------------- ---------------------------------------- -----------
C. David Thomas $750 $750
- --------------------------- ---------------------------------------- -----------
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.
25
- ---------------------------------- ------------------------------- ------------------------------- -------------------------------
Amount and Nature of
Name and Address of Beneficial Ownership (1) Percent of
Title of Class Beneficial Owner Class (2)
- ---------------------------------- ------------------------------- ------------------------------- -------------------------------
MORE THAN 5.00% BENEFICIAL OWNERSHIP
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 28,956,405 (3) 15.57%
Charles L. Stout
Route 1, Box 41J
Common Bridgeport, WV 26330 13,175,000 (4) 7.08%
Fay S. Alexander
6318 Timarron Cove Lane
Common Burke, VA 22015-4073 13,256,041 (5) 7.13%
William D. Jones
513 Georgia Avenue
Common Chattanooga, TN 37403 10,827,694 (6) 5.82%
Sue C. Hunt
1508 Viewmont Drive
Common Charleston, WV 25302 8,611,589 (7) 5.18%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 28,956,405 (3) 15.57%
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 6,920,000 (9) 3.72%
ALL DIRECTORS AND EXECUTIVE
Common OFFICERS AS A GROUP 38,468,700 20.68%
* Represents beneficial ownership of less than one percent of the Company's
common stock.
(1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
26
power with respect to securities. Shares of common stock issuable upon the
exercise of options or warrants currently exercisable within 60 days of
August 18, 2009 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 186,028,413 shares of common stock issued and outstanding as of
August 18, 2009.
(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 5,271,694 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 18, 2009. Includes the
right to convert Series B Preferred Stock holdings to 666,667 shares of
common stock exercisable within 60 days of August 18, 2009. 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 18, 2009. 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 18, 2009. 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 18, 2009.
(7) Includes 2,243,302 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 18, 2009
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
right to purchase 168,395 shares of common stock pursuant to issued and
outstanding stock warrants exercisable within 60 days of August 18, 2009
and held jointly with spouse.
27
(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 18, 2009. 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 18,
2009.
(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 6,000,000 in vested options to
purchase Company stock exercisable within 60 days of August 18, 2009.
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 March 2012 for repayment,
one of the participants providing part of the bridge-financing would acquire
common shares of the Registrant through such arrangement equal to 10.96% 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 14.15%.
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.
At the beginning of fiscal 2008, the balance due Mr. Jacobs from the Company was
$15,763. 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.
28
During fiscal 2009, advances to the Company from Mr. Jacobs amounted to $437,388
and repayments to Mr. Jacobs amounted to $454,777. As of May 31, 2009, the
balance due to Mr. Jacobs from the Company was $2,281. The largest aggregate
amount outstanding to Mr. Jacobs in fiscal 2009was $294,546.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2008 and 2009 fiscal years.
As of September 10, 2009, $27,806 was owed by the Company 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, 2009 amounted
to $89,098.
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.
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, 2009 and 2008.
FEES FOR TAX PREPARATION SERVICES
During fiscal 2009, billings for tax preparation services were $10,666. During
fiscal 2008, billings for tax preparation services were $12,584
29
ALL OTHER FEES
Billings for other services related to potential financing transactions in
amounted to $4,863 and $11,708 in fiscal 2009 and 2008 respectively.
Billings for professional services related to the audit of the acquisition
target, RSH Holdings, Inc. amounted to $21,659 during fiscal 2008.
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 $4,863
in fiscal 2009 which were approved by the Board of Directors prior to the
completion of the audit for fiscal 2009 as provided by Rule 2-01(c)(7)(i)(C)(3)
of Regulation S-X.
30
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-7
Notes to Consolidated Financial Statements F-9
(a)(2) The following financial statement schedules are included in response to
Item 8 herein:
Page
--------------------
SCHEDULES
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-48
Schedule IV - Supplemental Insurance Information - Reinsurance F-49
Schedule VI - Supplemental Information F-50
31
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-7
Notes to Consolidated Financial Statements F-9
Page
--------------------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-45
Schedule II - Condensed Financial Information of Registrant F-46
Schedule III - Supplementary Insurance Information F-48
Schedule IV - Supplemental Insurance Information - Reinsurance F-49
Schedule VI - Supplemental Information F-50
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors
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, 2009 and 2008, 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, 2009. 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, 2009 and 2008, and the results of its operations and its
cash flows for each of the years in the two-year period ended May 31, 2009 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, LLP
- -----------------------------
Malin, Bergquist & Company, LLP
Pittsburgh, PA
September 14, 2009
F-2
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 31, 2009 MAY 31, 2008
--------------- ---------------
ASSETS
INVESTMENTS AND CASH:
Bonds available for sale, at market value $ 908,766 $ 105,866
(amortized cost - 05/31/09 $866,855; 05/31/08 $98,774)
Mortgage-back securities held to maturity, at amortized costs 5,085,300 3,826,688
(market value - 05/31/09 $5,157,936; 05/31/08 $3,800,909)
Short-term investments, at cost (approximates market value) 387,753 1,176,056
Cash 80,038 48,640
--------------- ---------------
TOTAL INVESTMENTS AND CASH 6,461,857 5,157,250
Investment income due and accrued 28,124 19,892
Premiums and other accounts receivable 61,184 47,353
Prepaid reinsurance premium 87,114 -
Deferred policy acquisition costs 143,173 75,940
Furniture and equipment, net of accumulated depreciation
of $133,493 and $120,931, respectively 23,169 29,168
Other assets 43,517 298,163
Intangible assets 150,000 150,000
--------------- ---------------
TOTAL ASSETS $ 6,998,138 $ 5,777,766
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 432,658 $ 246,651
Reserve for unearned premiums 530,795 277,208
Accrued expenses and professional fees payable 470,099 367,464
Accounts payable 268,066 299,585
Related party payable 75,009 60,567
Demand note payable to related party 3,081 1,000
Notes payable 4,049,791 2,967,016
Accrued interest payable 303,914 71,483
Ceded reinsurance payable 92,173 -
Other liabilities 78,470 16,402
--------------- ---------------
TOTAL LIABILITIES 6,304,056 4,307,376
SERIES A PREFERRED STOCK, $.0001 par value per share; 1 million
shares authorized; 2,665 and 2,230 shares issued and outstanding
at May 31, 2009 and May 31, 2008, respectively; stated liquidation value
of $1,000 per share 2,860,670 2,308,933
SERIES B PREFERRED STOCK, $.0001 par value per share; 9,941.341
shares authorized; 9,621.940 shares issued and outstanding at
May 31, 2009 and May 31, 2008; stated liquidation value of $1,000 per share 11,429,440 9,936,866
--------------- ---------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 14,290,110 12,245,799
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value per share; 490 million shares authorized;
179,682,912 and 166,091,242 shares issued and outstanding at
May 31, 2009 and May 31, 2008, respectively 17,968 16,609
Additional paid in capital 2,626,236 2,423,537
Accumulated deficit (16,279,725) (13,222,038)
Accumulated other comprehensive income (loss) 39,493 6,483
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (13,596,028) (10,775,409)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 6,998,138 $ 5,777,766
=============== ===============
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
--------------------------------
2009 2008
------------- -------------
REVENUES:
Investment advisory services $ 233,298 $ 262,806
Insurance premiums and commissions 660,222 465,286
Net investment income 288,747 225,461
Net realized investment gains (losses) 8,098 3,589
Other income 3,712 -
------------- -------------
TOTAL REVENUES 1,194,077 957,142
EXPENSES:
Incurred policy losses 186,007 135,867
Insurance policy acquisition costs 152,964 126,386
General and administrative 1,564,224 2,037,178
Mutual fund costs 122,758 157,269
Depreciation 12,562 8,379
------------- -------------
TOTAL EXPENSES 2,038,515 2,465,079
------------- -------------
NET INCOME (LOSS) FROM OPERATIONS (844,438) (1,507,937)
Gain on debt extinguishment - 115,470
Interest expense (605,045) (479,295)
Interest income 1,107 10,137
------------- -------------
NET INCOME (LOSS) (1,448,376) (1,861,625)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (1,609,311) (1,471,317)
------------- -------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,057,687) $(3,332,942)
============= =============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ (0.02) $ (0.02)
============= =============
WEIGHTED-AVERAGE SHARES OUTSTANDING 173,788,315 159,130,160
============= =============
The accompanying notes are an integral part of these
consolidated financial statements
F-4
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR MONTHS ENDED
MAY 31
--------------------------------
2009 2008
--------------- ---------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $ (3,057,687) $ (3,332,942)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale investments arising during period 41,108 7,318
Reclassification adjustment for realized (gain) loss included in net income (8,098) (835)
--------------- ---------------
Net unrealized gain (loss) attributable to available-for-sale investments recognized
in other comprehensive income 33,010 6,483
--------------- ---------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,024,677) $ (3,326,459)
--------------- ---------------
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31
------------------------------
2009 2008
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,448,376) $(1,861,625)
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Unearned premium 166,473 5,986
Stock option expense 11,451 98,972
Stock issued (or to be issued) in connection with
financing arrangements 192,607 242,003
Provision for loss reserves 186,007 135,867
Amortization of premium 44,286 23,496
Depreciation 12,562 8,379
Write off of bad debts - 985
Premium and other receivables (13,831) (9,670)
Accretion of discount (13,072) (11,565)
Investment income due and accrued (7,770) 15,858
Realized (gain) loss on sale of securities (12,511) (3,589)
Deferred policy acquisition costs (67,233) (23,575)
(Gain) on extinguishment of debt - (115,470)
Loss on disposal of furniture and equipment - 684
Change in operating assets and liabilities:
Other assets 252,837 (125,531)
Related party accounts payable 14,442 60,567
Accounts payable and cash overdraft (31,519) (46,310)
Accrued expenses and other liabilities 489,307 (504,992)
-------------- --------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (224,340) (2,109,530)
CASH FLOWS FROM INVESTING ACTIVITIES
Short-term loan - (50,000)
Repayment of short-term loan - 50,000
(Increase) decrease in short-term investments 788,303 (835,305)
Cost of bonds acquired (356,101) (97,582)
Costs of mortgaged-backed securities acquired (2,851,803) (2,956,145)
Purchase of equity securities - (25,438)
Sale of securities held to maturity - 169,330
Sale of securities available for sale 107,639 -
Escrow deposits for pending acquisitions - (125,000)
Redemption of available for sale securities upon call 20,000 -
Repayment of mortgage-backed securities 1,034,407 476,400
Redemption of bonds upon call or at maturity - 2,155,000
Purchase of furniture and equipment (6,563) (14,603)
-------------- --------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (1,264,118) (1,253,343)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 456,858 132,200
Repayment of related party debt (454,777) (146,963)
Proceeds from borrowings 1,402,500 2,842,000
Repayment of borrowings (319,725) (269,357)
Proceeds from issuance of Series A preferred stock 435,000 803,000
Proceeds from issuance of Series B preferred stock - 25,000
Proceeds from exercise of common stock warrants - 335
-------------- --------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 1,519,856 3,386,215
NET INCREASE (DECREASE) IN CASH 31,398 23,342
CASH AT BEGINNING OF PERIOD 48,640 25,298
-------------- --------------
CASH AT END OF PERIOD $ 80,038 $ 48,640
============== ==============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 181,037 $ 171,889
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 192,607 -
Reclassification of bonds held-to-maturity to bonds
available for sale - -
See accompanying notes.
F-6
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-7
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) FOR THE YEAR ENDED MAY 31, 2009
----------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
SERIES A SERIES B
MANDATORILY REDEEMABLE MANDATORILY REDEEMABLE ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER
PREFERRED STOCK PREFERRED STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
(LOSS)
---------------------------------------------- ----------------------------------------------------------------------
-------- ----------- --------- ----------- ----------- ------- ----------- ------------- ------- -------------
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)
Issuance of
Series A 435 435,000 - - - - - - - -
and B
Preferred
Stock and
common stock
Issuance of
common stock - - - - 13,591,670 1,358 104,684 - - 106,042
stock as
additional
consideration
for financing
arrangement
Less expense
previously
recognized - - - - - - (38,958) - - (38,958)
Accretion of
mandatorily
redeemable
convertible
preferred stock - 16,939 - 550,874 - - - (567,812) - (567,812)
Accrued
dividends
of mandatorily
redeemable
convertible
preferred stock - 99,798 - 941,700 - - - (1,041,498) - (1,041,498)
Expense of
common shares
to be issued
in connection
with financing
arrangements - - - - - - 125,511 - - 125,511
Common stock
option
expense - - - - - - 11,462 - - 11,462
Unrealized net
gain on
available for
sale securities - - - - - - - - 33,010 33,010
Net income
(loss), year
ended
May 31, 2009 - - - - - - - (1,448,376) - (1,448,376)
-------- ----------- --------- ----------- ----------- ------- ----------- ------------- ------- -------------
BALANCE,
MAY 31, 2009 2,665 $ 2,860,670 9,621.940 $11,429,440 179,682,912 $17,968 $ 2,626,236 $(16,279,725) $39,493 $(13,596,028)
---------------------------------------------- ----------------------------------------------------------------------
See accompanying notes.
F-8
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 $3,058,000 and $3,333,000
for the years ended May 31, 2009 and 2008. 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.
F-9
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Management intends to improve cash flow through the implementation of
its business plan. Additionally, management continues to seek to raise
additional funds for operations through private placements of stock,
other long-term or permanent financing, or short-term borrowings.
However, the Company cannot be certain that it will be able to continue
to obtain adequate funding in order to reasonably predict whether it
will be able to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the
outcome of this uncertainty.
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-10
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.
Interest income with respect to fixed maturity securities is accrued as
earned. Dividend income is generally recognized when receivable.
F-11
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-12
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-13
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECLASSIFICATIONS
Certain amounts in the 2008 Consolidated Financial Statements have been
reclassified to be consistent with the presentation in the Consolidated
Financial Statements as of May 31, 2009 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 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 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
F-14
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 financialposition.
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 interim periods
F-15
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. 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.
In June 2009, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 168, "The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles - A Replacement
of FASB Statement No. 162." This SFAS establishes the FASB Accounting
Standards Codification as the single source of authoritative US
generally accepted accounting principles. SFAS No. 168 is effective for
financial statements issued for interim and annual periods ending after
September 15, 2009. 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.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)." This statement changes how a reporting
entity determines when an entity that is insufficiently capitalized or
is not controlled through voting (or similar rights) should be
consolidated. New disclosures will be required regarding involvement
with variable interest entities and any significant changes in risk
exposure due to that involvement. SFAS No. 167 will be effective for
F-16
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the start of the first fiscal year beginning after November 15, 2009
(June 1, 2010 for the Company). This SFAS is not expected to have a
material impact on the Company's financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers
of Financial Assets." This is a revision to SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," and will require more information about transfers of
financial assets, including securitization transactions, and where
entities have continuing exposure to the risks related to transferred
financial assets. It eliminates the concept of a "qualifying
special-purpose entity," and changes the requirements for derecognizing
financial assets, and requires additional disclosures. SFAS No. 166
will be effective for the start of the first fiscal year beginning
after November 15, 2009 (June 1, 2009 for the Company). This SFAS is
not expected to have a material impact on the Company's financial
statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." This
statement establishes general standards of accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. SFAS No.
165 is effective for interim and annual financial periods ending after
June 15, 2009, and shall be applied prospectively.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the
Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly." This FSP provides additional
clarification on the determination of fair value, including
illustrative examples. FSP FAS 157-4 is effective for interim and
annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. This FSP did not
have a material impact on the Company's financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2,
"Recognition and Presentation of Other-Than-Temporary Impairments."
This FSP provides guidance on determining whether an impairment is
other than temporary, provides examples to be considered and identifies
reporting requirements related to such impairments. FSP FAS 115-2 and
FAS 124-2 is effective for interim and annual periods ending after June
15, 2009, with early adoption permitted for periods ending after March
F-17
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15, 2009. This FSP did not have a material impact on the Company's
financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim
Disclosures about Fair Value of Financial Instruments." This FSP
requires disclosure about the fair value of financial instruments
whenever summarized financial information for interim periods is
issued, and requires disclosure of the fair value of all financial
instruments (where practicable) in the body or accompanying notes of
interim and annual financial statements. FSP FAS 107-1 and APB 28-1 is
effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009.
In April 2009, the FASB issued FSP FAS 141(R)-1, "Accounting for Assets
Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies." This FSP requires that assets acquired and
liabilities assumed in a business combination that arise from
contingencies be recognized at fair value if fair value can be
reasonably estimated, and eliminates the requirement to disclose an
estimate of the range of outcomes of recognized contingencies at the
acquisition date. This FSP is effective for assets or liabilities
arising from contingencies in 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.
In December 2008, the FASB issued FSP 132(R)-1, "Employers' Disclosure
about Postretirement Benefit Plan Assets." This FSP provides guidance
on an employer's disclosures regarding plan assets of a defined benefit
pension or other postretirement plan. The objectives of the disclosures
required under this FSP are to provide users of financial statements
with an understanding of:
a) How investment allocation decisions are made;
b) The major categories of plan assets;
c) The inputs and valuation techniques used to measure
the fair value of plan assets;
d) The effect of fair value measurements using
significant unobservable inputs on changes in plan
assets for the period; and
e) Significant concentrations of risk within plan
assets.
The disclosures about plan assets required by this FSP are required for
fiscal years ending after December 15, 2009, and earlier application is
permitted.
F-18
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2008, the FASB issued FSP 142-3, "Determination of the Useful
Life of Intangible Assets." This FSP amends the factors that should be
considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS
No. 142, "Goodwill and Other Intangible Assets." The intent of this FSP
is to improve the consistency between the useful life of a recognized
intangible asset under SFAS No. 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS No.
141(R), "Business Combinations," and other U.S. generally accepted
accounting principles. FSP 142-3 is effective for financial statements
issued for fiscal years beginning after December 15, 2008, and interim
periods within those fiscal years.
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, 2009:
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
---------------------- ---------------------- ---------------------- ----------------------
State and municipal $ 352,816 $ 28,570 $ - $ 381,386
securities
Equity securities 10,280 - 2,418 7,862
Mortgage Backed
Securities $ 514,039 $ 13,342 $ - $ 527,381
---------------------- ---------------------- ---------------------- ----------------------
$ 877,135 $ 41,912 $ 2,418 $ 916,629
====================== ====================== ====================== ======================
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
====================== ====================== ====================== ======================
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. In
March 2009, $15,412 of the equity investment was sold for $11,000
resulting in a loss of $4,413.
F-19
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company held the following investments, by security type, with the
positive intent and ability to hold to maturity:
MAY 31, 2009
-------------------------------------------------------------------------------------------
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
---------------------- ---------------------- ---------------------- ----------------------
U.S Government agency $ 5,085,300 $ 79,739 $ 7,103 $ 5,157,936
mortgage-backed
securities
====================== ====================== ====================== ======================
MAY 31, 2008
-------------------------------------------------------------------------------------------
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
---------------------- ---------------------- ---------------------- ----------------------
U.S Government agency $ 3,826,688 $ 23,206 $ 48,985 $ 3,800,909
mortgage-backed
securities
====================== ====================== ====================== ======================
Invested assets are exposed to various risks, such as interest rate,
market and credit risks. Due to the level of risk associated with
certain of these invested assets and the level of uncertainty related
to changes in the value of these assets, it is possible that changes in
risks in the near term may significantly affect the amounts reported in
the Consolidated Condensed Balance Sheets and Statements of Income.
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date. The Company uses the following
fair value hierarchy in selecting inputs, with the highest priority
given to Level 1, as these are the most transparent or reliable:
O Level 1 - Quoted prices for identical instruments in active
markets.
O Level 2 - Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets.
O Level 3 - Valuations derived from valuation techniques in
which one or more significant inputs are unobservable.
F-20
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair market values are provided by the Company's independent investment
custodians that utilize third-party quotation services for the
valuation of the fixed-income investment securities and money-market
funds held. The Company's investment custodians are large money-center
banks. The Company's equity investment is valued using quoted market
prices.
The following section describes the valuation methodologies used to
measure different financial instruments at fair value, including an
indication of the level in the fair value hierarchy in which the
instrument is generally classified.
FIXED INCOME SECURITIES
Securities valued using Level 1 inputs include highly liquid government
bonds for which quoted market prices are available. Securities using
Level 2 inputs are valued using pricing for similar securities,
recently executed transactions, cash flow models with yield curves and
other pricing models utilizing observable inputs. Most fixed income
securities are valued using Level 2 inputs. Level 2 includes corporate
bonds, municipal bonds, asset-backed securities and mortgage
pass-through securities.
EQUITY SECURITIES
Level 1 includes publicly traded securities valued using quoted market
prices.
SHORT-TERM INVESTMENTS
The valuation of securities that are actively traded or have quoted
prices are classified as Level 1. These securities include money market
funds and U.S. Treasury bills. Level 2 includes commercial paper, for
which all significant inputs are observable.
Assets measured at fair value on a recurring basis are summarized
below:
May 31, 2009
---------------------------------------------------------------------
Fair Value Measurements Using
Assets At
Level 1 Level 2 Level 3 Fair Value
----------------- ---------------- ----------------- ----------------
Assets:
Fixed income securities at fair value $ - $908,766 $ - $ 908,766
Equity securities at fair value 7,862 - - 7,862
Short-term investments at fair value 387,753 - - 387,753
----------------- ---------------- ----------------- ----------------
Total Assets $ 395,615 $908,766 $ - $1,304,381
The Company had no assets or liabilities measured at fair value on a
recurring basis using significant unobservable inputs (Level 3) at
either the adoption of SFAS 157 on June 1, 2008 or at May 31, 2009.
F-21
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $
6,440,387 and $ 5,142,101 as of May 31, 2009 and 2008, respectively,
are restricted to the use of FSC.
The amortized cost and estimated market values of investments with
fixed- maturities available-for-sale as of May 31, 2009, by contractual
maturity, are as follows:
Amortized Cost Fair Market Value
---------------------- -------------------
Due after ten years $ 352,816 $ 381,386
====================== ===================
Principal repayments on U.S. government agency mortgaged-backed
securities held by the Company as of May 31, 2009 are estimated as
follows:
Amortized Cost Fair Market
Value
----------------- ------------------
Due in one year or less $1,098,337 $1,112,857
Due after one year through five years 2,284,503 2,320,319
Due after five years through ten years 1,051,586 1,069,507
Due after ten years 650,874 655,253
----------------- ------------------
$ 5,085,300 $ 5,157,936
================= ==================
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:
2009 2008
-------------- ------------------
Bonds - fixed maturities $ 15,006 $ 76,185
Mortgage-backed securities 267,993 111,115
Short-term investments 7,842 39,377
-------------- ------------------
290,841 226,677
Total investment income
-------------- ------------------
Investment expense 2,094 1,216
-------------- ------------------
Net investment income $288,747 $225,461
============== ==================
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 $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.
F-22
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
2009 2008
---------------- --------------
Bonds-fixed maturities $ - $ 2,754
Mortgage-backed securities (46) -
Equity securities - -
Short-term investments - -
----------------- -------------
Net realized gain $ (46) $ 2,754
================ ==============
The increases (decrease) in unrealized appreciation of investments were
as follows:
2009 2008
--------------- ---------------
Bonds-fixed maturities $ 21,478 $ 15,964
Mortgage-backed securities 111,757 (23,732)
Equity securities (1,810) (609)
--------------- ---------------
Increase (decrease) in unrealized
appreciation $ 131,425 $ (8,377)
=============== ===============
The gross gains and gross losses realized on available-for-sale
securities were as follows:
Gross Gross
Gross Realized Realized
Proceeds Gains Losses
------------ ------------- ---------------
2009
Bonds-fixed maturities $ 107,639 $ 12,577 $ -
Mortgage-backed securities - - -
Equity securities 11,000 - (4,413)
------------ ------------- ---------------
Total $ 118,639 $ 12,577 $ (4,413)
============ ============= ===============
F-23
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2008
Bonds-fixed maturities $ 830,000 $ 835 $ -
Mortgage-backed securities - - -
Equity securities - - -
------------ ------------- --------------
Total $ 830,000 $ 835 $ -
============ ============= ==============
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, 2009 and May 31, 2008.
Less than 12 Months 12 Months or More Total
------------------------------- ---------------------------- --------------------------------
Cost Unrealized Cost Unrealized Fair Unrealized
(a) Losses (a) Losses Value Losses
--------------- --------------- ------------ --------------- --------------- ----------------
2009
Mortgage-backed
securities $ 686,543 $ 7,103 $ - $ - $ 679,440 $ 7,103
Equity - - 10,290 2,418 7,861 2,418
--------------- --------------- ------------ --------------- --------------- ----------------
Total $ 686,543 $ 7,103 $ 10,290 $ 2,418 $ 687,301 $ 9,521
=============== =============== ============ =============== =============== ================
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.
As of May 31, 2009, the company held 3 mortgage-backed securities with
gross unrealized losses of $7,103, 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.
F-24
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Equity securities consist of the company's investment in the Jacobs &
Company Mutual Fund with an unrealized loss of $2,418 which has been in
a continuous loss position for more 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, 2009 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.
2009 2008
------------------ ------------------
Balance at beginning of year $ 75,940 $ 52,365
Acquisition costs deferred 220,496 149,961
Amortization charged to operations (153,263) (126,386)
------------------ ------------------
Total $ 143,173 $ 75,940
================== ==================
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 2009.
As of May 31, 2009 and 2008, such balances are comprised of the
following:
2009 2008
------------- ----------
Advance deposits for professional fees $ 1,311 $ 133,498
Escrow deposits for proposed acquisitions - 125,000
Mutual fund investment at market 7,862 24,829
Prepaid expense and other deposits 34,344 14,836
------------- ----------
Total $ 43,517 $ 298,163
============= ==========
F-25
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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,
2009 and 2008.
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,
2009, the Company's insurance subsidiary, FSC, is only licensed to
write surety in West Virginia and Ohio and has focused its primary
efforts towards coal permit bonds while also providing other
miscellaneous surety bonds 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
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 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 collateral in amounts deemed to be
sufficient to reclaim the disturbed land and thus mitigate the exposure
to significant loss. Such collateral 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, 2009 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.
F-26
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At May 31, the reserve for losses and loss expenses consisted of:
2009 2008
-------------- ------------
Balance at beginning of year $ 246,651 $ 110,784
Incurred policy losses-current year 186,007 135,867
Incurred policy losses-prior year -
Amounts paid-current year losses - -
Amounts paid-prior year losses - -
-------------- ------------
Balance at end of year $ 432,658 $ 246,651
============== ============
NOTE H - NOTES PAYABLE
At May 31, 2009 and 2008, the Company had the following unsecured notes
payable to individuals and a commercial bank:
2009 2008
------------- --------------
Unsecured demand notes payable to individuals and
others; interest rate fixed @ 10.00% $ 380,000 $ 127,000
Unsecured short-term advances from principal
shareholder and chief executive officer; interest rate
fixed @ 12.00% (Also See Note T -
Related Party Transactions) 3,081 1,000
Unsecured note(s)payable to individual(s) under a
bridge- financing arrangement described below 3,500,000 2,635,000
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% maturing January 31, 2012 169,791 205,016
------------- --------------
Total $ 4,052,872 $ 2,968,016
============= ==============
F-27
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Additional borrowings in the amount of $75,000, $60,000 and $865,000
were transacted in April, May and June 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 July 2, 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 cumulative $3,500,0000 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 was not consummated by September 10, 2008,
accrued interest-to-date became 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 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 received 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).
Beginning September 10, 2008, because a qualified financing had not
been completed, the Company became required under the terms of the
bridge financing to issue 2.80% of the Company's outstanding common
shares and shall issue 2.80% of the Company's outstanding common shares
F-28
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
upon each six-month anniversary date thereof until retirement of the
notes. On September 10, 2008 and March 10, 2009, 4,870,449 and
5,010,640 common shares, respectively, were issued to those
noteholders.
Pursuant to the terms of the Promissory Notes, the first two of 20
equal quarterly installments of principal and interest payable
thereunder were to have been paid on December 10, 2008 and March 10,
2009 (the "INITIAL AMORTIZATION PAYMENTS"). As the result of upheavals
and dislocations in the capital markets, the Company was unable to
either refinance the indebtedness evidenced by the Promissory Notes or
make the Initial Amortization Payments to the Holders when due; and an
Event of Default (as defined in the Promissory Notes) occurred under
the Promissory Notes as a result of the Company's failure to pay the
Initial Amortization Payments within 14 days after same became due and
payable.
The Company asked the Holders to forbear from exercising their rights
and remedies arising from the Acknowledged Events of Default and
reached agreement subsequent to May 31, 2009.
The Holders agreed that the Company may satisfy its obligation to make
the Initial Amortization Payments by making 8 consecutive quarterly
payments of $67,185 each, commencing September 10, 2009, and within a
14 day grace period after the same, and continuing on the payment dates
(and 14 day grace periods) prescribed by the Amortization Schedule for
the Promissory Notes and ending on June 10, 2011 (collectively, the
"PAYMENTS"), it being understood that the Payments shall result in the
payment of the principal of and interest on the unpaid portion of the
Initial Amortization Payments at the rate of 10% per annum from and
after the originally scheduled payment dates. The Payments shall be
allocated among and paid to the Holders in accordance with the balances
due to each. The Company may at any time prepay the balance remaining
due with respect to the principal of the Initial Amortization Payments
by paying the amount thereof, together with interest accrued through
the date of such prepayment.
Scheduled maturities and principal payments for each of the next five
years are as follows:
2009
-------------
Fiscal year 2009-2010
(including demand notes) $ 1,028,539
Fiscal year 2010-2011 958,809
Fiscal year 2011-2012 832,668
Fiscal year 2012-2013 801,035
Fiscal year 2013-2014 431,821
Fiscal year 2014-2015 -
--------------
Total $ 4,052,872
==============
F-29
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, in fiscal 2008 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. Holders of Series A Preferred Stock are entitled to participate in
the FSC's partially collateralized bonding programs, subject to
continuing satisfaction of underwriting criteria, based upon the
bonding capacity of FSC attributable to capital reserves of FSC
established with the subscription proceeds (i.e., bonding capacity
equal to ten times subscription proceeds) and for so long as the
subscriber holds the Series A shares. Holders of the Series A Preferred
Stock are entitled to receive, when and as declared by the board of
directors, cumulative preferential cash dividends at a rate of four
percent of the $1,000 liquidation preference per annum (equivalent to a
fixed annual rate of $40 per share). The Series A Preferred Stock ranks
senior to the Company's common stock, and pari passu with the Company's
Series B Preferred 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
F-30
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009, the Company has issued 2,665 shares of Series A Preferred
Stock in exchange for cash investments in the amount of $2,665,000, of
which 435 shares were issued in fiscal 2009 and 803 shares were issued
in fiscal 2008. As of May 31, 2009 the Company has chosen to defer
payment of dividends on the Series A Preferred Stock with such accrued
and unpaid dividends amounting to $224,437 through May 31, 2009.
On December 30, 2005, through a private placement, the Company issued
3,980 shares of 8% Non-Voting Series B Convertible Preferred Stock
(Series B Preferred Stock), along with 19,900,000 warrants for common
shares of Company stock as additional consideration, for a cash
investment in the amount of $2,985,000; and issued 4,890.599 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. The Company has not issued any additional shares of
Series B Preferred Stock during this fiscal year. During fiscal year
2008, 25 shares of Series B Preferred Stock and 25,000 shares of the
Company's common stock were issued as additional consideration, in
exchange for cash investments of $25,000. As of May 31, 2009 the
Company has chosen to defer payment of dividends on the Series B
Preferred Stock with such accrued and unpaid dividends amounting to
$2,767,946 through May 31, 2009.
F-31
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.
NOTE K - STOCK WARRANTS
At May 31, 2009, the Company had issued and outstanding warrants to
purchase 13,071,564 shares of common stock.
F-32
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
$449,972.
NOTE L-STOCK-BASED COMPENSATION
On October 12, 2005, the board of directors adopted its 2005 Stock
Incentive Plan (the "Plan") to allow the Company to make awards of
stock options as part of the Company's compensation to key employees,
non-employee directors, contractors and consultants. The Plan was
approved by the stockholders on December 8, 2005. The aggregate number
of shares of Common Stock issuable under all awards under the Plan is
35,000,000. No awards may be granted under the Plan after December 8,
2015.
On May 25, 2006, the compensation committee of the board of directors
awarded 23,400,000 of incentive stock options to acquire common shares
at an exercise price of seven cents ($.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. As of May 31,
2009, the awarded options had been reduced to 21,300,000 due to changes
in employment status for two employees. Subsequent to May 31, 2009,
1,500,000 vested options expired, leaving 19,800,000 options awarded,
of which 17,300,000 are vested.
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 ($.04) per share, of
which 450,000 shares vested immediately and the remaining 1,650,000
options vesting over the next three years ending in December 2009. The
term of the options is five years and expires in December 2011. As of
May 31, 2009, the awarded options had been reduced to 1,800,000 due to
changes in employment status. As of May 31, 2009, 1,550,000 in options
have vested.
Subsequent to May 31, 2009, on June 30, 2009 the compensation committee
of the board of directors awarded 10,000,000 of incentive stock options
to acquire common shares at an exercise price of four cents ($.04) per
share, of which 4,700,000 shares vested immediately and the remaining
5,300,000 options vesting over the next three years ending in June
2011. The term of the options is five years and expires in June 2014.
The following table summarizes option activity under the Plan for the
fiscal year ended May 31, 2009.
F-33
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2009
-------------------------------------------------------------
Number Weighted-Avg.
Weighted-Avg. Of Shares Remaining Aggregate
Exercise Under Life Intrinsic
Price Option (Years) Value
-------------- ----------------- ----------- --------------
Balance at June 1, 2008 $ .06649 26,500,000
Options granted - -
Options exercised - -
Options canceled/expired .06625 2,400,000
-------------- ----------------
Balance, May 31, 2009 $ .06652 24,100,000
============== ================
Exercisable at May 31, 2009 $ .06642 21,350,000 2.00 $ -
============== ================
Expected to vest $ .06727 2,750,000 2.04 $ -
============== ================
The following table summarizes activity and pricing information for the
non- vested shares under the Plan for the year ended May 31, 2009.
2009
-------------------------------
Weighted-Average Number
Grant Date Of
Fair Value Non-vested
Shares
---------------- --------------
Balance at June 1, 2008
$ .01804 8,916,666
Options granted - -
Options vested .01804 ( 5,166,666)
Options canceled/expired .01810 ( 1,000,000)
---------------- --------------
Balance at May 31, 2009 $ .01818 2,750,000
================ ==============
No options were granted in fiscal 2009 or 2008. There were no options
exercised in fiscal 2009 or 2008. The total fair value of shares vested
amounted to approximately $93,000 and $101,000 in fiscal 2009 and 2008
respectively.
Stock-based compensation expense attributable to such awards amounted
to approximately $11,000 and $99,000 in fiscal years ended May 31, 2009
and 2008 respectively. Unrecognized compensation expense related to
non-vested awards at May 31, 2009 was approximately $8,200 and is
expected to be recognized over the next year.
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.
F-34
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,
2009, the Company had operating loss carry forwards of approximately
$15 million. These carry forwards begin expiring in 2015 and, as a
result of the ownership change resulting from the 2001 acquisitions of
FSI and Jacobs, the utilization of approximately $6.4 million of the
operating loss carry forwards are substantially limited.
The Company has fully reserved the $5.1 million tax benefit of the
operating loss carry forward, by a valuation allowance of the same
amount, because the likelihood of realization of the tax benefit cannot
be determined.
NOTE N-STOCKHOLDERS EQUITY
In fiscal 2009, the Company issued 595,000 shares of the Company's
common stock as additional consideration in connection with short-term
and demand borrowing arrangements totaling $435,000. The shares were
valued at approximately $.024761 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 $14,733.
In fiscal 2009, the Company issued 3,115,581 shares of the Company's
common stock in connection with the second round of bridge-financing
arrangements (see Note H) totaling $940,000. The shares were valued at
approximately $.009027 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 $28,126.
In fiscal 2009, the Company issued 5,010,640 shares of the Company's
common stock in connection with the semi-annual issuance of shares
under terms of the bridge-financing arrangement. The shares were valued
at approximately $.004350 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 $21,796.
In fiscal 2009, the Company issued 4,870,449 shares of the Company's
common stock in connection with the semi-annual issuance of shares
under terms of the bridge-financing arrangement. The shares were valued
at approximately $.008498 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 $41,389.
In fiscal 2008, the Company 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
F-35
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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, 2009 and 2008 and net income for the
Company's insurance subsidiary the calendar year ended December 31,
2008 and 2007 and five-month periods ended May 31, 2009 and 2008 are as
follows:
F-36
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Statutory Surplus May 31, 2009 $ 5,439,269
Statutory Surplus May 31, 2008 4,564,352
Net Income Calendar year 2008 177,018
Net Income Calendar year 2007 54,173
Net Income Five-month period 2009 76,395
Net Income Five-month period 2008 108,957
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 AND CONTINGENCIES
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 Insurance. 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.
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. for a purchase price of $3,400,000, less
certain indebtedness. The Company made a $50,000 deposit that was to be
applied toward the purchase price. RSH and subsidiaries perform surety
underwriting services and service surety bonding programs. The
acquisition was expected to add a substantial depth of experience and
expertise to the Company.
F-37
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 made a $75,000 deposit that was to
be applied toward the purchase price. 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 of Unione were 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 were and are contingent upon the Company's obtaining necessary
financing. Based on the dislocation in the capital markets that began
in the fall of 2007 and has continued through the present, the Company
has not been able to obtain the financing necessary to complete the
acquisitions of RSH and Unione. Each acquisition agreement as become
terminable by the parties by reason of the Company's inability to meet
the financing conditions within the time frames provided in the
acquisition agreements. The Company has released its $50,000 purchase
money deposit to the shareholders of RSH. NICO continues to hold the
Company's $75,000 deposit made with respect to the Unione acquisition.
Neither agreement has been formally terminated.
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 October 31, 2008. 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.
F-38
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $3,905
each month.
The Company leases an apartment for corporate use that has a remaining
term of 6 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 $180 per
month. The Company has options to extend the leasehold arrangement
through October 2026 and also has a right to cancel the lease at any
time upon sixty (60) days written notice.
Rental expense for these lease commitments totaled approximately
$66,092 and $65,650 during 2009 and 2008.
Minimum future lease payments under non-cancelable operating leases
having remaining terms in excess of one year as of May 31, 2009 are:
Fiscal year 2009-2010 11,839
Fiscal year 2010-2011 6,944
Fiscal year 2011-2012 6,944
------------
Total $ 25,727
============
CONTINGENCIES
On May 15, 2009, the Company sold shares of Series A Preferred Stock in
conjunction with the sale of surety bonds. As of September 14th, the
Company has not transferred the monies received from the sale of stock
to FSC to be applied towards its surplus. The amount of Preferred A
Stock was $176,000. Pursuant to the terms of the Consent Order dated
December 23, 2005 (Consent Order) and the Amended Consent Order dated
June 8, 2007 (Amended Consent Order), each with the West Virginia
Insurance Commissioner (Commissioner) , all money received from the
sale of Series A Preferred Stock shall be placed into the surplus
accounts of FSC. The monies received from the above described
transaction were not placed with FSC but were retained by the Company.
This action is viewed by the Commissioner to be a violation of the
Consent Order and Amended Consent Order. Under the terms of the Amended
Consent Order any knowing or intentional violation of the conditions of
the Order shall constitute grounds for the Commissioner to issue a
Confidential Order immediately suspending FSC from doing business in
West Virginia. FSC advised the Commissioner of this violation.
Presently the Commissioner has advised FSC that no action will be taken
by the Commissioner with respect to this violation. FSC has submitted a
plan to correct this violation as expeditiously as possible, and the
Company has agreed with this plan.
F-39
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The carrying values and fair values of the Company's financial
instruments at May 31, 2009 and 2008 are as follows:
2009 2008
------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------------ ----------------- -----------------
ASSETS
Bonds available for sale $ 908,766 $ 908,766 $ 105,866 $ 105,866
Mortgage-backed securities held to maturity 5,085,300 5,157,936 3,826,688 3,800,909
Cash and short-term investments 467,791 467,791
1,224,696 1,224,696
Premiums and other receivables 89,308 89,308 67,245 67,245
Equity securities (included in other assets) 7,862 7,862 24,829 24,829
LIABILITIES
Notes payable 4,052,872 4,052,872 2,968,016 2,968,016
Accounts payable and advance premiums 268,066 268,066 299,585 299,585
Accrued expenses and other liabilities
1,019,665 1,019,665 515,916 515,916
F-40
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2009 the Company's investment securities of approximately
$6,382,000 are solely comprised of mortgage-backed securities and
defeased municipal bonds that are guaranteed by U.S government
agencies, and money-market mutual funds that invest principally in
obligations issued by the U.S government, its agencies or
instrumentalities. Such instruments are generally considered to be of
the highest credit quality investment available.
The Company transacts the majority of its business with 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 $250,000 federally insured limit. Management believes these
financial institutions are financially sound. With respect to the
financial institutions providing brokerage and custodial services,
amounts on deposit are invested in money market funds that invest
principally in obligations issued by the U.S government, its agencies
or instrumentalities.
Management believes that substantially all receivables are collectible,
and therefore has not established an allowance for estimated
uncollectible accounts.
CONCENTRATION IN PRODUCTS, MARKETS AND CUSTOMERS
The Company's insurance subsidiary currently writes only the surety
line of business, is licensed to write surety only in West Virginia and
Ohio and has focused its primary efforts towards coal permit bonds.
Such business, including investment advisory fees from managed
collateral accounts, accounted for approximately 65% and 58% of the
Company's fiscal 2009 and 2008 revenues, respectively. Furthermore, the
Company provides surety bonds to companies that share common ownership
interests that constitute 52% and 48% of the Company's fiscal 2009 and
2008 revenues, respectively, as follows:
2009 2008
------------------------------------------------------------------------
Investment Investment
Surety Advisory Surety Advisory
Premium Fees Premium Fees
------------------ ----------------- ----------------- -----------------
Customer group # 1 $ 259,000 $ 71,000 $ 270,000 $ 80,000
Customer group # 2 248,000 40,000 96,000 11,000
------------------ ----------------- ----------------- -----------------
TOTAL 507,000 111,000 366,000 91,000
================== ================= ================= =================
F-41
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
YEAR ENDED
-------------------------------------
INDUSTRY SEGMENT MAY 31, 2009 MAY 31, 2008
- ---------------- ------------------- -----------------
Investment advisory $ 232,853 $ 263,250
Surety insurance 961,480 694,336
Corporate 851 9,693
------------------- -----------------
Total revenues $ 1,195,184 $ 967,279
=================== =================
OPERATING INCOME (LOSS):
Investment advisory $ (136,830) $ (200,009)
Surety insurance 313,556 92,368
Corporate (1,625,102) (1,753,984)
------------------- -----------------
Total operating income (loss) $ (1,448,376) $ (1,861,625)
=================== =================
IDENTIFIABLE ASSETS:
Investment advisory $ 49,752 $ 69,112
Surety insurance 6,828,127 5,420,727
Corporate 107,345 287,927
------------------- -----------------
Total assets $ 6,985,224 $ 5,777,766
=================== =================
CAPITAL ACQUISITIONS:
Investment advisory $ - $ -
Surety insurance - 13,093
Corporate 6,563 1,510
------------------- -----------------
Total capital acquisitions $ 6,563 $ 14,603
=================== =================
DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
Investment advisory $ 50 $ 45
Surety insurance 7,513 3,311
Corporate 4,999 5,023
------------------- -----------------
Total Depreciation $ 12,562 $ 8,379
=================== =================
INTEREST EXPENSE:
Investment advisory $ 1,023 $ 13,892
Surety insurance 23 -
Corporate 603,999 465,403
------------------- -----------------
Total interest expense $ 605,045 $ 479,295
=================== =================
F-42
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 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.
During 2009, advances to the Company from Mr. Jacobs amounted to
$456,858 and repayments amounted to $454,777. As of May 31, 2009 the
balance due Mr. Jacobs was $3,081.
During the years ended May 31, 2009 and May 31, 2008, a company owned
by a board member provided consulting services. This company provided
services totalling $62,531 and $102,488 in 2009 and 2008. Amounts owed
to this company at year end are treated as related party payables in
the amounts $75,009 and $60,567 at May 31, 2009 and 2008.
NOTE U - REINSURANCE
On March 23, 2009, the Company announced that FSC has entered into a
reinsurance agreement with Lloyd's of London ("Reinsurer") for its coal
reclamation surety bonding programs that took effect April 1, 2009. The
reinsurance agreement is an excess of loss contract which protects the
Company against losses up to certain limits over stipulated amounts,
has an initial term of three years and can be terminated by either
party by written notice of at least 90 days prior to any April 1. The
contract calls for a minimum premium to be paid to the Reinsurer of
$490,000 per year. At May 31, 2009 The Company had prepaid reinsurance
premiums of $87,114 and ceded reinsurance payable of $92,173.
The Company limits the maximum net loss that can arise from large risks
by reinsuring (ceding) certain levels of risks with reinsurers. The
Company's reinsurer is comprised of five syndicates. Ceded reinsurance
is treated as the risk and liability of the assuming companies. The
Company cedes insurance to other companies and these reinsurance
contracts do not relieve the Company from its obligations to
policyholders.
F-43
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The effect of reinsurance on premiums written and earned for fiscal
2009 is as follows:
2009 2009
Written Earned
Direct $ 905,519 $ 651,933
Ceded $ 92,174 $ 5,060
----------- -----------
Net $ 813,345 $ 646,873
=========== ===========
NOTE V - EVENTS SUBSEQUENT TO MAY 31, 2009
Subsequent events have been evaluated through September 14, 2009, the
date these financial statements were issued. Subsequent to May 31,
2009, the Company obtained borrowings of $157,500 from individuals to
fund ongoing operation and made repayments of $32,000. Such borrowings
were obtained under demand notes bearing interest at the rate of 10%.
Additionally, the Company borrowed $250,000 at the rate of 10%, which
matures on December 31, 2009. This borrowing included the issuance of
500,000 shares of its common stock as additional consideration.
Additionally, advances to the Company from its largest shareholder and
CEO amounting to $100,025, with repayments totaling $75,300.
On June 5, 2009 the Company asked the Holders of the Bridge loans to
forbear from exercising their rights and remedies arising from the
Acknowledged Events of Default and reached agreement. The Holders
agreed that the Company may satisfy its obligation to make the Initial
Amortization Payments by making 8 consecutive quarterly payments of
$67,185 each, commencing September 10, 2009, and within a 14 day grace
period after the due date, and continuing on the payment dates
prescribed by the Amortization Schedule for the Promissory Notes and
ending on June 10, 2011 (collectively, the "PAYMENTS"), it being
understood that the Payments shall result in the payment of the
principal of and interest on the unpaid portion of the Initial
Amortization Payments at the rate of 10% per annum from and after the
originally scheduled payment dates.
On September 10, 2009, in accordance with the Bridge financing
agreement, the Company became obligated to issue in the aggregate
5,354,642 shares of its common stock to the holders of such notes.
Subsequent to May 31, 2009, warrants totaling 1,795,273 were exercised
for cash and the issuance 1,795,273 common shares of the Company.
On June 30, 2009, the Board of Directors of the Registrant voted to
expand the number of Directors comprising the Board from three to five.
The Board then elected two new members to fill the vacancies created.
The new Directors so elected are Mario J. Marra and Bradley W.
Tuckwiller. Each will serve until the next meeting of the shareholders
of the Registrant at which there is an election of members of the Board
of Directors (and until his successor is elected and qualified) and, if
nominated, may stand for reelection.
On June 30, 2009, 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
$251,458 and $3,011,518 as of June 30, 2009.
F-44
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES SCHEDULE I
- ------------------------------------------------------------------------------------------------------------------------------------
AMOUNT
AT WHICH
AT MAY 31, 2009 SHOWN IN THE
COST* VALUE BALANCE SHEET
---------------- ---------------- ------------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ - $ - $ -
States, municipalities, and political subdivisions 352,816 381,386 381,386
---------------- ---------------- ------------------
Total fixed maturities 352,816 381,386 381,386
Equity securities:
- - -
---------------- ---------------- ------------------
Total equity securities - - -
Mortgage-backed securities guaranteed by U.S. government agency 5,599,339 5,685,317 5,612,681
Short-term investments, at cost (approximates market value) 387,753 387,753 387,753
---------------- ---------------- ------------------
Total investments $ 6,339,908 $ 6,454,456 $ 6,381,820
================ ================ ==================
* Original cost of equity securities and, as to fixed maturities, original cost
reduced by repayments and adjusted for amortization of premiums and accrual of
discounts
F-45
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- ------------------------------------------------------------------------------------------------------------
BALANCE SHEETS - PARENT COMPANY ONLY
MAY 31, 2009 MAY 31, 2008
------------ ------------
Assets:
Cash $ (2,028) $ 12,385
Accounts receivable from affiliates - 2,740
Prepaid expense and other assets 24,822 264,816
Furniture and equipment, net 9,551 7,987
Investment in subsidiaries, equity method 4,661,611 3,807,434
Due from affiliates, net 989,836 772,966
------------ ------------
Total assets $ 5,683,792 $ 4,868,328
============ ============
LIABILITIES:
Accounts payable $ 6,460 $ 8,339
Accrued expenses and professional fees 365,859 289,584
Related party payable 67,275 52,192
Notes payable 4,049,791 2,967,017
Related party notes payable 2,281 1,000
Due to affiliates 176,000 -
Other liabilities 361,538 86,289
------------ ------------
Total liabilities 5,029,204 3,404,421
MANDATORILY REDEEMABLE PREFERRED STOCK 14,290,109 12,245,799
STOCKHOLDERS EQUITY:
Common stock 17,968 16,609
Additional paid in capital 2,626,236 2,423,537
Accumulated deficit (16,279,725) (13,222,038)
------------ ------------
Total stockholders equity (deficit) (13,635,521) (10,781,892)
------------ ------------
Total liabilities and stockholders equity $ 5,683,792 $ 4,868,328
============ ============
F-46
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- ------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2009 2008
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,448,376) $(1,861,625)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Equity in undistributed net loss of consolidated subsidiaries (95,177) (7,829)
Stock option compensation expense 11,462 98,972
Stock issued in connection with financing arrangements 231,554 242,003
Depreciation 4,999 5,023
Loss on disposal of equipment - 684
Change in other assets, accounts payable and accrued expense, net 568,504 (398,549)
------------- -------------
TOTAL CASH USED IN OPERATIONS (727,034) (1,921,321)
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to insurance company subsidiary (759,000) (804,000)
Funds provided to affiliates for operations (40,871) (659,377)
Purchase of furniture and equipment (6,563) (1,510)
------------- -------------
TOTAL CASH USED IN INVESTING ACTIVITIES (806,434) (1,464,887)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable preferred stock 435,000 828,000
Proceeds from exercise of stock warrants - 335
Redemption of mandatorily redeemable preferred stock - -
Proceeds from borrowings 1,402,500 2,842,000
Repayment of borrowings (319,725) (269,357)
Proceeds from short-term borrowings from related party 456,057 132,200
Repayment of short-term borrowings to related party (454,777) (146,963)
------------- -------------
TOTAL CASH PROVIDED BY FINANCING ACTIVITIES 1,519,055 3,386,215
------------- -------------
CHANGE IN CASH (14,413) 7
Cash at beginning of year 12,385 12,378
------------- -------------
Cash at end of year $ (2,028) $ 12,385
============= =============
F-47
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INSURANCE INFORMATION
AS OF MAY 31, 2009 AND 2008 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
- -------- ------------ ------------ ---------- --------- --------- ---------- ---------- ------------ --------- -----------
2009
Surety $ 143,173 $ 432,658 $ 530,794 $ - $ 646,873 $ 288,747 $ 186,007 $ 153,263 $ - $ 813,345
- ------------------------------------------------------------------------------------------------------------------------------------
2008
Surety $ 75,940 $ 246,651 $ 277,208 $ - $ 453,478 $ 225,461 $ 135,867 $ 126,386 $ - $ 586,498
F-48
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INSURANCE INFORMATION - REINSURANCE
AS OF MAY 31, 2009 AND 2008 AND FOR THE YEARS THEN ENDED SCHEDULE IV
- ------------------------------------------------------------------------------------------------------------------------------------
CEDED TO OTHER
2009 GROSS AMOUNT COMPANIES NET AMOUNT
Premiums written:
Property and casualty insurance $ 905,519 $ 92,174 $ 813,345
--------------------- ------------------- -------------------
Total premiums written $ 905,519 $ 92,174 $ 813,345
===================== =================== ===================
Premiums earned:
Property and casualty insurance $ 651,933 $ 5,060 $ 646,873
--------------------- ------------------- -------------------
Total premiums earned $ 651,933 $ 5,060 $ 646,873
===================== =================== ===================
There were no premiums ceded to other companies for the year ended May 31, 2008.
F-49
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
AS OF MAY 31, 2009 AND 2008 AND FOR THE YEARS THEN ENDED SCHEDULE VI
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
RESERVE FOR
LOSSES DISCOUNT CLAIMS, LOSSES AMORTIZATION
AND IF ANY, AND SETTLEMENT OF
DEFERRED LOSS EXPENSES, DEDUCTED EXPENSES IN- DEFERRED PAID CLAIMS
POLICY FUTURE IN NET CURRED RELATED TO POLICY AND CLAIMS NET
AFFILIATION ACQUISITION POLICY COLUMN UNEARNED PREMIUM INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
WITH REGISTRANT COSTS CLAIMS C PREMIUMS REVENUE INCOME YEAR YEARS COSTS EXPENSES WRITTEN
- --------------- ----------- ------------- --------- --------- -------- ---------- ----------------- ----------- ----------- --------
2009
Consolidated
property-
casualty
entities $ 143,173 $ 432,658 $ - $ 530,794 $ 646,873 $ 288,747 $ 186,007 $ - $ 153,263 $ - $ 813,345
- ------------------------------------------------------------------------------------------------------------------------------------
2008
Consolidated
property-
casualty
entities $ 75,940 $ 246,651 $ - $ 277,208 $ 453,478 $ 225,461 $ 135,867 $ - $ 126,386 $ - $ 586,498
F-50
(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 26, 2008
(12) Incorporated by reference to the Company's Current Report on Form 8-K
dated November 20, 2008
(13) Incorporated by reference to the Company's Current Report on Form 8-K
dated March 23, 2009
(14) Incorporated by reference to the Company's Current Report on Form 8-K
dated June 16, 2009
(15) Incorporated by reference to the Company's Current Report on Form 8-K
dated July 7, 2009
32
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JACOBS FINANCIAL GROUP, INC.
Dated: September 14, 2009 By: /s/ John M. Jacobs
-------------------------------------------
John M. Jacobs
President and CEO
Director
33
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 14, 2009 By:/s/John M. Jacobs
------------------------ ----------------------------
John M. Jacobs
President and CEO
Director
Dated: September 14, 2009 By:/s/ John M. Jacobs
------------------------ ----------------------------
John M. Jacobs
Chief Financial Officer
Dated: September 14, 2009 By:/s/ Mario J. Marra
------------------------ ----------------------------
Mario J. Marra
Director
Dated: September 14, 2009 By:/s/ C. David Thomas
------------------------ ----------------------------
C. David Thomas
Director
Dated: September 14, 2009 By:/s/ Frederick E. Ferguson
------------------------ ----------------------------
Frederick E. Ferguson
Director
Dated: September 14, 2009 By:/s/ Bradley W. Tuckwiller
------------------------ ----------------------------
Bradley W. Tuckwiller
Director
34