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, 2010
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 84-0922335
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
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300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 343-8171
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Securities registered under Section 12 (b) of the Exchange Act:
NONE
Securities registered under Section 12 (g) of the Exchange Act:
COMMON STOCK $.0001 PAR VALUE
Indicate by check mark if registrant is a well-known seasoned insurer, as
defined in rule 405 of the Securities Act.
Yes[ ] No[X]
Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes[ ] No[X]
Indicate by a check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the 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, 2009: $849,861 (207,283,086 shares at $.0041 /
share)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 222,072,297 shares of common
stock as of September 13, 2010.
TABLE OF CONTENTS
Page
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PART I
Item 1 Business 4
Item 1A Risk Factors 5
Item 2 Properties 5
Item 3 Legal Proceedings 5
Item 4 Submission of Matters to a Vote of Security Holders 5
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities 6
Item 6 Selected Financial Data 8
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 7A Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 21
Item 9A(T) Controls and Procedures 21
Item 9B Other Information 22
PART III
Item 10 Directors, Executive Officers and Corporate Governance 23
Item 11 Executive Compensation 25
Item 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters 28
Item 13 Certain Relationships and Related Transactions and Director
Independence 31
Item 14 Principal Accounting Fees and Services 32
PART IV
Item 15 Exhibits, Financial Statement Schedules 33
PART I
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Item 1. BUSINESS
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The predecessor of Jacobs Financial Group, Inc. (the "Registrant", "JFG" or the
"Company"), NELX, Inc., was incorporated in the State of Kansas in March 1983 as
Nelson Exploration, Inc. In October 1993 the Company changed its name to NELX,
Inc. On or about December 29, 2005, NELX was merged with and into its
newly-formed wholly-owned subsidiary, JFG, a Delaware corporation. JFG survived
the merger as the Registrant. The merger effected a change in the Registrant's
name, a change in the state of incorporation of the Registrant from Kansas to
Delaware, and amendments to the Articles of Incorporation and Bylaws of the
Registrant. The Company holds four wholly owned subsidiaries, FS Investments,
Inc. ("FSI"), Jacobs & Company ("Jacobs & Co."), First Surety Corporation
("FSC") and Crystal Mountain Water, Inc. ("CMW").
FSI, incorporated in 1997 in West Virginia, is a holding company that was
organized to develop surety business through the formation or acquisition of
subsidiaries engaged in the issuance of surety bonds collateralized by
investment accounts that are professionally managed by Jacobs & Co. Through its
wholly-owned subsidiary, Triangle Surety Agency, Inc. ("Triangle Surety" or
"TSA"), FSI is actively engaged in the placement with insurance companies of
surety bonds, with an emphasis on clients engaged in regulated industries.
Jacobs & Co., incorporated in 1988 in West Virginia, is a 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. In June 2001, the Jacobs & Company
Mutual Fund (the "Fund") was organized as a series of the Advisors Series Trust.
On June 27, 2005, the Fund was reorganized as a series of Northern Lights Fund
Trust. The Fund's assets were liquidated in November 2009 and distribution of
proceeds to the Fund's shareholders was made on December 1, 2009.
On December 31, 2005 the Company acquired the former West Virginia Fire and
Casualty Company (WVFC), subsequently renamed First Surety Corporation (FSC),
from The Celina Mutual Insurance Company (Celina). The acquisition consisted of
the purchase of marketable investments and insurance licenses and did not
include any existing policies or customer base as the insurance lines being
offered by WVFC were not insurance lines that new ownership intended to pursue.
FSC is a West Virginia domiciled property and casualty company with licenses
(multi-line) in West Virginia, Indiana and Ohio, targeting primarily coal and
oil & gas industry surety markets in the Eastern United States. In 2006, the
Company was licensed for the surety line of business in West Virginia. In 2008,
the Company's license for surety was expanded to include Ohio, however no
policies were written in Ohio in 2008.
CMW has an undeveloped leasehold interest in a mineral water spring located near
Hot Springs, Arkansas.
The Company is headquartered in Charleston, West Virginia, and through its
wholly-owned subsidiaries, employs a total of seven (7) full-time employees.
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Item 1A.RISK FACTORS
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As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
Item 2. PROPERTIES
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Through its wholly-owned subsidiary, CMW, the Company has an undeveloped
leasehold interest in a mineral water spring located near Hot Springs, Arkansas.
Under this leasehold arrangement, CMW is obligated for minimum lease payments in
the amount of approximately $180 per month with automatic options to extend the
leasehold through October 2026. CMW has the right to cancel the lease upon sixty
(60) days written notice at any time. The property is presently not being
actively explored or developed. During the 2002 fiscal year, management
evaluated the lease and determined the development was not currently feasible.
Accordingly, the Company recorded an impairment of $116,661 to its investment in
the lease. Opportunities will continue to be explored as they arise with respect
to the development or sale of the leasehold interest. The stock of CMW has been
pledged to a group of lenders as collateral (See Item 7 "Bridge-financing,
Commitments and Material Agreements").
Item 3. LEGAL PROCEEDINGS
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None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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Three new members have been appointed to the JFG Board of Directors since the
last annual meeting, held in December 2005, and will serve until the next called
meeting of shareholders which is not yet scheduled. Mr. Fred Ferguson, a board
member of the Company and FSC, died on May 21, 2010. The vacancy on the
Company's board remains unfilled.
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PART II
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Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES.
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The Company's common stock is traded in the over-the-counter market under the
symbol JFGI (OTC Bulletin Board Symbol). The table below sets forth the high and
low price information for the Company's common stock for the periods indicated.
Such prices are inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions.
HIGH LOW
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FISCAL YEAR ENDED MAY 31, 2010
4th Quarter .012 .003
3rd Quarter .015 .005
2nd Quarter .026 .006
1st Quarter .04 .003
FISCAL YEAR ENDED MAY 31, 2009
4th Quarter .045 .001
3rd Quarter .01 .003
2nd Quarter .01 .003
1st Quarter .01 .003
As of May 31, 2010, there were approximately 899 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.
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As of May 31, 2010, 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
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Number of Shares to be Issued Weighted-Average Number of Shares
Upon Exercise of Exercise Price of Remaining Available
Outstanding Options Outstanding Options For Future Issuance
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32,600,000 .05822 2,400,000
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There are no other equity compensation plans not approved by stockholders of the
Company.
UNREGISTERED SALES OF EQUITY SECURITIES
In the year ended May 31, 2010, 10 shares of Series A Preferred Stock were
issued pursuant to ongoing bonding programs of FSC in exchange for cash in the
amount of $10,000.
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.
In the year ended May 31, 2010, 6,804.936 shares of Series C Preferred Stock and
13,609,872 Common shares were issued in a private placement to holders of the
Company's Series B Preferred Stock that elected to exchange their Series B
Preferred stock.
The Certificate of Designations, Powers, Preferences and Rights of Series C
Preferred Stock adopted by the Board of Directors of the Company on October 29,
2009 is set forth as Exhibit 4.3.
In the year ended May 31, 2010, 1,675,000 common shares were issued as
additional consideration to various lenders in private placements pursuant to
short term borrowings. 2,963,668 common shares were issued to holders exercising
the company's warrants. 16,532,559 common shares were issued to the Bridge
lenders. Subsequent to May 31, 2010, 1,395,000 common shares have been issued in
private placements to various individuals pursuant to short term borrowings and
6,213,285 common shares were issued to the Bridge lenders.
The Registrant's Common Shares are issued under the restrictions of Rule 144 and
bear a legend to that effect.
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.
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Item 6. SELECTED FINANCIAL DATA
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As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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During fiscal 2010, the Company has focused its primary efforts on the
development and marketing of its surety business in West Virginia and Ohio,
arranging reinsurance and other potential strategic relationships that will
accelerate the progression of the Company's business plan, and, raising
additional capital to increase the capital base of its insurance subsidiary,
First Surety Corporation (FSC), to facilitate entry into other state markets.
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2010
RESULTS OF OPERATIONS
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) of $2,713,193 in fiscal 2010 as
compared with a loss (after accretion of mandatorily redeemable convertible
preferred stock, including accrued dividends) of $3,057,687 in fiscal 2009.
While total revenues increased from approximately $1,194,000 in fiscal 2009 to
approximately $1,372,000 in fiscal 2010, total operating expenses decreased from
approximately $2,039,000 in fiscal 2009 to approximately $1,830,000 in fiscal
2010, resulting in a decrease in the loss from operations of approximately
$386,000.
The increase in revenues is largely attributable to new business acquired by FSC
and increased investment holdings and the gain on sales of investments of FSC.
The decrease in expenses is attributable to decreased general and administrative
expense related to reduction in professional legal fees incurred in the
Company's pending acquisition agreements and ongoing efforts to raise additional
capital to expand its business and penetrate new markets.
Interest expense increased from approximately $605,000 in fiscal 2009 to
approximately $957,000 in fiscal 2010. This was mainly due to additional
borrowings incurred in relation to the Company's efforts to raise additional
capital financing and to provide financing of current operations, as well as the
increased expense of common shares issued in connection with bridge loans and
other financing arrangements, and the higher interest rate on bridge loans due
to the forbearance agreement.
In the twelve-month period ending May 31, 2010, the Company, upon advice of
legal counsel, removed certain dormant accounts payable in the aggregate amount
of $200,240 based upon the conclusion that none of the accounts represented an
obligation that is legally enforceable against the Company. Such removal was
recorded as a gain on debt extinguishment.
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CAPITAL RESOURCES AND FINANCIAL CONDITION
MANDATORILY REDEEMABLE PREFERRED STOCK
In conjunction with the acquisition of FSC at December 31, 2005, a restructuring
of the Company's financing was accomplished through the private placement of 350
shares of Series A Preferred stock and 3,980 shares of Series B Preferred stock,
each accompanied by warrants to acquire common stock of the Company in exchange
for cash totaling $3,335,000. $2,860,000 was used in the acquisition and funding
of the insurance subsidiary, with the remaining funds used to pay expenses
attributable to the acquisition and the funding of on-going operations.
Additionally, approximately $3,668,000 of indebtedness of the Company was
converted into preferred stock and warrants reducing the Company's borrowings
under short-term financing arrangements to approximately $167,000 as of December
30, 2005.
The Series A designation was designed for issuance to principals desiring surety
bonds under FSC's partially collateralized bonding programs. As designed,
proceeds from the sale of Series A preferred stock is down-streamed to FSC to
increase its capital and insurance capacity, although to the extent that
proceeds from the sale of Series B preferred shares was used in the initial
acquisition and funding of FSC, the Company was allowed to use such proceeds to
redeem Series B preferred stock (Company option to redeem) or for funding of
on-going operations. Effective June 1, 2007, the Company agreed to the
requirement of the West Virginia Insurance Department to downstream all future
proceeds from sales of Series A preferred stock in order to increase capital and
reserves of the insurance subsidiary to more substantial levels.
The Series A designation contains a conditional redemption feature providing for
the redemption of the Series A shares at any time after the seventh (7th)
anniversary of the Issue Date, provided that the principal no longer requires
surety bonds issued by FSC. 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
choosing to exercise 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.
As an inducement to the initial preferred stock shareholders, warrants to
purchase 45,402,996 shares of common stock at an exercise price of one-tenth of
one cent ($.001) per share were issued with a five-year expiration period. Such
warrants were valued at approximately $533,000 using the Black-Scholes pricing
model. Additionally, the Series B preferred shares were issued at a twenty-five
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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.
In November 2009, 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 proposed a recapitalization to assist in stabilizing the
financial position of the Company. The Board deemed it advisable to designate a
Series C Preferred Stock, with 10,000 authorized shares. The Recapitalization
consisted of the exchange of 6,804.936 Series B Shares for a combination of
Series C Shares and Common Stock Shares. For each Series B Share, the
participating holder received (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock. The accumulated dividend rights and preferences associated
with the Series B Shares transferred undiminished to the corresponding Series C
Shares. This exchange amounted to $6,269,051 of carrying value of Series B stock
being exchanged for Series C and Common Stock. 13,609,872 shares of Common Stock
were issued to the Series C Stock holders at the rate of 2,000 Common shares for
each exchanged Series B Stock, with the related cost associated with the Common
issuance offsetting the Series C carrying value by $265,120. The shares were
valued at approximately $.01948 per share based on the average quoted closing
price of the Company's stock for the 20-day period proceeding the date of the
transaction. Series C stock may be redeemed by the Company but does not have a
fixed maturity date and is considered permanent equity. Holders of over 70% of
the outstanding Series B Preferred Shares elected to participate in the
recapitalization. The carrying value of the Series B Preferred Shares that did
not convert are listed in the Liabilities section of the Balance Sheet, and
therefore the accretion and dividends associated with the Series B stock after
November 30, 2009 are deductions from net income. The remaining Series B shares
are continuing to be accreted from carrying value to the face amount for the 5
year period from the date of issuance. Series C stock has no accretion. The
recorded values of the Series A preferred stock is 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 Series A designation is entitled to receive cumulative dividends at the rate
of 4.00% per annum and the Series B and Series C designations are entitled to
receive cumulative dividends at the rate of 8.00% per annum, with the Series A,
B and C designations having equal ranking and preference as to dividends and
liquidation rights and in priority to the Company's common stockholders. The
accrued (but undeclared) dividends associated with the Series C exchange
amounted to $2,295,624 and are included in the total amount exchanged for Series
C Shares.
Unlike the Series B Shares with their fixed maturity date, the Series C Shares
are permanent equity, with accruing dividends only increasing the preference
amount that must be satisfied before junior securities may participate in
dividends or on liquidation. Accordingly, the effect of the accrual of dividends
with respect to the Series C Shares on the Company's balance sheet is to
increase the aggregate claim of the Series C Shares on the equity of the
corporation and to increase the deficit in common equity, while having no effect
on the net equity of the corporation as a whole. The entitlement of the Series C
Shares to a priority in relation to junior securities with respect to dividends
and on liquidation does not create an obligation by the Company and therefore no
liability is recorded until the dividends are declared by the Board of the
Company. The Series C Shares are pari passu with the Series A Shares and Series
B Shares and no dividends or other distributions will be paid upon Common Shares
or any other class of Shares that is junior in priority to the Series C Shares
while dividends are in arrears. At this time, management has chosen to defer
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payment of dividends to the holders of the Series A, B and C Preferred Shares
until the Company has sufficient cash flow from operations to service the
obligation.
BRIDGE-FINANCING, COMMITMENTS AND MATERIAL AGREEMENTS
Of primary importance to the Company's ability to fully implement its business
plan is the expansion of that business into additional states. Regulatory
approval and licensing is required for each state where FSC seeks to conduct
business. Management found entry into additional states (as a surety) was
proving difficult without the benefit of more substantial capital and reserves
due to FSC's status as a recent entry into this market. Accordingly, management
began pursuing avenues that would provide additional capital to facilitate such
expansion.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009,
the Company obtained two rounds of bridge financing totaling an aggregate of
$3,500,000. The purpose of the financing was to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing and, in addition, to increase the capital surplus
of FSC to make possible the reactivation of FSC's surety license in the state of
Ohio. The terms of the bridge-financing arrangement provide for payment in full
upon consummation by the Company of a qualified equity offering providing net
proceeds of at least $15 million on or before September 10, 2013; and because
such a qualified equity offering was not consummated by September 10, 2008,
accrued interest-to-date was payable, and quarterly installments of principal
and interest became payable over five years commencing in December 2008. The
interest rates on such notes were fixed at 10.00%. Payments due December 2008
and March 2009 were not made by the Company as scheduled, but a forbearance
agreement was subsequently entered into with the bridge lenders on June 5, 2009,
modifying payment terms to cure the default (including increasing the interest
rate on the loans to 17%), issuing additional common stock to the loan holders,
and pledging the stock of the Company's subsidiary, CMW, as security for
repayment of the loans. The modification required the Company to pay interest of
$224,515 on june 10, 2009 and increase the quarterly payments by $67,185 (to a
total of $291,700) for eight consecutive quarters beginning September 10, 2009
to satisfy the arrearage. Although the Company has failed to make the payment
that was due September 10, 2009 and the payments that were due in the ensuing
quarters, management has remained in close contact with the bridge lenders,
providing reports regarding its efforts to refinance or otherwise repay the
bridge loans. To date, none of the bridge lenders has elected to pursue legal
remedies.
Certain equity inducements in the form of common stock of the Company were
provided under the terms of the bridge loan documents. Upon issuance of the
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.
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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, 2010, such assets
amounted to approximately $6.96 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INVESTMENTS
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during the current fiscal year, the Company
determined it may dispose of securities prior to their scheduled maturity due to
changes in interest rates, prepayments, tax and credit considerations, liquidity
or regulatory capital requirements, or other similar factors. As a result, the
Company reclassified all of its fixed income securities (bonds) and equity
securities as available-for-sale. These securities are reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reported in
stockholders' equity as a separate component of accumulated other comprehensive
income.
INSURANCE PREMIUMS
Insurance premiums are recognized as revenue ratably over the term of the
related policies in proportion to the insurance protection provided. Premium
revenues are net of amounts ceded to reinsurers. Unearned premiums represent the
portion of premiums written, before ceded reinsurance which is shown as an
asset, applicable to the unexpired terms of policies in force determined on a
pro rata basis.
Insurance premium receivables are presented net of an estimated allowance for
doubtful accounts, which is based on a periodic evaluation of the aging and
collectability of premium receivables.
DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, consisting of commissions, premium taxes and other
underwriting expenses which vary with, and are primarily related to, the
production of business, are deferred and amortized as a charge to income as the
related premiums are earned. The Company periodically tests that deferred policy
acquisition costs are recoverable based on the expected profitability embedded
in the reserve for unearned premium. If the expected profitability is less than
the balance of deferred policy acquisition costs, a charge to income is taken
and the deferred policy acquisition cost balance is reduced to the amount
determined to be recoverable. Anticipated investment income is considered in the
determination of the recoverability of deferred policy acquisition costs.
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the property and casualty licenses of
FSC in the states of West Virginia, Ohio and Indiana. Such licenses have
indefinite lives and are evaluated annually for recoverability and impairment
loss. Impairment loss, if any, is measured by estimating future cash flows
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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, 2010.
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 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, and accrued dividends on mandatorily
redeemable preferred stock and equity preferred stock) of approximately
$2,713,000 and $3,058,000 for the fiscal years ended May 31, 2010 and 2009,
respectively. Despite increased revenue and the continued decline of operating
-13-
expenses, the Company has not been able to pay certain amounts due to
professionals and others and continues to be unable to pay its preferred stock
dividend obligation, certain payroll taxes and withholdings from 2009, and to
cure its defaults in certain quarterly payments due its bridge-financing
lenders. A substantial portion of the Company's cash flow is generated by its
insurance subsidiary and is subject to certain withdrawal restrictions. While
management expects revenue growth and cash flow to increase significantly as its
business plan is fully implemented, it is anticipated that losses will continue
and the Company will be cash constrained until FSC is able to develop a
substantial book of business.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to continue FSC's expansion of market share
and to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. In fiscal 2009, the Company was able
to increase the capital of FSC and reactivate FSC's insurance license in Ohio
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
proposed a recapitalization to assist in stabilizing the financial position of
the Company. Holders of the Series B Preferred Stock were offered the
opportunity to exchange their Series B Shares for an equal number of shares of a
new series of JFG preferred stock designated as Series C Preferred Stock plus
2,000 shares of JFG Common Stock. Series C Preferred Stock is equal in priority
to the Series B Preferred Stock, is entitled to dividends at the same rate as
Series B Preferred Stock, is entitled to convert to common stock of the Company
at a conversion rate of $.10 per common share (in contrast to $1.00 per share
for Series B Preferred) and may be redeemed by the Company but does not have a
fixed maturity date and, thus, is classified as permanent equity. Holders of
over 70% of the outstanding Series B Preferred Shares elected to participate in
the recapitalization. Management believes the recapitalization will improve the
-14-
Company's prospects for engaging in a larger financing, will assist FSC as it
applies to enter other state markets, and will be an impetus to the growth of
the Company's business.
Through the sharing of resources (primarily personnel) to minimize operating
costs, the Company and its subsidiaries attempt to minimize operating expenses
and preserve resources. Although FSC is now cash flow positive, the use of its
assets and profits are restricted to its stand-alone operation by regulatory
authority 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 2010 WITH 2009
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock, and accrued dividends on mandatorily redeemable
preferred stock and equity preferred stock) of $2,713,193 in fiscal 2010 as
compared with a loss of $3,057,687 (after accretion of mandatorily redeemable
convertible preferred stock, including accrued dividends) in fiscal 2009.
REVENUES
Revenues in fiscal 2010 amounted to $1,371,783 as compared with $1,194,077 in
fiscal 2009. The increase in revenues is largely attributable to new business
acquired by FSC and increased investment holdings of FSC and gains on sales of
those investment holdings.
Revenue from the investment management segment, net of advisory referral fees,
was $262,635 in fiscal 2010 as compared with $233,297 in fiscal 2009,
representing an increase of $29,337. 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 increase in
revenues is primarily attributable to growth in individually managed funds...
Revenue from the surety insurance segment, consisting of FSC and TSA, was
$1,095,213 for fiscal 2010 as compared with $957,067 for fiscal 2009. Revenues
attributable to the insurance segment are as follows:
Year Ended May 31,
2010 2009
--------------- ---------------
Premiums and commissions $ 780,808 $ 660,222
Net investment income 273,577 288,747
Net realized investment gains 40,828 8,098
--------------- ---------------
Total $ 1,095,213 $ 957,067
=============== ===============
-15-
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. Commission income for the year ending 2010 was $11,900
compared to $13,349 for 2009. 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 2010. Gross premium written in fiscal
2010 amounted to $1,114,197 as compared to $905,519 and is reflective of the
growth experienced in this segment of the business for the comparable periods.
However, net premium written (written premium less deductions ceded reinsurance)
in fiscal 2010 amounted to $728,938 as compared with $813,345 in fiscal 2009,
due to a full year of ceded premium in 2010 compared to 2 months in 2009.
Commission income earned for the placement of bonds with outside insurers has
remained relatively stagnant.
FSC's investment holdings in fiscal 2010 averaged $6.553 million as compared
with $5.986 million for fiscal 2009, with investment yields decreasing slightly
from 5.0% to 4.1%.
EXPENSES
Incurred policy losses represent the provision for loss and loss adjustment
expense for "incurred but not reported" (IBNR) losses attributable to surety
bonds issued by FSC. Incurred policy losses for fiscal 2010 have been recorded
as $178,531 or 23.2% of earned premium as compared to $186,007 or 28.5% of
earned premium for fiscal 2009. IBNR loss estimates have been based on industry
averages adjusted for factors that are unique to the FSC's underwriting
approach. As of May 31, 2010 FSC has not received any claims for losses on any
bonds underwritten since business began in 2006, therefore its actuaries have
approved reducing the percentage of premiums reserved for IBNR due to this
historical pattern.
Insurance policy acquisition costs represent charges to operations for
underwriting, commissions and premium tax attributable to surety polices issued
by FSC and are recognized ratably over the period in which premiums are earned.
In fiscal 2010 such costs amounted to $249,478 or 32.4% of earned premium as
compared with $152,964 or 23.5% in fiscal 2009. The increase of $96,514 in
expenses is attributable to costs associated to the increase in gross premium
written, while the increase as a percentage is attributable to reduced net
premium earned after ceding of premium to reinsurers.
General and administrative expenses for fiscal 2010 were $1,316,211 as compared
with $1,564,224 for fiscal 2009, representing a decrease of $248,013 and are
comprised of the following:
-16-
Year Ended May 31,
2010 2009 Difference
---------------- ----------------- ------------
Salaries and related costs $ 710,750 $ 550,646 $ 160,104
General office expense 111,203 103,830 7,373
Legal and other professional fees 171,535 486,878 (315,343)
Audit, accounting and related services 110,431 126,359 (15.928)
Travel, meals and entertainment 49,214 58,589 (9,375)
Other general and administrative 163,078 237,922 (74,844)
---------------- ----------------- -------------
Total general and administrative $ 1,316,211 $ 1,564,224 $ (248,013)
================ ================= =============
Salaries and related costs, net of deferred internal policy acquisition costs,
increased approximately $160,104 and are comprised of the following:
Year Ended May 31,
2010 2009 Difference
------------------ ------------------ ---------------
Salaries and wages $ 469,341 $ 528,699 $ (59,358)
Commissions 44,374 26,131 18,243
Payroll taxes 42,372 45,262 (2,890)
Stock option expense 251,631 11,462 240,169
Fringe benefits 54,027 63,531 (9,504)
Key-man life insurance 54,994 57,522 (2,528)
Deferred policy acquisition costs (205,989) (181,961) (24,028)
------------------ ------------------ ----------------
Total salaries and related costs $ 710,750 $ 550,646 $ 160,104
================== ================== ================
Decreases in salaries and wages relate to decreased staff and lower salary for
staff replaced during the last month of 2009. The increase in stock option
expense is attributable to the awarding of 10,000,000 shares of incentive stock
options on June 30, 2009. Group health benefits decreased slightly due to less
employees being covered in 2010. Commissions increase due to a large number of
new bonds being written in 2010.
The decrease in legal and professional fees of $315,343 is due to fewer
resources expended in 2010 in the areas of acquisition and expansion.
Other less significant decreases were experienced in audit, travel and other
general administrative expenses categories in fiscal 2010 as compared to fiscal
2009, also due to fewer resources expended in acquisition efforts.
Jacobs & Co. was the investment advisor to the Jacobs & Company Mutual Fund (the
"Fund"). The Fund was initially established by Jacobs & Co. to provide the
ability to manage smaller accounts in a more efficient and diversified manner
and provide an investment vehicle that would fit within the Company's broader
business plan of issuing smaller bonds under its collateralized surety programs.
The delays incurred by the Company in accomplishing a financing that would make
possible the full implementation of the Company's business plan coupled with the
-17-
Fund's lackluster performance during the interim period contributed to a gradual
decline in assets and the fixed cost maintenance of the Fund was a significant
expense to the Company. The Fund's independent Board of Trustees had determined
that unless the Fund experienced a significant growth in assets it would be
necessary to liquidate the Fund. Growth in assets was not accomplished. As a
result, the Board of Trustees directed the liquidation of the Fund's assets in
November and the distribution of the proceeds to the Fund's shareholders on
December 1, 2009.
While the Fund was responsible for its own operating expenses, Jacobs & Co., as
the investment advisor, had agreed to limit the Fund's aggregate annual
operating expenses to 2% of the average net assets. Under this expense
limitation agreement, Jacobs & Co. absorbed $75,038 of the Fund's operating
expenses in 2010 as compared to $122,758 in 2009. Due to the Fund's liquidation,
there were no revenues and minimal expenses attributable to the fund subsequent
to December 1, 2009. The cumulative reimbursement due the Fund by J&C as of May
31, 2010 was $54,866.
GAIN ON EXTINGUISHMENT OF DEBT
During the year ended May 31, 2010, the Company, upon advice of legal counsel,
removed certain dormant accounts payable in the aggregate amount of $200,240,
based upon the conclusion that none of accounts represented an obligation that
is legally enforceable against the Company. Such removal was recorded as a gain
on debt extinguishment.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense for fiscal 2010 was $956,973 as compared with $605,045 in
fiscal 2009. The increase in interest expense is primarily attributable to the
bridge-financing arrangement forbearance agreement and increased debt and stock
issued as incentive for debt in 2010. Components of interest expense are
comprised of the following:
Year Ended May 31,
2010 2009 Difference
------------------ ------------------ --------------
Interest expense on bridge financing $ 583,829 $ 349,016 $ 234,813
Expense of common shares issued or to be issued in
connection with bridge financing arrangements 233,683 149,738 83,945
Expense of common shares issued or to be issued in
connection with issued debt 28,275 14,733 13,542
Interest expense on demand and term notes 102,046 77,460 24,586
Other finance charges 9,140 14,098 (4,958)
------------------ ------------------ ---------------
Total interest expense $ 956,973 $ 605,045 $ 351,928
================== ================== ===============
-18-
PREFERRED STOCK ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock is comprised of
accretion of discount and accrued but unpaid dividends on preferred stock as
follows:
Year Ended May 31,
2010 2009
----------------- ----------------
Accretion of discount $ 273,369 $ 567,811
Accrued dividends - mandatorily redeemable
preferred stock 607,706 1,041,499
Accrued dividends - equity preferred stock 374,662 -
----------------- ----------------
$ 1,255,737 $ 1,609,310
================= ================
The Series B class of stock is treated as a liability as of November 30, 2009
when the majority was exchanged for Series C equity stock. Therefore, accretion
of $86,932 and dividends of $155,708 associated with the Series B after that
date are deductions from net income and not included in the table above. The
decrease in the accretion of discount results from this exclusion of Series B
subsequent to November 30, 2009 as well as the application of the interest or
constant yield method to the initial discount recorded with respect to the
mandatorily redeemable preferred stock over a period of five years from the date
of issuance of the stock. Series C equity stock accrues dividends at the same
rate as the Series B it was exchanged for, however it is separated in the table
above due to Series C not being mandatorily redeemable. Series C does not
accrete.
OFF BALANCE SHEET ARRANGEMENTS
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
-19-
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-10
SCHEDULES
Schedule I - Summary of Investments - Other than Investments
in Related Parties F-39
Schedule II - Condensed Financial Information of Registrant F-40
Schedule III - Supplementary Insurance Information F-42
Schedule IV - Supplementary Insurance Information - Reinsurance F-43
Schedule VI - Supplemental Information F-44
-20-
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
- --------------------------------------------------------------------------------
In connection with the audits for the years ended May 31, 2010 and May 31, 2009,
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, 2010. 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, 2010,
control deficiencies were identified that constitute a material weakness in
internal control over financial reporting. Such control deficiencies relate to
the use of internally developed non-integrated accounting systems, lack of
internal review of account reconciliations, and lack of internal review of
general journal entries, elimination entries and the financial statement
consolidation process. As a result, JFG's Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2010, JFG's disclosure controls
and procedures were ineffective. Changes will be considered as additional
financial resources and accounting staff become available.
Notwithstanding the above, JFG believes the consolidated financial statements in
this Annual Report on Form 10-K fairly present, in all material respects, JFG's
financial condition as of May 31, 2010 and 2009, and the results of its
operations and cash flows for the years ended May 31, 2010 and 2009 in
conformity with U.S. generally accepted accounting principals (GAAP).
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of JFG is responsible for establishing and maintaining adequate
internal control over financial reporting. JFG's internal control over financial
reporting is a process under the supervision of JFG's Chief Executive Officer
and Chief Financial Officer, designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of JFG's financial
statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
-21-
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, 2010. 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, 2010. 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, 2010. Such control deficiencies relate to the use of internally
developed non-integrated accounting systems, lack of internal review of account
reconciliations, and lack of internal review of general journal entries,
elimination entries and the financial statement consolidation process.
Changes are to be considered as additional financial resources and accounting
staff become available. Management believes that overall controls over financial
reporting are in place, but may not, at this time, be sufficient to effectively
mitigate this material weakness.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to exemption rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
Item 9B. OTHER INFORMATION
- --------------------------
None
-22-
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 56 President and CEO/CFO, Director
C. David Thomas 57 Director
Mario J. Marra 56 Director
Bradley W. Tuckwiller 57 Director
Eric D. Ridenour 38 Director
Robert J. Kenney 63 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.
C. DAVID THOMAS
Mr. Thomas is a licensed resident insurance agent in West Virginia and holds
non-resident agent licenses in several other states. Mr. Thomas began his surety
career in 1976 with United States Fidelity and Guaranty Company and served as
the surety underwriter in the Charleston, WV branch office until 1979. At that
time he joined George Friedlander & Company, a regional insurance agency based
in Charleston, WV, where he presently serves as Vice President and Manager of
the Surety Department. Mr. Thomas is a shareholder and Director of George
Friedlander & Company. He has served as a Director of FS Investments, Inc. since
its inception in December 1997, and has served as a director of JFG since July
2002.
MARIO J. MARRA
Mr. Marra holds a Masters in Business Administration from the University of
Findlay and is the production supervisor for the Bridgeport WV facility of a
multinational aerospace and building industries company where he has been
employed since 1986. Mr. Marra joined the JFG board in June 2009.
BRADLEY W. TUCKWILLER
Mr. Tuckwiller is a licensed resident insurance agent in West Virginia. Mr.
Tuckwiller served in various bank management and credit administration
capacities for a small regional bank based in West Virginia from 1977 through
-23-
2001, concluding as Executive Vice President. Mr. Tuckwiller is the owner of a
consulting firm, providing assistance in financial and regulatory compliance
matters. He has served as a Director of Jacobs and Company since January 2008,
Director of First Surety Corporation since June 2010 and Director of JFG since
June 2009.
ERIC D. RIDENOUR
Mr. Ridenour is a Certified Public Accountant and has been employed since 2003
in the Charlotte, NC office of a national wealth management firm that serves
several hundred wealthy families. Mr. Ridenour serves as a Managing Director of
that firm. His prior employer was Deloitte & Touche from 1996 to 2003 where his
most recent position was Senior Manager. Mr. Ridenour was appointed as Director
of JFG in December 2009.
ROBERT J. KENNEY
Mr. Kenney has been Vice President of the Company since 2003. Mr. Kenney joined
FSI and Jacobs &Co. in 2000, and is President of First Surety Corporation and
Vice President and Assistant Portfolio Manager of Jacobs & Co. Mr. Kenney is a
licensed resident insurance agent in West Virginia and also holds Series 63 and
65 securities licenses. Prior to joining the Company Mr. Kenney had over 20
years experience in the oil and gas industry with Columbia Energy Group. With
Columbia, Mr. Kenney held various positions in Treasury, Human Resources, and
Law Departments and served as both Manager of Risk Management and Special
Projects Manager.
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.
-24-
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:
Jacobs Financial Group, Inc.
Attn: Compliance Director
300 Summers Street, Suite 970
Charleston, WV 25301
Jacobs & Co., as an investment advisor, has its own compliance policy that was
revised and updated in September 2006 and is specifically designed to assure
compliance by Jacobs & Co. and its employees with the Investment Advisors Act of
1940 and the rules promulgated thereunder.
AUDIT (COMMITTEE) FINANCIAL EXPERT
The Board has determined that John M. Jacobs is the Audit (Committee) Financial
Expert as such term is defined in Item 407(d)(5)(ii) of Regulation SK. Mr.
Jacobs is not independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Securities Exchange Act.
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, 2010 and 2009 to the Principal Executive Officer and
the two most highly compensated executive officers of the Company (the "Named
Executive Officers").
- ------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
ALL
STOCK OPTION OTHER
NAMES AND SALARY BONUS AWARDS AWARDS COMPENSATION TOTAL
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (1) (2) ($) (3) ($)
- ------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
John M. Jacobs, 2010 $ 125,000 - - $ 147,311 $ 32,259 $ 304,750
CEO 2009 $ 150,000 $ 10,731 $ 23,235 $ 183,966
- ------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
Robert J. Kenney, 2010 $ 75,000 - - $ 55,830 - $ 130,830
VP 2009 $ 75,000 $ 6,336 - $ 81,336
- ------------------- -------- --------------- ---------- ----------- --------------- ------------------- --------------------
-25-
(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 ($.07) per share to Mr.
Jacobs and Mr. Kenney, respectively, which vest as set forth in the table
below. The term of the options is five years and expires in May 2011.
- ------------------------- ------------------------------------------------
Vesting date Incentive Stock Option Awards
- ------------------------- ------------------------------------------------
John M. Jacobs Robert J. Kenney
- ------------------------- ---------------------- -------------------------
May 25, 2006 2,500,000 2,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2007 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2007 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2008 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2008 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2009 2,500,000
- ------------------------- ---------------------- -------------------------
May 25, 2009 1,000,000
- ------------------------- ---------------------- -------------------------
January 1, 2010 2,500,000
- ------------------------- ---------------------- -------------------------
(2) On June 30, 2009, the compensation committee of the board of directors
awarded 5,000,000, and 2,000,000 of incentive stock options to acquire
common shares at an exercise price of four cents ($.04) per share to Mr.
Jacobs and Mr. Kenney, respectively, which vest as set forth in the table
below. The term of the options is five years and expires in June 2014.
- ------------------------- ------------------------------------------------
Vesting date Incentive Stock Option Awards
- ------------------------- ------------------------------------------------
John M. Jacobs Robert J. Kenney
- ------------------------- ---------------------- -------------------------
June 30, 2009 2,500,000 1,000,000
- ------------------------- ---------------------- -------------------------
June 30, 2010 2,500,000 1,000,000
- ------------------------- ---------------------- -------------------------
The amounts shown in this column represent the dollar amount recognized for
financial reporting purposes during the fiscal year for the fair value of stock
options received by the named individuals, excluding the effects of forfeitures
relating to service-based vesting conditions. The assumptions used to compute
the fair value are disclosed in "Note L, Stock-Based Compensation", to the
audited financial statements included herein under Part II Item 8.
(3) 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, 2010.
-26-
- ---------------- -----------------------------------------------------------------------------------
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. 12,500,000 - - $.07 05/25/2011
Jacobs, CEO
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
John M. 2,500,000 2,500,000 - $.04 06/30/2014
Jacobs, CEO
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
Robert J.
Kenney, VP 5,000,000 - - $.07 05/25/2011
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
Robert J.
Kenney, VP 1,000,000 1,000,000 - $.04 06/30/2014
- ---------------- ---------------- ----------------- ----------------- -------------- ---------------
OTHER EXECUTIVE COMPENSATION PLANS
The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
The Company has no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a named executive officer at,
following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.
DIRECTOR COMPENSATION
Directors of JFG are not compensated for board meetings or other duties as board
members.
Non-employee board members of FSC, which include some JFG board members, are
compensated at the rate of $150 per meeting.
The following table sets forth compensation received by non-employee directors
for the fiscal year ended May 31, 2010.
- ---------------------------- --------------------------------------- -----------
NAME FEES EARNED OR PAID IN CASH ($) TOTAL ($)
- ---------------------------- --------------------------------------- -----------
Frederick E. Ferguson $450 $450
- ---------------------------- --------------------------------------- -----------
C. David Thomas $450 $450
- ---------------------------- --------------------------------------- -----------
Linda G. Aguilar $450 $450
- ---------------------------- --------------------------------------- -----------
-27-
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
- --------------------------------------------------------------------------------
The following tables set forth the beneficial ownership of common stock of the
Company as of September 9, 2010 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.
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF
CLASS BENEFICIAL OWNER OWNERSHIP (1) CLASS (2)
- ------------ ------------------------------ ------------------- ---------------
MORE THAN 5.00% BENEFICIAL OWNERSHIP
- ------------------------------------
Common John M. Jacobs 40,247,746 (3) 18.65%
300 Summers St. Suite 970
Charleston, WV 285301
Common Ungurean, Charles C. 19,207,265 8.90%
8400 Dunsinane Drive
Dublin, OH 43017
Common Charles L. Stout 13,175,000 (4) 6.11%
Route 1, Box 41J
Bridgeport, WV 26330
Common Fay S. Alexander 13,256,041 (5) 6.14%
6318 Timarron Cove Lane
Burke, VA 22015-4073
Common William D. Jones 12,520,392 (6) 5.80%
513 Georgia Avenue
Chattanooga, TN 37403
Common A Thomas Falbo 12,351,937 (9) 5.72%
2700 E. DuPont Ave.
Belle, WV 25015
Common Sue C. Hunt 12,384,240 (7) 5.74%
1508 Viewmont Drive
Charleston, WV 25302
-28-
TITLE OF NAME AND ADDRESS OF BENEFICIAL PERCENT OF
CLASS BENEFICIAL OWNER OWNERSHIP (1) CLASS (2)
- ------------ ------------------------------ ------------------- ---------------
DIRECTORS AND NAMED EXECUTIVE OFFICERS
- --------------------------------------
John M. Jacobs 40,247,746 (3) 18.65%
Common 300 Summers St. Suite 970
Charleston, WV 285301
C. David Thomas 992,295 *
Common P. O., Box 5157
Charleston, WV 25361
Robert J. Kenney 7,920,000 (8) 3.67%
Common 809 Sherwood Drive
Charleston, WV 25314
Mario J. Marra 989,795 *
Common 204 Olive Street
Bridgeport, WV 26330
Bradley W. Tuckwiller 5,869,152 2.72%
Common P O Box 1294
Lewisburg, WV 24901
Eric D. Ridenour 8,089,536 (10) 3.75%
Common Two Morrocroft Centre
4064 Colony Road, Suite 195
Charlotte, NC 28211
ALL DIRECTORS AND EXECUTIVE
Common OFFICERS AS A GROUP 64,108,524 29.71%
- -----------------------
* Represents beneficial ownership of less than one percent of the Company's
common stock.
1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock issuable upon the
exercise of options or warrants currently exercisable within 60 days of
September 9, 2010 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 215,784,012 shares of common stock issued and outstanding as of
September 9, 2010.
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
-29-
owned by JFLP. Includes 5,068,416 shares held in joint tenancy with spouse,
Kathleen M. Jacobs. Includes 15,000,000 in vested options to purchase
Company stock exercisable within 60 days of September 9, 2010. Includes the
right to convert Series C Preferred Stock holdings to 6,733,340 shares of
common stock exercisable within 60 days of September 9, 2010. 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, 12,000,000 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 September 9, 2010. 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 C Preferred
Stock holdings to 2,821,160 shares of common stock (182,116 in joint
tenancy with spouse) exercisable within 60 days of September 9, 2010.
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 September 9, 2010.
7) Includes 2,643,302 shares of common stock held in the Individual Retirement
Account ("IRA") of spouse, Douglas E. Hunt. Includes the right to convert
Series C Preferred Stock holdings to 2,000,000 shares of common stock.
Includes the right to convert Series C Preferred Stock holdings to 336,790
shares of common stock held jointly with spouse exercisable within 60 days
of September 9, 2010.
8) 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 7,000,000 in vested options to
purchase Company stock exercisable within 60 days of September 9, 2010.
9) Includes 748,000 shares of common stock held in joint tenancy with spouse,
Vicke R. Falbo. Includes 6,518,667 shares of common stock held in
Montgomery Equipment Company, Inc., of which he is president. Includes the
right to convert Series C Preferred Stock holdings to 4,666,670 shares of
common stock exercisable within 60 days of September 9, 2010.
10) Includes 562,346 shares of common stock held in joint tenancy with spouse,
Mary K. Ridenour. Includes 937,504 shares of common stock held in the
Individual Retirement Account of Eric D. Ridenour. Includes the right to
convert Series C Preferred Stock holdings to 2,811,730 shares of common
stock held in joint tenancy with spouse. Includes the right to convert
Series C Preferred Stock holdings to 810,670 shares of common stock held in
the Individual Retirement Account of Eric D. Ridenour exercisable within 60
days of September 9, 2010.
-30-
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
- --------------------------------------------------------------------------------
For the past several years the Company's operating expenses were partially
funded by advances from its largest shareholder and chief executive officer,
John M. Jacobs. The source of funding for these advances originated with
obligations incurred by Mr. Jacobs with third parties (such obligations together
with the loans by Mr. Jacobs to the Company, "back-to-back loans") with interest
rates ranging from 6.75% to 12%.
To assure that repayments of the various borrowings by the Company that were
either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such
back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs,
Mr. Jacobs entered into an Assumption Agreement with the Company, pursuant to
which Mr. Jacobs assumes, and agrees to hold the Company harmless from,
principal of specified indebtedness of the Company as and when necessary to
fully offset what might otherwise be deemed an advance of funds arising out of
the Company's financing activities.
During fiscal 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.
During fiscal 2010, advances to the Company from Mr. Jacobs amounted to
$710,435, which included assumption of company debt in the amount of $185,652
and repayments to Mr. Jacobs amounted to $706,412. As of May 31, 2010, the
balance due to Mr. Jacobs from the Company was $7,104. The largest aggregate
amount outstanding to Mr. Jacobs in fiscal 2010 was $178,444.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2009 and 2010 fiscal years.
As of September 10, 2010, $12,574 was owed by the Company to Mr. Jacobs.
DIRECTOR'S INDEPENDENCE
The board of directors ("Board") is comprised of five members, John M. Jacobs,
Bradley W. Tuckwiller, Mario J. Marra, Eric D. Ridenour, and C. David Thomas.
Mr. John M. Jacobs, who serves as Chief Executive Officer for the Company, Eric
D. Ridenour, who is the holder of notes from the Company, and Bradley W
Tuckwiller, who is owed fees for consulting services, are not independent within
the meaning of The Nasdaq Stock Market, Inc. listing standards.
There were no transactions, relationships or arrangements with Mr. Marra or Mr.
Thomas that would affect their independence.
-31-
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -----------------------------------------------
AUDIT FEES
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-Q, and services provided by the accountant in connection with
statutory and regulatory filings for the year ended May 31, 2010 amounted to
$108,824.
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-Q, and services provided by the accountant in connection with
statutory and regulatory filings for the year ended May 31, 2009 amounted to
$89,098.
AUDIT-RELATED SERVICES
Billings for assurance and related services by the principal accountant that are
reasonably related to the performance of the annual audit or review of financial
statements for the year ended May 31, 2010 amounted to $3,164. 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 year ended May 31, 2009.
FEES FOR TAX PREPARATION SERVICES
During fiscal 2010, billings for tax preparation services were $9,221. During
fiscal 2009, billings for tax preparation services were $10,666.
ALL OTHER FEES
Billings for other services related to potential financing transactions in
amounted to $4,863 in fiscal 2009. There were no billings for services related
to potential financing transactions in 2010.
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.
-32-
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-10
(a)(2) The following financial statement schedules are included in response to
Item 8 herein:
Page
----------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments
in Related Parties F-39
Schedule II - Condensed Financial Information of Registrant F-40
Schedule III - Supplementary Insurance Information F-42
Schedule IV - Supplementary Insurance Information - Reinsurance F-43
Schedule VI - Supplemental Information F-44
-33-
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-10
SCHEDULES
Schedule I - Summary of Investments - Other than Investments
in Related Parties F-39
Schedule II - Condensed Financial Information of Registrant F-40
Schedule III - Supplementary Insurance Information F-42
Schedule IV - Supplementary Insurance Information - Reinsurance F-43
Schedule VI - Supplemental Information F-44
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, 2010 and 2009, and
the related consolidated statements of operations, comprehensive income (loss),
cash flows, and mandatorily redeemable preferred stock and stockholders' equity
(deficit) for the years then ended. 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, 2010 and 2009, and the results of its operations and its
cash flows for the years then ended in conformity with accounting principles
generally accepted in the United States of America. Also, in our opinion, such
financial statement schedules, when considered in relation to the basic
consolidated financial 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 & Co., LLP
Pittsburgh, PA
September 13, 2010
F-2
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
MAY 31, 2010 MAY 31, 2009
-------------- ----------------
ASSETS
INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at market value $ 6,618,472 $ 908,766
(amortized cost - 5/31/10 $6,413,857; 05/31/09 $866,855)
Mortgage-back securities held to maturity, at amortized costs - 5,085,300
(market value - 5/31/10 $0; 05/31/09 $5,157,936)
Short-term investments, at cost (approximates market value) 264,079 387,753
Cash 74,571 80,038
-------------- ----------------
TOTAL INVESTMENTS AND CASH 6,957,122 6,461,857
Investment income due and accrued 31,833 28,124
Premiums and other accounts receivable 147,466 61,184
Prepaid reinsurance premium 214,385 87,114
Funds deposited with Reinsurers 122,568 -
Deferred policy acquisition costs 128,453 143,173
Furniture and equipment, net of accumulated depreciation
of $144,102 and $133,493, respectively 18,380 23,169
Other assets 27,832 43,517
Intangible assets 150,000 150,000
-------------- ----------------
TOTAL ASSETS $ 7,798,039 $ 6,998,138
============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 611,190 $ 432,658
Reserve for unearned premiums 618,095 530,795
Accrued expenses and professional fees payable 613,301 470,099
Accounts payable 150,673 268,066
Related party payable 96,160 75,009
Term note payable to related party 360,000 360,000
Demand notes payable to related party 82,104 78,081
Notes payable 4,159,119 3,614,791
Accrued interest payable 651,983 277,305
Accrued interest payable to related party 71,481 26,609
Ceded reinsurance payable - 92,173
Other liabilities 212,995 78,470
MANDATORILY REDEEMABLE SERIES B PREFERRED STOCK, $.0001 PAR VALUE PER SHARE;
3,136.405 SHARES AUTHORIZED; 2,817.004 AND 9,621.940 (PRE EXCHANGE TO SERIES C)
SHARES ISSUED AND OUTSTANDING AT MAY 31, 2010 AND MAY 31, 2009; STATED
LIQUIDATION VALUE OF $1,000 PER SHARE 3,826,882 -
-------------- ----------------
TOTAL LIABILITIES 11,453,983 6,304,056
SERIES A PREFERRED STOCK, $.0001 PAR VALUE PER SHARE; 1 MILLION SHARES
AUTHORIZED; 2,675 AND 2,665 SHARES ISSUED AND OUTSTANDING AT MAY 31, 2010 AND
MAY 31, 2009, RESPECTIVELY; STATED LIQUIDATION VALUE OF $1,000 PER SHARE 3,005,266 2,860,670
SERIES B PREFERRED STOCK, $.0001 PAR VALUE PER SHARE; 3,136.405 SHARES
AUTHORIZED; 2,817.004 AND 9,621.940 (PRE EXCHANGE TO SERIES C) SHARES ISSUED AND
OUTSTANDING AT MAY 31, 2010 AND MAY 31, 2009; STATED LIQUIDATION VALUE OF $1,000
PER SHARE - 11,429,440
-------------- ----------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 3,005,266 14,290,110
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Series C Preferred Stock, $.0001 par value per share; 10,000 shares authorized;
6,804.936 and 0 shares issued and outstanding at May 31, 2010 and May 31, 2009,
respectively; includes $2,670,286 accrued Series C dividends 8,701,217 -
Common stock, $.0001 par value per share; 490 million shares authorized;
214,464,012 and 179,682,912 shares issued and outstanding at May 31, 2010 and
May 31, 2009, respectively 21,446 17,968
Additional paid in capital 3,404,431 2,626,236
Accumulated deficit (18,992,919) (16,279,725)
Accumulated other comprehensive income (loss) 204,615 39,493
-------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (6,661,210) (13,596,028)
-------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,798,039 $ 6,998,138
============== ================
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
YEAR ENDED MAY 31,
------------------------------
2010 2009
------------- --------------
REVENUES:
Investment advisory services $ 262,635 $ 233,298
Insurance premiums and commissions 780,808 660,222
Net investment income 273,577 288,747
Net realized investment gains (losses) 40,828 8,098
Other income 13,935 3,712
------------- --------------
TOTAL REVENUES 1,371,783 1,194,077
OPERATING EXPENSES:
Incurred policy losses 178,531 186,007
Insurance policy acquisition costs 249,478 152,964
General and administrative 1,316,211 1,564,224
Mutual fund costs 75,038 122,758
Depreciation 10,609 12,562
------------- --------------
TOTAL OPERATING EXPENSES 1,829,867 2,038,515
------------- --------------
NET INCOME (LOSS) FROM OPERATIONS (458,084) (844,438)
Gain on debt extinguishment 200,240 -
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (242,639) -
Interest expense (956,973) (605,045)
Interest and dividend income - 1,107
------------- --------------
NET INCOME (LOSS) (1,457,456) (1,448,376)
Accrued dividends on Series C Preferred Stock equity (374,662) -
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (881,075) (1,609,311)
------------- --------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (2,713,193) $ (3,057,687)
============= ==============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ (0.01) $ (0.02)
============= ==============
WEIGHTED-AVERAGE SHARES OUTSTANDING 200,089,422 173,788,315
============= ==============
See accompanying notes.
F-4
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
YEAR MONTHS ENDED
MAY 31,
2010 2009
------------ -------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $(2,713,193) $ (3,057,687)
OTHER COMPREHENSIVE INCOME (LOSS):
Reclassification of investments from Held to Maturity
to Avaialble for Sale 175,479 -
Net unrealized gain (loss) of available-for-sale investments
arising during period 15,794 41,108
Reclassification adjustment for realized (gain) loss included
in net income (26,151) (8,098)
------------ -------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized in other comprehensive income 165,122 33,010
------------ -------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $(2,548,071) $ (3,024,677)
============ =============
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS
YEAR ENDED MAY 31,
2010 2009
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (1,457,456) $ (1,448,376)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Unearned premium (39,971) 166,473
Stock option expense 251,632 11,451
Stock issued (or to be issued) in connection with financing arrangements 261,958 192,607
Accrual of Series B preferred stock dividends 155,708 -
Accretion of Series B preferred stock 86,931 -
Provision for loss reserves 178,532 186,007
Amortization of premium 71,996 44,286
Depreciation 10,609 12,562
Accretion of discount (9,217) (13,072)
Realized (gain) loss on sale of securities (42,926) (12,511)
Gain on extinguishment of debt (200,239) -
Change in operating assets and liabilities:
Other assets 18,103 252,837
Premium and other receivables (86,282) (13,831)
Investment income due and accrued (2,860) (7,770)
Deferred policy acquisition costs 14,720 (67,233)
Related party accounts payable 21,150 14,442
Accounts payable and cash overdraft 82,846 (31,519)
Accrued expenses and other liabilities 482,536 489,307
------------- -------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (202,230) (224,340)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments 123,674 788,303
Costs of bonds acquired - (356,101)
Costs of mortgaged-backed securities acquired (2,378,290) (2,851,803)
Redemption of bonds upon call or maturity - 20,000
Sale of securities available for sale 404,958 107,639
Repayment of mortgage-backed securities 1,490,926 1,034,407
Purchase of furniture and equipment (5,819) (6,563)
------------- -------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (364,551) (1,264,118)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 691,764 606,858
Repayment of related party debt (687,741) (454,777)
Proceeds from borrowings 1,017,500 1,252,500
Repayment of borrowings (473,172) (319,725)
Proceeds from issuance of Series A preferred stock 10,000 435,000
Proceeds from exercise of common stock warrants 2,963 -
------------- -------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 561,314 1,519,856
NET INCREASE (DECREASE) IN CASH (5,467) 31,398
CASH AT BEGINNING OF PERIOD 80,038 48,640
------------- -------------
CASH AT END OF PERIOD $ 74,571 $ 80,038
============= =============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 292,689 $ 181,037
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 261,958 192,607
See accompanying notes.
F-6
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD 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
as additional
consideration
for financing
arrangements
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-7
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD ENDED MAY 31, 2010
SERIES A SERIES B
MANDATORILY REDEEMABLE MANDATORILY REDEEMABLE
CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
SHARES AMOUNT SHARES AMOUNT
----------------------------------------------
-------- ----------- --------- ------------
BALANCE,
MAY 31, 2009 2,665 $ 2,860,670 9,621.940 $11,429,440
Issuance of
Series A and B Preferred
Stock and common stock 10 10,000 - -
Issuance of common stock
as additional consideration
for financing arrangements - - - -
Exercise of warrants - - - -
Accretion of mandatorily
redeemable convertible
preferred stock - 17,881 - 255,487
Accrued dividends
of mandatorily
redeemable convertible
preferred stock - 116,715 - 490,991
Accrued dividends
of Series C equity
preferred stock - - - -
Exchange of Series C Preferred
Stock for Series B
Mandatorily Redeemable
Convertible Preferred Stock - - (6,804,936) (8,591,675)
Reclassification of Series B
from temporary equity
to liabilities - - (2,817.004) (3,584,243)
Increase (Decrease)
in accrual of common
shares to be issued in
connection with
financing arrangements - - - -
Common stock
option expense - - - -
Unrealized net gain
(loss) on available for
sale securities - - - -
Net income (loss), year
ended May 31, 2010 - - - -
------- ----------- --------- ------------
BALANCE,
MAY 31, 2010 2,675 $ 3,005,266 - $ -
---------------------------------------------
(CONTINUED)
See accompanying notes.
F-8
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE TWELVE MONTH PERIOD ENDED MAY 31, 2010 (CONTINUED)
----------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------------------
SERIES C
COMMON SHARES PREFERRED STOCK
------------------------------------- --------------------
ACCUMULATED
ADDITIONAL OTHER
PAID-IN AMOUNT ACCUMULATED COMPREHENSIVE
SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT INCOME TOTAL
(LOSS)
----------------------------------------------------------------------------------------------------
BALANCE,
MAY 31, 2009 179,682,912 17,968 $ 2,626,236 - $ - $(16,279,725) $ 39,493 $(13,596,028)
Issuance of Series A and B
Preferred Stock and common stock - - - - - - - -
Issuance of common stock as
additional consideration for
financing arrangements 18,207,560 1,820 348,184 - - - - 350,004
Exercise of warrants 2,963,668 297 2,668 - - - - 2,965
Accretion of mandatorily
redeemable convertible
preferred stock - - - - - (273,368) - (273,368)
Accrued dividends of mandatorily
redeemable convertible
preferred stock - - - - - (607,706) - (607,706)
Accrued dividends of Series C
equity preferred stock - - - - 374,664 (374,664) - -
Exchange of Series C Preferred
Stock for Series B Mandatorily
Redeemable Convertible
Preferred Stock 13,609,872 1,361 263,759 6,804.936 8,326,553 - - 8,591,673
Reclassification of Series B
from temporary equity
to liabilities - - - - - - - -
Increase (Decrease) in accrual
of common shares to be issued in
connection with financing
arrangements - - (88,047) - - - - (88,047)
Common stock option expense - - 251,631 - - - - 251,631
Unrealized net gain (loss) on
available for sale securities - - - - - - 165,122 165,122
Net income (loss), year
ended May 31, 2010 - - - - - (1,457,456) - (1,457,456)
----------------------------------------------------------------------------------------------------
BALANCE,
MAY 31, 2010 214,464,012 $ 21,446 $ 3,404,431 6,804.936 $ 8,701,217 $(18,992,919) $ 204,615 $ (6,661,210)
----------------------------------------------------------------------------------------------------
See accompanying notes.
F-9
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - ORGANIZATION AND BUSINESS
- ----------------------------------
ORGANIZATION AND NATURE OF BUSINESS
Jacobs Financial Group, Inc. (the "Company" or "JFG"), formerly NELX, Inc., was
incorporated in Kansas on March 25, 1983. In 2001, the Company acquired all the
outstanding stock of two corporations located in Charleston, West Virginia:
Jacobs & Company ("Jacobs") and FS Investments, Inc. ("FSI"). Jacobs is a
registered investment advisory firm that derives its revenue from asset-based
investment advisory fees. FSI, through its wholly-owned subsidiary Triangle
Surety Agency, Inc. ("Triangle"), is engaged in the business of placing surety
bonds with insurance companies for clients engaged in regulated industries, such
as the extraction of coal, oil and gas. FSI receives commission income from the
placement of these bonds and is licensed in ten states primarily in the eastern
United States. On December 30, 2005, the Company acquired all of the outstanding
stock of West Virginia Fire & Casualty Company ("WVFCC"), an insurance company
licensed to engage in business in West Virginia, Ohio and Indiana. The
acquisition of WVFCC consisted of the purchase of marketable investments and
insurance licenses and did not include any existing policies or customer base as
the insurance lines of business offered by WVFCC were not insurance lines that
the Company intended to pursue. Following the acquisition, the name of WVFCC was
changed to First Surety Corporation ("FSC"). FSC receives insurance premium
income in connection with the issuance of surety bonds. The Company and its
subsidiaries are subject to the business risks inherent in the financial
services industry.
LIQUIDITY AND GOING CONCERN
These financial statements are presented on the basis that the Company is a
going concern. Going concern contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business over a reasonable
length of time. The Company incurred operating losses (after accretion of
mandatorily redeemable convertible preferred stock, including accrued dividends)
of approximately $2,713,000 and $3,058,000 for the years ended May 31, 2010 and
2009. Losses are expected to continue until FSC develops a more substantial book
of business. While improvement is anticipated as the Company's business plan is
implemented, restrictions on the use of FSC's assets (See Note C), the company's
significant deficiency in working capital and stockholders' equity raise
substantial doubt about the Company's ability to continue as a going concern.
Management intends to improve cash flow through the implementation of its
business plan. Additionally, management continues to seek to raise additional
funds for operations through private placements of stock, other long-term or
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.
F-10
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ---------------------------------------------------
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Jacobs Financial
Group, Inc. and its wholly owned subsidiaries, after the elimination of
intercompany transactions.
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. The reserve for unearned premiums represents the
portion of premiums written relating to the unexpired terms of coverage. The
reserve for unearned premium is determined using the monthly pro rata method.
Advance premiums represent renewal premiums paid in advance of the effective
renewal date.
Agency commissions for surety bond services are based on a percentage of
premiums charged for bonds placed with insurance companies, and are recorded
upon issuance or effective renewal date of the bonds. No significant continuing
services subsequent to the issuance or renewal of surety bonds are required.
Policy acquisition costs include costs that vary with and are primarily related
to the acquisition of new business. Such costs generally include commissions,
underwriting expenses, and premium taxes and are deferred and amortized over the
period in which the related premiums are earned. The deferred policy acquisition
cost assets 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.
F-11
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Debt and equity securities that the Company may not have a positive intent to
hold until maturity and not classified as trading, are considered to be
available for sale and carried at current market values, with unrealized gains
and losses reflected as a separate component of other comprehensive income in
consolidated shareholders' equity currently.
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during the current fiscal year, the Company
determined it may dispose of securities prior to their scheduled maturity due to
changes in interest rates, prepayments, tax and credit considerations, liquidity
or regulatory capital requirements, or other similar factors. As a result, the
Company reclassified all of its fixed income securities (bonds) and equity
securities as available-for-sale. These securities are reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reported in
stockholders' equity as a separate component of accumulated other comprehensive
income.
Short-term investments consist primarily of debt securities having maturities of
one year or less at date of purchase, money-market investment funds and other
similar investments that have immediate availability.
Interest income with respect to fixed maturity securities is accrued as earned.
Dividend income is generally recognized when receivable.
Realized gains and losses are determined by specific identification of the
security sold.
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
required by ASC 718, 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.
RECLASSIFICATIONS
Certain amounts in the 2009 Consolidated Financial Statements have been
reclassified to be consistent with the presentation in the Consolidated
Financial Statements as of May 31, 2010 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.
F-13
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2010, the FASB issued Accounting Standards Update 2010-20, "Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses." This FASB is intended to provide additional information to assist
financial statement users in assessing an entity's credit risk exposure and
evaluating the adequacy of its allowance for credit losses. This update affects
all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
This update is effective for interim and annual reporting periods ending on or
after December 15, 2010. Management does not expect this update to have a
material effect on the Company's financial statements.
In August 2010, the FASB issued Accounting Standards Update 2010-21, "Accounting
for Technical Amendments to Various SEC Rules and Schedules". This Accounting
Standards Update amends various SEC paragraphs pursuant to the issuance of
Release No. 33-9026; Technical Amendments to Rules, Forms, Schedules and
Codifications of Financial Reporting Policies. Management does not expect this
update to have a material effect on the Company's financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09,
"Subsequent Events: Amendments to Certain Recognition and Disclosure
Requirements." This FASB retracts the requirement to disclose the date through
which subsequent events have been evaluated and whether that date is the date
the financial statements were issued or were available to be issued. ASU 2010-09
is effective for interim and annual financial periods ending after February 24,
2010, and has been applied with no material impact on the Company's financial
statements.
In February 2010, the FASB issued Accounting Standards Update 2010-08,
"Technical Corrections to Various Topics." This FASB eliminates inconsistencies
and outdated provisions in GAAP and provides needed clarification on others. ASU
2010-08 is effective for interim and annual financial periods ending after
February 2010, and has been applied with no material impact on the Company's
financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06, "Fair
Value Measurements and Disclosures: Improving Disclosures About Fair Value
Measurements." This FASB requires additional disclosures about the fair value
measurements including transfers in and out of Levels 1 and 2 and a higher level
of disaggregation for the different types of financial instruments. For the
reconciliation of Level 3 fair value measurements, information about purchases,
sales, issuances and settlements should be presented separately. ASU 2010-06 is
effective for interim and annual financial periods beginning after December
2009, and is not expected to have a material impact on the Company's financial
statements.
In August 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update 2009-04, "Accounting for Redeemable Equity
Instruments - Amendment to Section 480-10-S99". This updates Section 480-10-S99,
"Distinguishing Liabilities from Equity", to reflect the SEC staff's views
regarding the application of Accounting Series Release No. 268, "Presentation in
Financial Statements of "Redeemable Preferred Stocks." The exchange for Series B
Preferred shares into Series C shares as elected by those shareholders utilizes
the view of the SEC in classifying the Series C Preferred shares as equity.
F-14
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
There is no stated maturity on the Series C Preferred shares and at the time of
redemption the Company will accrete changes in the redemption value at the
appropriate time. These amounts will be adjusted at the end of each reporting
period as applicable.
In August 2009, the FASB issued Accounting Standards Update 2009-05, "Fair Value
Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value".
This update includes amendments to Subtopic 820-10 "Fair Value Measurements and
Disclosures - Overall" for the fair value measurements of liabilities and
provides clarification that in circumstances in which quoted price in an active
market for the identical liability is not available, a reporting entity is
required to measure fair value using one or more of the techniques provided for
in this update. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after August 26, 2009. The
application of this update did not have a material impact on the Company's
results of operations or financial position.
In September 2009, the FASB issued Accounting Standards Update 2009-08,
"Earnings Per Share-Amendments to Section 260-10-S99". This update includes
technical corrections to Topic 260-10-S99, "Earnings Per Share", based on EITF
Topic D-53, "Computation of Earnings Per Share for a Period that Includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock"
and EITF Topic D-42, "The Effect of the Calculation of Earnings Per Share for
the Redemption or Induced Conversion of Preferred Stock". The application of
this update did not have an impact on the Company's results of operations,
therefore not requiring additional earnings per share computation.
NOTE C - INVESTMENTS
- --------------------
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, 2010:
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
---------------------- ---------------------- ---------------------- ----------------------
Mortgage Backed $ 6,413,856 $ 208,315 $ 3,700 $ 6,818,472
Securities
---------------------- ---------------------- ---------------------- ----------------------
$ 6,413,856 $ 208,315 $ 3,700 $ 6,818,472
====================== ====================== ====================== ======================
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
securities $ 352,816 $ 28,570 $ - $ 381,386
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
====================== ====================== ====================== ======================
Equity securities consisted of an investment in the amount of $25,000 made in
2007 in the Jacobs & Company Mutual Fund by its investment advisor, Jacobs &
Company, and recorded in other assets at market value. Dividends paid by the
Fund at calendar year-end 2007 and 2008 were reinvested. In March 2009, a
F-15
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
partial withdrawal of $11,000 was made. In November 2009 the remaining cost of
$10,280 was withdrawn for $8,182 and a loss of $2,098. The total amounts
withdrawn reflect a loss in market value.
In December 2009, all state and municipal securities, totaling $362,033, were
sold for $404,958 resulting in a gain of $42,926.
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during the current fiscal year, the Company
determined it may dispose of securities prior to their scheduled maturity due to
changes in interest rates, prepayments, tax and credit considerations, liquidity
or regulatory capital requirements, or other similar factors. As a result, the
Company reclassified all of its fixed income securities (bonds) and equity
securities as available-for-sale. These securities are reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reported in
stockholders' equity as a separate component of accumulated other comprehensive
income. Cost of these investments totaled $5,647,133 and market value at
transfer was $5,822,613 for an unrealized gain of $175,480.
There are no securities classified as held to maturity at May 31, 2010.
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
mortgage-backed
securities $ 5,085,300 $ 79,739 $ 7,103 $ 5,157,936
====================== ====================== ====================== ======================
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-16
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, 2010
---------------------------------------------------------------------
Fair Value Measurements Using
-------------------------------------------------- Assets At
Level 1 Level 2 Level 3 Fair Value
--------------- ------------------ --------------- ------------------
Assets:
Fixed income securities at fair value $ - $ 6,618,472 $ - $ 6,618,472
Short-term investments at fair value 264,079 - - 264,079
--------------- ------------------ --------------- ------------------
Total Assets $ 264,079 $ 6,618,472 $ - $ 6,882,551
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
F-17
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had no assets or liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) at either May 31, 2010 or
at May 31, 2009.
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
$6,956,987 and $ 6,440,387 as of May 31, 2010 and 2009, respectively, are
restricted to the use of FSC.
Principal repayments on U.S. government agency mortgaged-backed securities held
by the Company as of May 31, 2010 are estimated as follows:
Fair Market
Amortized Cost Value
------------------ ------------------
Due in one year or less $ 2,025,267 $ 2,081,486
Due after one year through five years 3,211,413 3,322,997
Due after five years through ten years 943,577 979,352
Due after ten years 233,600 234,637
------------------ ------------------
$ 6,413,857 $ 6,618,472
================== ==================
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:
2010 2009
------------------ ------------------
Bonds - fixed maturities $ 9,217 $ 15,006
Mortgage-backed securities 264,508 267,993
Short-term investments 146 7,842
------------------ ------------------
Total investment income 273,871 290,841
------------------ ------------------
Investment expense 294 2,094
------------------ ------------------
Net investment income $ 273,577 $ 288,747
================== ==================
The increases (decrease) in unrealized appreciation of investments were as
follows:
2010 2009
----------------- ---------------
Bonds-fixed maturities $ (28,570 $ 21,478
Mortgage-backed securities 118,637 111,757
Equity securities 2,418 (1,810)
----------------- ---------------
Increase (decrease) in unrealized appreciation $ 92,485 $ 131,425
================= ===============
F-18
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The gross gains and gross losses realized on available-for-sale securities were
as follows:
Gross Gross
Gross Realized Realized
Proceeds Gains Losses
------------- -------------- --------------
2010
Bonds-fixed maturities $ 404,958 $ 42,926 $ -
Mortgage-backed securities - - -
Equity securities 8,182 - 2,098
------------- -------------- --------------
Total $ 413,140 $ 42,926 $ 2,098
============= ============== ==============
2009
Bonds-fixed maturities $ 107,639 $ 12,577 $ -
Mortgage-backed securities - - -
Equity securities 11,000 - (4,413)
------------- -------------- --------------
Total $ 118,639 $ 12,577 $ (4,413)
============= ============== ==============
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,
2010 and May 31, 2009.
Less than 12 Months 12 Months or More Total
------------------------------- ---------------------------- --------------------------------
Cost Unrealized Cost Unrealized Fair Unrealized
(a) Losses (a) Losses Value Losses
--------------- --------------- ------------ --------------- --------------- ----------------
2010
Mortgage-backed
securities $ 945,394 $ 3,699 $ - $ - $ 941,685 $ 3,699
--------------- --------------- ------------ --------------- --------------- ----------------
Total $ 945,394 $ 3,699 $ - $ - $ 941,685 $ 3,699
=============== =============== ============ =============== =============== ================
2009
Mortgage-backed
securities $ 686,543 $ 7,103 $ - $ - $ 679,440 $ 7,103
Equity securities - - 10,280 2,418 7,861 2,418
--------------- --------------- ------------ --------------- --------------- ----------------
Total $ 686,543 $ 7,103 $ 10,280 $ 2,418 $ 687,301 $ 9,521
=============== =============== ============ =============== =============== ================
- ---------------
(a) For bonds-fixed maturities and mortgage-backed securities, represents
amortized costs.
F-19
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2010, the company held 5 mortgage-backed securities with gross
unrealized losses of $3,699, 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 to hold the securities
until maturity if needed.
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.
2010 2009
------------------ -----------------
Balance at beginning of year $ 143,173 $ 75,940
Acquisition costs deferred 242,090 220,496
Amortization charged to operations (256,810) (153,263)
------------------ -----------------
Total $ 128,453 $ 143,173
================== =================
NOTE E - OTHER ASSETS
- ---------------------
Included in other assets as of May 31, 2009 are advance deposits for
professional fees relating to pending acquisitions and certain equity financing
matters (see Note P-Commitments) the Company endeavored to undertake in fiscal
2009. As of May 31, 2010 and 2009, such balances are comprised of the following:
2010 2009
---------- ---------
Advance deposits for professional fees $ - $ 1,311
Mutual fund investment at market - 7,862
Prepaid expense and other deposits 27,832 34,344
---------- ---------
Total $ 27,832 $ 43,517
========== =========
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, 2010 and 2009.
F-20
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 2010, 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 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 cash in amounts deemed sufficient to reclaim the disturbed land and thus
mitigate the exposure to significant loss. Such cash is invested in investment
collateral accounts managed by Jacobs utilizing conservative investment
strategies. Inspections of mining activity and reclamation work are performed on
a regular basis with initial costs estimates being updated periodically. Should
the principal default in the obligation to reclaim the property in accordance
with the mining permit, FSC would then use the funds held in the collateral
account to reclaim the property or would be required to forfeit the face amount
of the bond to the agency to which the bond is issued. Losses can occur if the
costs of reclamation exceed estimates obtained at the time the bond was
underwritten or upon subsequent re-evaluations, if sufficient collateral is not
obtained and increased if necessary, or if collateral held has experienced a
significant deterioration in value. FSC has experienced no claims for losses as
of May 31, 2010 and thus provisions for losses and loss adjustment expense have
been based on industry averages adjusted for other factors unique to the
Company's approach, and in consultation with consulting actuaries experienced in
the surety field.
At May 31, the reserve for losses and loss expenses consisted of:
2010 2009
------------------ ------------------
Balance at beginning of year $ 432,658 $ 246,651
Incurred policy losses-current year 178,532 186,007
Incurred policy losses-prior year - -
Amounts paid-current year losses - -
Amounts paid-prior year losses - -
------------------- -----------------
Balance at end of year $ 611,190 $ 432,658
=================== =================
F-21
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE H - NOTES PAYABLE
- ----------------------
At May 31, 2010 and 2009, the Company had the following unsecured notes payable
to individuals and a commercial bank:
2010 2009
------------- ------------
Unsecured demand notes payable to individuals and
others; interest rate fixed @ 10.00% ($75,000 to
related party) $ 1,057,000 $ 380,000
Unsecured short-term advances from principal
shareholder and chief executive officer; interest rate
fixed @ 12.00% (Also See Note T -
Related Party Transactions) 7,104 3,081
Unsecured note(s)payable to individual(s) under a
bridge- financing arrangement described below
($360,000 to related party) 3,500,000 3,500,000
Unsecured 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 37,119 169,791
------------ ------------
Total $ 4,601,223 $ 4,052,872
============ ============
In accordance with the terms of the first round bridge-financing of $2.5 million
on March 10, 2008, the holders of such notes were paid accrued interest-to date
and issued 5.00% of the Company's common shares. Holders of the second round of
bridge-financing notes of $1.0 million received 2.00% of the Company's common
shares. Upon retirement of the notes subsequent to consummation of a qualified
equity offering, the Company shall issue to the holders of the bridge financing
notes additional Company common stock that, when added to the stock initially
issued to the holders of the notes, will equal the 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%
F-22
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of the Company's outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. On September 10, 2008, March 10, 2009,
September 10, 2009, and March 10, 2010, 4,870,449, 5,010,640, 5,354,642, and
6,005,925 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.
On June 5, 2009 the Company entered into an agreement with the bridge lenders to
forbear from exercising their rights and remedies arising from the Acknowledged
Events of Default. As consideration for the forbearance, the Company issued
5,171,993 shares of Common stock, and pledged the stock of the Company's
subsidiary, Crystal Mountain Water (CMW), as security for repayment of the
loans. The original repayment schedule called for quarterly payments of
$224,515. The Holders agreed that under the forebearance the Company may satisfy
its obligation by increasing the quarterly payments by $67,185, (to a total of
$291,700) for eight consecutive quarters beginning september 10, 2009 to satisfy
the arrearage. In addition, the interest rate was increased to 17.00%. Although
the Company has failed to make the payment that was due September 10, 2009 and
the payments that were due in the ensuing quarters, management has remained in
close contact with the bridge lenders, providing reports regarding its efforts
to refinance or otherwise repay the bridge loans. To date, none of the bridge
lenders has elected to pursue legal remedies.
Scheduled maturities and principal payments for each of the next five years are
as follows:
2010
-------------
Fiscal year 2010-2011 (including demand notes) $ 4,601,223
Fiscal year 2011-2012 -
Fiscal year 2012-2013 -
Fiscal year 2013-2014 -
Fiscal year 2014-2015 -
Fiscal year 2015-2016 -
-------------
Total $ 4,601,223
=============
NOTE I - OTHER LIABILITIES
- --------------------------
In the twelve-month period ending May 31, 2010, the Company, upon advice of
legal counsel, removed certain dormant accounts payable in the aggregate amount
of $200,240, based upon the conclusion that none of accounts represented an
obligation that is legally enforceable against the Company. Such removal was
recorded as a gain on debt extinguishment.
F-23
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of May 31, 2010, the Company had accrued and withheld approximately $155,000
in Federal payroll taxes and approximately $24,000 in West Virginia payroll
withholdings. These amounts have not been remitted and are still payable at
September 13, 2010, as well as penalties and interest of approximately $28,000.
These amounts are reflected in the accompanying financial statements as accrued
expenses, and management intends to pay this obligation as soon as possible.
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 FSC's partially collateralized bonding programs,
subject to continuing satisfaction of underwriting criteria, based upon the
bonding capacity of FSC attributable to capital reserves of FSC established with
the subscription proceeds (i.e., bonding capacity equal to ten times
subscription proceeds) and for so long as the subscriber holds the Series A
shares. Holders of the Series A Preferred Stock are entitled to receive, when
and as declared by the board of directors, cumulative preferential cash
dividends at a rate of four percent of the $1,000 liquidation preference per
annum (equivalent to a fixed annual rate of $40 per share). The Series A
Preferred Stock ranks senior to the Company's common stock, and pari passu with
the Company's Series B Preferred and Series C Preferred Stock with respect to
dividend rights and rights upon liquidation, dissolution or winding up of the
Company. The holder may redeem the Series A Preferred Stock on or after the
seventh anniversary of the Issue Date, if the holder provides a written
statement to the Company that it will no longer require surety bonds issued by
the Company's insurance subsidiary (FSC) under its partially collateralized
bonding programs and, if no such surety bonds are then outstanding, the Company,
at the option of the holder, will redeem all or any portion of the Series A
Preferred Stock of such holder at a price per share equal to the Series A
Preferred Stock Issue Price plus all accrued and unpaid dividends with respect
to the shares of the Series A Preferred Stock of such holder to be redeemed. The
conditional redemption shall not be available to any holder of Series A
Preferred Stock for so long as surety bonds of the Company's insurance
subsidiary issued on a partially collateralized basis remain outstanding for the
benefit of such holder, and upon redemption, such holder shall no longer be
eligible to participate in the partially collateralized bonding programs of the
insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares
of the Series A Preferred Stock. As of May 31, 2010, the Company has issued
2,675 shares of Series A Preferred Stock in exchange for cash investments in the
amount of $2,675,000, of which 10 shares were issued in fiscal 2010 and 435
shares were issued in fiscal 2009. As of May 31, 2010 the Company has chosen to
defer payment of dividends on the Series A Preferred Stock with such accrued and
unpaid dividends amounting to $341,153 through May 31, 2010.
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
F-24
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and Series C Preferred Stock with
respect to dividend rights and rights upon liquidation, dissolution or winding
up of the Company. Each share of the Series B Preferred Stock is convertible at
the option of the holder, at any time after the original issue date, into 1,000
fully paid and 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.
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
proposed a recapitalization to assist in stabilizing the financial position of
the Company. The Company's Certificate of Incorporation provides for two classes
of capital stock, known as common stock, $0.0001 par value per share (the
"COMMON STOCK"), and preferred stock, $0.0001 par value per share (the
"PREFERRED STOCK"). The Company's Board is authorized by the Certificate of
Incorporation to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in such series and to fix the designations, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. The Board deemed it advisable to designate a Series C Preferred Stock
and fixed and determined the preferences, rights, qualifications, limitations
and restrictions relating to the Series C Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock are designated
"Series C Preferred Stock" (referred to herein as the "SERIES C STOCK"). The
date on which the first share of Series C Stock is issued shall hereinafter be
referred to as the "ORIGINAL ISSUE DATE".
2. Authorized Number. The number of shares constituting the Series C Stock
is 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon
Liquidation senior and prior to the Common Stock and all other equity securities
to which the Series C ranks prior, with respect to dividends and upon
Liquidation (collectively, "JUNIOR SECURITIES"), (b) pari passu with the
Corporation's Series A Preferred Stock, par value $0.0001 per share (the "SERIES
A STOCK"), the Corporation's Series B Stock, and any other series of Preferred
Stock subsequently established by the Board with equal ranking (any such other
series of Preferred Stock, together with the Series C Stock, the Series B Stock
and Series A Stock are collectively referred to as the "EQUAL RANKING
PREFERRED") and (c) junior to any other series of Preferred Stock subsequently
established by the Board with senior ranking.
F-25
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Dividends.
(a) DIVIDEND ACCRUAL AND PAYMENT. The holders of the Series C Stock shall
be entitled to receive, in preference to the holders of Junior Securities,
dividends ("DIVIDENDS") on each outstanding share of Series C Stock at the rate
of 8% per annum of the sum of (i) the Series C Face Amount plus (ii) an amount
equal to any accrued, but unpaid, dividends on such Series C Stock, including
for this purpose the exchanged Series B Amount outstanding with respect to such
Series C Stock. For purposes hereof, the "SERIES B AMOUNT" means an amount equal
to the dividend that would have accrued on such Series C Stock held by such
holder from and after the Series B Original Issue Date applicable to such share
of Series C Stock, through the Original Issue Date as if such Series C Stock had
been issued on such Series B Original Issue Date, less all amounts thereof
distributed by the Corporation with respect to such Series C Stock. Dividends
shall be payable quarterly in arrears on each January 1, April 1, July 1 and
October 1 following the Original Issue Date, or, if any such date is a Saturday,
Sunday or legal holiday, then on the next day which is not a Saturday, Sunday or
legal holiday (each a "DIVIDEND PAYMENT DATE"), as declared by the Board and, if
not paid on the Dividend Payment Date, shall accrue. Amounts available for
payment of Dividends (including for this purpose the Series B Amount) shall be
allocated and paid with respect to the shares of Series C Preferred and any
other Equal Ranking Preferred, FIRST, among the shares of Equal Ranking
Preferred pro rata in accordance with the amounts of dividends accruing with
respect to such shares at the current Dividend Payment Date, and, THEN, any
additional amounts available for distribution in accordance with the accrued,
but unpaid, dividends (and the Series B Amount then outstanding) at each prior
Dividend Payment Date, in reverse chronological order, with respect to all
shares of the Equal Ranking Preferred then outstanding in accordance with
amounts accrued, but unpaid. For purposes hereof, the term "SERIES B ORIGINAL
ISSUE DATE" shall mean, with respect to any share of Series C Stock issued by
the Corporation in exchange for a share of Series B Stock, the date on which the
Corporation originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a
combination of Series C Shares and Common Stock. For each Series B Share, the
participating holder received (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock (for no additional consideration).
The Series B Shares have an 8.0% per annum compounding dividend preference, are
convertible into Common Shares of JFG at the option of the holders at a
conversion price of $1.00 per Share (as adjusted for dilution) and, to the
extent not converted, must be redeemed by the Corporation at any time after
December 31, 2010 at the option of the holder. Any such redemption is subject to
legal constraints, such as the availability of capital or surplus out of which
to pay the redemption, and to a determination by our Board of Directors that the
redemption will not impair the operations of First Surety.
The Series C Shares issued in the Recapitalization have the same 8.0% per annum
compounding dividend preference and carry over from the Series B Shares the same
accrued but unpaid dividends. While dividends had never been declared on the
Series B shares, they had been accrued, increasing the dividend preference and
the redemption price and liquidity preference of such shares and increasing the
liability represented thereby based upon the Series B Shares fixed maturity
date. The accrued (but undeclared) dividends associated with the Series C
F-26
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
exchange amounted to $2,295,624 and are included in the total amount exchanged
for Series C Shares. Unlike the Series B Shares with their fixed maturity date,
the Series C Shares are permanent equity, with accruing dividends only
increasing the preference amount that must be satisfied before junior securities
may participate in dividends or on liquidation. Accordingly, the effect of the
accrual of dividends with respect to the Series C Shares on the Company's
balance sheet is to increase the aggregate claim of the Series C Shares on the
equity of the corporation and to increase the deficit in common equity, while
having no effect on the net equity of the corporation as a whole. The
entitlement of the Series C Shares to a priority in relation to junior
securities with respect to dividends and on liquidation does not create an
obligation to the Company and therefore no liability is recorded until the
dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the Corporation's Series A Preferred Stock and Series B Shares (to
the extent any remain outstanding following the Recapitalization) and no
dividends or other distributions will be paid upon Common Shares or any other
class of Shares that is junior in priority to the Series C Preferred while
dividends are in arrears. In addition, the Series C Shares are convertible into
Common Shares of JFG at the option of the holders at a conversion price of $0.10
per Share. The Series C Shares may be redeemed by the Corporation, at its
option, when it is in a financial position to do so.
For the year ending May 31, 2010, 6,804.936 shares of Series B Stock were
surrendered and exchanged for 6,804.936 shares of Series C Stock. This exchange
amounted to $6,269,051 of carrying value of Series B stock being exchanged for
Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the
Series C Stock holders at the rate of 2,000 Common shares for each exchanged
Series B Stock, with the related cost associated with the Common issuance
offsetting the Series C carrying value by $265,120. The shares were valued at
approximately $.01948 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction.
Series C stock may be redeemed by the Company but does not have a fixed maturity
date and, thus, is classified as permanent equity. Holders of over 70% of the
outstanding Series B Preferred Shares elected to participate in the
recapitalization. Those Series B Preferred Shareholders that chose not to
convert at this time are listed in the Liabilities section of the Balance Sheet,
and therefore the accretion and dividends associated with the Series B stock
after November 30, 2009 are deductions from net income. As the redemption date
on the Series B shares got closer, it became apparent that it was unlikely that
the shares would be converted to common at $1.00, and thus the classification
was changed. The remaining Series B shares are continuing to be accreted from
carrying value to the face amount for the 5 year period from the date of
issuance. Series C stock has no accretion.
As of May 31, 2010 the Company has chosen to defer payment of dividends on the
Series B and Series C Preferred Stock with such accrued and unpaid dividends
amounting to $1,119,020 and $2,670,286 through May 31, 2010.
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.
F-27
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 only the Series A 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, 2010, the Company had issued and outstanding warrants to purchase
10,107,897 shares of common stock.
On December 30, 2005, the Company issued warrants to purchase 45,402,996 shares
of common stock in connection with the Series A and B Preferred Stock private
placements, of which 10,107,897 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 $449,972.
NOTE L-STOCK-BASED COMPENSATION
- -------------------------------
On October 12, 2005, the board of directors adopted its 2005 Stock Incentive
Plan (the "Plan") to allow the Company to make awards of stock options as part
of the Company's compensation to key employees, non-employee directors,
contractors and consultants. The Plan was approved by the stockholders on
December 8, 2005. The aggregate number of shares of Common Stock issuable under
all awards under the Plan is 35,000,000. No awards may be granted under the Plan
after December 8, 2015.
F-28
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On May 25, 2006, the compensation committee of the board of directors awarded
23,400,000 of incentive stock options to acquire common shares at an exercise
price of seven cents ($.07) per share, of which 5,500,000 shares vested
immediately and the remaining 17,900,000 options vesting over the next four
years ending in May 2010. The term of the options is five years and expires in
May 2011. 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, all
of which 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 ($.04) per share, of which 450,000 shares vested
immediately and the remaining 1,650,000 options vesting over the next three
years ending in December 2009. The term of the options is five years and expires
in December 2011. As of May 31, 2009, the awarded options had been reduced to
1,800,000 due to changes in employment status. As of May 31, 2010, all of these
options have vested.
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 of incentive stock options to acquire common shares at an exercise
price of four cents ($.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, 2010.
2010
Number Weighted-Avg.
Weighted-Avg. Of Shares Remaining Aggregate
Exercise Under Life Intrinsic
Price Option (Years) Value
------------- ------------- ------------- ----------
Balance at June 1, 2009 $ .06652 24,100,000
Options granted .04000 10,000,000
Options exercised - -
Options canceled/expired .07000 1,500,000
------------- -------------
Balance, May 31, 2010 $ .05822 32,600,000
============= =============
Exercisable at May 31, 2010 $ .06176 27,300,000 1.53 $ -
============= =============
Expected to vest $ .04000 5,300,000 4.08 $ -
============= =============
F-29
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity and pricing information for the non-
vested shares under the Plan for the year ended May 31, 2010.
2010
Number
Weighted-Average Of
Grant Date Non-vested
Fair Value Shares
---------------- -------------------
Balance at June 1, 2009
$ .01818 2,750,000
Options granted .02962 10,000,000
Options vested .02540 ( 7,450,000)
Options canceled/expired
-
---------------- -------------------
Balance at May 31, 2010 $ .02962 5,300,000
================ ===================
No options were granted in fiscal 2009. There were no options exercised in
fiscal 2010 or 2009. The total fair value of shares vested amounted to
approximately $189,000 and $93,000 in fiscal 2010 and 2009 respectively.
Stock-based compensation expense attributable to such awards amounted to
approximately $252,000 and $11,000 in fiscal years ended May 31, 2010 and 2009
respectively. Unrecognized compensation expense related to non-vested awards at
May 31, 2010 was approximately $17,156 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.
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, 2010, the Company had operating loss carry forwards of approximately
$16.5 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 $5.6 million tax benefit of the operating
loss carry forward, by a valuation allowance of the same amount, because the
likelihood of realization of the tax benefit cannot be determined.
F-30
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE N-STOCKHOLDERS EQUITY
- --------------------------
In fiscal 2010, the Company issued 1,675,000 shares of the Company's common
stock as additional consideration in connection with short-term and demand
borrowing arrangements totaling $500,000. The shares were valued at
approximately $.0169 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 $28,275.
In fiscal 2010, warrants totaling 2,963,668 were exercised for cash and issuance
of 2,963,668 common shares of the Company.
In fiscal 2010, the Company issued 5,354,642 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 $.0146 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 $78,178.
In fiscal 2010, the Company issued 6,005,925 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 $.00912
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 $54,774.
In fiscal 2010, the Company issued 5,171,993 shares of the Company's common
stock in connection with the forbearance agreement of the bridge-financing
arrangement (See Note H). The shares were valued at approximately $.0365 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 $188,778.
In fiscal 2010, the Company issued 13,609,872 shares of the Company's common
stock in connection with the exchange of Series B Preferred Shares for Series C
Preferred Shares (See Note J).
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.
F-31
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 notreflect deferred policy acquisition costs and certain assets are
non-admitted.
Statutory surplus as of May 31, 2010 and 2009 and net income for the Company's
insurance subsidiary the calendar year ended December 31, 2009 and 2008 and
five-month periods ended May 31, 2010 and 2009 are as follows:
Statutory Surplus May 31, 2010 $ 5,869,182
Statutory Surplus May 31, 2009 $ 5,439,269
Net Income Calendar year 2009 279,136
Net Income Calendar year 2008 177,018
Net Income Five-month period 2010 72,782
Net Income Five-month period 2009 76,395
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 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"). 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, such amounts to be applied toward the
Merger Consideration at closing. On June 24, 2008, the Company amended its
Merger Agreement with Reclamation Surety Holding Company, Inc. releasing the
F-32
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deposit to the sellers and extending the date for closing until October 31, 2008
after which time either party may terminate the Merger Agreement. Discussions
continue with RSH, and the Merger Agreement has not been terminated. Among other
conditions, closing was subject to the closing by the Company of an equity
financing. 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.
On August 20, 2008, the Company entered into a stock purchase agreement (the
"Agreement") with National Indemnity Company ("NICO"), pursuant to which the
Company agreed to acquire 100% of the outstanding stock of Unione Italiana
Reinsurance Company of America ("Unione"). Such agreement was amended on
November 13, 2008 to clarify certain definitions and calculation of the purchase
price, in addition to extending until December 31, 2008 the date by which the
Company must satisfy the financing condition prior to closing and which after
time either party may terminate the Agreement. The Company was unable to provide
certification to NICO that the Company had cash available or had existing or
committed borrowing facilities ("Financing Certificate") which together were
sufficient to enable it to consummate the acquisition of Unione by December 31,
2008. Under the terms of the Agreement, as amended, NICO had the right to
terminate the Agreement at its discretion and retain the good faith deposit of
$75,000. By letter dated January 15, 2010, NICO exercised this right of
termination.
LEASE COMMITMENTS
The Company leases certain office equipment with combined monthly payments of
approximately $615 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 $560.00 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 $63,452 and
$66,092 during 2010 and 2009.
Minimum future lease payments under non-cancelable operating leases having
remaining terms in excess of one year as of May 31, 2010 are:
Fiscal year 2010-2011 10,362
Fiscal year 2011-2012 7,002
------------
Total $ 17,364
============
F-33
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, 2010 and 2009 are as follows:
2010 2009
------------------------------------ ------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------------- ------------------ ----------------- ------------
ASSETS
Bonds available for sale $ 6,618,472 $ 6,618,472 $ 908,766 $ 908,766
Mortgage-backed securities held to maturity - - 5,085,300 5,157,936
Cash and short-term investments 338,650 338,650 467,791 467,791
Premiums and other receivables 179,299 179,299 89,308 89,308
Equity securities (included in other assets) - - 7,862 7,862
LIABILITIES
Notes payable 4,601,223 4,601,223 4,052,872 4,052,872
Accounts payable and advance premiums 246,833 246,833 343,075 343,075
Accrued expenses and other liabilities 1,549,760 1,549,760 944,656 944,656
F-34
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE R - OTHER RISKS, UNCERTAINTIES AND CONCENTRATIONS
- ------------------------------------------------------
CONCENTRATION OF CREDIT RISK
As of May 31, 2010 the Company's investment securities of approximately
$6,883,000 are solely comprised of mortgage-backed securities and money-market
mutual funds that invest principally in obligations issued by the U.S
government, its agencies or instrumentalities. Such instruments are generally
considered to be of the highest credit quality investment available.
The Company transacts the majority of its business with three financial
institutions, one for commercial banking services and the others for brokerage
and custodial services. Periodically, the amount on deposit in financial
institutions providing commercial banking services exceeds the $250,000
federally insured limit. Management believes these financial institutions are
financially sound. With respect to the financial institutions providing
brokerage and custodial services, amounts on deposit are invested in money
market funds that invest principally in obligations issued by the U.S
government, its agencies or instrumentalities.
Management believes that substantially all receivables are collectible, and
therefore has not established an allowance for estimated uncollectible accounts.
CONCENTRATION IN PRODUCTS, MARKETS AND CUSTOMERS
The Company's insurance subsidiary currently writes only the surety line of
business, is licensed to write surety only in West Virginia and Ohio and has
focused its primary efforts towards coal permit bonds. Such business, including
investment advisory fees from managed collateral accounts, accounted for
approximately 82% and 65% of the Company's fiscal 2010 and 2009 revenues,
respectively. Furthermore, the Company provides surety bonds to companies that
share common ownership interests that constitute 60% and 52% of the Company's
fiscal 2010 and 2009 revenues, respectively, as follows:
2010 2009
------------------------------------- ----------------------------------
Investment Investment
Surety Advisory Surety Advisory
Premium Fees Premium Fees
------------------ ----------------- ----------------- -----------------
Customer group # 1 $ 277,000 $ 73,000 $ 259,000 $ 71,000
Customer group # 2 262,000 46,000 248,000 40,000
Customer group # 3 167,000 1,400 - -
------------------ ----------------- ----------------- -----------------
TOTAL 706,000 120,400 507,000 111,000
================== ================= ================= =================
F-35
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, 2010 MAY 31, 2009
- ------------------------------- ----------------- -----------------
REVENUES:
Investment advisory $ 361,412 $ 232,853
Surety insurance 1,210,611 961,480
Corporate - 851
----------------- -----------------
Total revenues $ 1,572,023 $ 1,195,184
================= =================
OPERATING INCOME (LOSS):
Investment advisory $ 113,005 $ (136,830)
Surety insurance 536,938 313,556
Corporate (2,107,399) (1,625,102)
----------------- -----------------
Total operating income (loss) $ (1,457,456) $ (1,448,376)
================= =================
IDENTIFIABLE ASSETS:
Investment advisory $ 51,097 $ 49,752
Surety insurance 7,724,941 6,916,041
Corporate 22,001 32,345
----------------- -----------------
Total assets $ 7,798,039 $ 6,998,138
================= =================
CAPITAL ACQUISITIONS:
Investment advisory $ - $ -
Surety insurance 5,819 -
Corporate - 6,563
----------------- -----------------
Total capital acquisitions $ 5,819 $ 6,563
================= =================
DEPRECIATION CHARGED TO
IDENTIFIABLE ASSETS:
Investment advisory $ 45 $ 50
Surety insurance 7,282 7,513
Corporate 3,282 4,999
----------------- -----------------
Total Depreciation $ 10,609 $ 12,562
================= =================
INTEREST EXPENSE:
Investment advisory $ - $ 1,023
Surety insurance - 23
Corporate 956,973 603,999
----------------- -----------------
Total interest expense $ 956,973 $ 605,045
================= =================
F-36
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 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.
During fiscal 2010, advances to the Company from Mr. Jacobs amounted to
$710,435, which included assumption of company debt in the amount of $185,652,
and repayments to Mr. Jacobs amounted to $706,412. As of May 31, 2010, the
balance due Mr. Jacobs was $7,104. The largest aggregate amount outstanding to
Mr. Jacobs in fiscal 2010 was $178,444.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2009 and 2010 fiscal years.
As of September 10, 2010, $12,574 was owed by the Company to Mr. Jacobs.
OTHER RELATED PARTIES
During the years ended May 31, 2010 and May 31, 2009, a company owned by a board
member provided consulting services. This company provided services totaling
$62,100 and $62,531 in 2010 and 2009. Amounts owed to this company at year end
are treated as related party payables in the amounts $96,160 and $75,009 at May
31, 2010 and 2009.
During the year ended May 31, 2009, the company borrowed money from an
individual that became a board member during 2010. Loans in the amount of
$110,000 were borrowed as part of the second round bridge financing and demand
loans in the amounts of $150,000 were borrowed and paid back in 2009. Total
amounts owed to this board member at May 31, 2010 consisted of $75,000 in demand
notes and $360,000 in bridge financing. Total amounts owed to this board member
at May 31, 2009 consisted of $75,000 in demand notes and $250,000 in initial
bridge financing.
NOTE U - REINSURANCE
- --------------------
The Company limits the maximum net loss that can arise from large risks by
reinsuring (ceding) certain levels of such risk with reinsurers. Ceded
reinsurance is treated as the risk and liability of the assuming companies. The
Company cedes insurance to other companies and these reinsurance contracts do
not relieve the Company from its obligations to policyholders.
F-37
JACOBS FINANCIAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Effective April 1, 2009, FSC entered into a reinsurance agreement with various
syndicates at Lloyd's of London and one Bermuda based reinsurer ("Reinsurer")
for its coal reclamation surety bonding programs. The reinsurance agreement is
an excess of loss contract which protects the Company against losses up to
certain limits over stipulated amounts, has an initial term of 39 months and can
be terminated by either party by written notice of at least 90 days prior to any
July 1. The contract calls for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first Agreement Year,
June 1, 2010, at a rate of 35% of gross written premium, subject to a minimum
premium $490,000. At May 31, 2010 and 2009, the Company had prepaid reinsurance
premiums of $214,385 and $87,114 and ceded reinsurance payable/(deposited) of
($122,568) and $92,173. During 2010, the amounts deposited with the Reinsurer
were greater than the ceded premium written, resulting in a net deposit instead
of a payable.
There were no ceded losses and lae expenses for the years ended May 31, 2010 or
2009.
The effects of reinsurance on premium written and earned for fiscal 2010 and
2009 are as follows;
2010 Written 2010 Earned 2009 Written 2009 Earned
--------------- --------------- --------------- -------------
Direct $ 1,114,197 $ 1,026,896 $ 905,519 $ 651,933
Ceded $ 385,259 $ 257,987 $ 92,174 $ 5,060
--------------- --------------- --------------- -------------
Net $ 728,938 $ 768,909 $ 813,345 $ 646,873
NOTE V - EVENTS SUBSEQUENT TO MAY 31, 2010
- ------------------------------------------
Subsequent to May 31, 2010, the Company obtained new borrowings of $9,500 from
individuals to fund ongoing operation and made repayments of $159,500. Such
borrowings were obtained under demand notes bearing interest at the rate of 10%.
Additionally, the Company obtained various borrowings from individuals and
businesses totaling $295,000 at the rate of 10%, which mature in September and
October 2010. These borrowings included the issuance of 895,000 shares of its
common stock as additional consideration. Additionally, there were advances to
the Company from its largest shareholder and CEO amounting to $320,420, with
repayments totaling $314,950.
On June 30, 2010, the Company awarded 500,000 shares to an individual as
compensation for services instrumental to advancing the Company's business plan,
including introductions and negotiations with reinsurers, investors and insurers
with the potential to provide license authority in additional states. In August
2010, these shares were issued.
On September 10, 2010, in accordance with the Bridge financing agreement, the
Company became obligated to issue in the aggregate 6,213,285 shares of its
common stock to the holders of such notes.
On June 30, 2010, the Company elected to continue to defer payment of dividends
on its Series A Preferred Stock, Series B Preferred Stock, and Series C
Preferred Stock with such accumulated accrued and unpaid dividends amounting to
$371,232, $1,197,525, and $2,859,271 as of June 30, 2010.
F-38
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------
SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES SCHEDULE I
- ----------------------------------------------------------------------------------------------------------------------------
AMOUNT
AT WHICH
AT MAY 31, 2010 SHOWN IN THE
COST* VALUE BALANCE SHEET
------------- ------------- --------------
Fixed maturities:
Bonds:
United States Government and government agencies and authorities $ - $ - $ -
States, municipalities, and political subdivisions - - -
------------- ------------- --------------
Total fixed maturities - - -
Equity securities:
- - -
------------- ------------- --------------
Total equity securities - - -
Mortgage-backed securities guaranteed by U.S. government agency 6,413,856 6,618,472 6,618,472
Short-term investments, at cost (approximates market value) 264,079 264,079 264,079
------------- ------------- --------------
Total investments $ 6,677,935 $ 6,882,551 $ 6,882,551
============ ============ ==============
* 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-39
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- --------------------------------------------------------------------------------------------------------------------
BALANCE SHEETS - PARENT COMPANY ONLY
MAY 31, 2010 MAY 31, 2009
-------------- --------------
Assets:
Cash $ (16,526) $ (2,028)
Accounts receivable from affiliates - -
Prepaid expense and other assets 15,696 24,822
Furniture and equipment, net 6,269 9,551
Investment in subsidiaries, equity method 5,360,750 4,661,611
Due from affiliates, net 718,054 989,836
-------------- --------------
Total assets $ 6,084,243 $ 5,683,792
============== ==============
LIABILITIES:
Accounts payable $ 6,710 $ 6,460
Accrued expenses and professional fees 519,187 365,859
Related party payable 159,907 93,884
Notes payable 4,159,119 3,614,791
Related party note payable 442,104 437,281
Due to affiliates - 176,000
Other liabilities 830,893 334,929
Series B Preferred Stock 3,826,882 -
-------------- --------------
Total liabilities 9,944,802 5,029,204
MANDATORILY REDEEMABLE PREFERRED STOCK 3,005,266 14,290,109
STOCKHOLDERS EQUITY:
Common stock 21,446 17,968
Additional paid in capital 3,404,431 2,626,236
Series C Stock 8,701,217 -
Accumulated deficit (18,992,919) (16,279,725)
-------------- --------------
Total stockholders equity (deficit) (6,865,825) (13,635,521)
-------------- --------------
Total liabilities and stockholders equity $ 6,084,243 $ 5,683,792
============== ==============
STATEMENTS OF INCOME - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2010 2009
-------------- --------------
REVENUES
Equity in undistributed net income (loss) of consolidated subsidiaries $ 513,139 $ 95,178
Tax benefit to parent from subsidiary attributable to
utilization of net operating loss carryforwards 148,174 81,549
Interest income - 851
-------------- --------------
Total revenues 661,313 177,578
EXPENSES:
General and administrative 904,505 1,016,956
Interest 968,343 603,999
Accrued dividends on stock liability 242,639 -
Depreciation 3,282 4,999
-------------- --------------
Total expenses 2,118,769 1,625,954
-------------- --------------
Net income (loss) (1,457,456) (1,448,376)
Accrued dividends on equity stock (374,662) -
Accretion of mandatorily redeemable convertible preferred stock,
including accrued dividends (881,075) (1,609,311)
-------------- --------------
Net income (loss) attributable to common stockholders $ (2,713,193) $ (3,057,687)
============== ==============
F-40
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- --------------------------------------------------------------------------------------------------------------------
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
- --------------------------------------------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS - PARENT COMPANY ONLY
YEAR ENDED MAY 31,
2010 2009
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (1,457,456) $ (1,448,376)
Adjustments to reconcile net (loss) to net cash provided by operating
activities:
Equity in undistributed net loss of consolidated subsidiaries (513,139) (95,177)
Accrual of preferred stock dividend 155,708 -
Accretion of preferred stock 86,931 -
Stock option compensation expense 251,632 11,462
Stock issued in connection with financing arrangements 261,958 231,554
Depreciation 3,282 4,999
Loss on disposal of equipment - -
Change in other assets, accounts payable and accrued expense, net 724,690 568,504
-------------- --------------
TOTAL CASH USED IN OPERATIONS (486,394) (727,034)
CASH FLOWS FROM INVESTING ACTIVITIES:
Contributions to insurance company subsidiary (186,000) (759,000)
Funds provided to affiliates for operations 95,782 (40,871)
Purchase of furniture and equipment - (6,563)
-------------- --------------
TOTAL CASH USED IN INVESTING ACTIVITIES (90,218) (806,434)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of mandatorily redeemable preferred stock 10,000 435,000
Proceeds from exercise of stock warrants 2,963 -
Redemption of mandatorily redeemable preferred stock - -
Proceeds from borrowings 1,017,500 1,252,500
Repayment of borrowings (473,172) (319,725)
Proceeds from short-term borrowings from related party 691,764 606,057
Repayment of short-term borrowings to related party (686,941) (454,777)
-------------- --------------
TOTAL CASH PROVIDED BY FINANCING ACTIVITIES 562,114 1,519,055
-------------- --------------
CHANGE IN CASH (14,498) (14,413)
Cash at beginning of year (2,028) 12,385
-------------- --------------
Cash at end of year $ (16,526) $ (2,028)
============== ==============
F-41
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTARY INSURANCE INFORMATION
AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED SCHEDULE III
- ------------------------------------------------------------------------------------------------------------------------------------
RESERVE FOR
LOSSES
AND OTHER AMORTIZATION
LOSS POLICY CLAIMS OF
DEFERRED 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
- --------- ----------- ----------- --------- -------- --------- ---------- ---------- ----------- --------- ---------
2010
Surety $ 128,453 $ 611,190 $ 618,095 $ - $ 768,909 $ 273,577 $ 178,531 $ 256,810 $ - $ 728,938
- ------------------------------------------------------------------------------------------------------------------------------------
2009
Surety $ 143,173 $ 432,658 $ 530,794 $ - $ 646,873 $ 288,747 $ 186,007 $ 153,263 $ - $ 813,345
F-42
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INSURANCE INFORMATION - REINSURANCE
AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED SCHEDULE IV
- ------------------------------------------------------------------------------------------------------------------------------
CEDED TO OTHER
2010 GROSS AMOUNT COMPANIES NET AMOUNT
--------------------- ------------------- -------------------
Premiums written:
Property and casualty insurance $ 1,114,197 $ 385,259 $ 728,938
--------------------- ------------------- -------------------
Total premiums written $ 1,114,197 $ 385,259 $ 728,938
===================== =================== ===================
Premiums earned:
Property and casualty insurance $ 1,026,896 $ 257,987 $ 768,909
--------------------- ------------------- -------------------
Total premiums earned $ 1,026,896 $ 257,987 $ 768,909
===================== =================== ===================
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
===================== =================== ===================
F-43
JACOBS FINANCIAL GROUP, INC.
AND SUBSIDIARIES
- ------------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL INFORMATION
AS OF MAY 31, 2010 AND 2009 AND FOR THE YEARS THEN ENDED SCHEDULE VI
- ------------------------------------------------------------------------------------------------------------------------------------
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F COLUMN G COLUMN H COLUMN I COLUMN J COLUMN K
RESERVE
FOR
LOSSES CLAIMS, LOSSES
AND DISCOUNT AND SETTLEMENT AMORTIZATION
LOSS IF ANY, EXPENSES INCURRED OF
DEFERRED EXPENSES, DEDUCTED RELATED TO DEFERRED PAID CLAIMS
POLICY FUTURE IN NET POLICY AND CLAIMS NET
AFFILIATION WITH ACQUISITION POLICY COLUMN UNEARNED PREMIUM INVESTMENT CURRENT PRIOR ACQUISITION ADJUSTMENT PREMIUMS
REGISTRANT COSTS CLAIMS C PREMIUMS REVENUE INCOME YEAR YEARS COSTS EXPENSES WRITTEN
- ----------------- ----------- ---------- -------- --------- -------- ---------- --------- ------- --------- ----------- --------
2010
Consolidated
property-casualty
entities $128,453 $ 611,190 $ - $618,095 $ 768,909 $ 273,577 $ 178,531 $ - $ 256,810 $ - $728,938
- ------------------------------------------------------------------------------------------------------------------------------------
2009
Consolidated
property-casualty
entities $143,173 $ 432,658 $ - $530,795 $ 646,873 $ 288,747 $ 186,007 $ - $ 153,263 $ - $813,345
F-44
(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
-34-
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 13, 2010 By: /s/ John M. Jacobs
-------------------------------------------
John M. Jacobs
President and CEO
Director
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
Dated: September 13, 2010 By:/s/ John M. Jacobs
------------------------ ----------------------------
John M. Jacobs
President and CEO
Director
Dated: September 13, 2010 By:/s/ John M. Jacobs
------------------------ ----------------------------
John M. Jacobs
Chief Financial Officer
Dated: September 13, 2010 By:/s/ Mario J. Marra
------------------------ ----------------------------
Mario J. Marra
Director
Dated: September 13, 2010 By:/s/ C. David Thomas
------------------------ ----------------------------
C. David Thomas
Director
Dated: September 13, 2010 By:/s/ Eric D. Ridenour
------------------------ ----------------------------
Eric D. Ridenour
Director
Dated: September 13, 2010 By:/s/ Bradley W. Tuckwiller
------------------------ ----------------------------
Bradley W. Tuckwiller
Director
-35-