UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2010
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
===================================== ==================================
DELAWARE 84-0922335
------------------------------------- ----------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
===================================== ==================================
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
--------------
Indicated by a check mark whether the registrant (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 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 Exchange Act).
Yes[ ] No[ X ]
---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 225,379,679 shares of common
stock as of October 15, 2010.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- ----------------------------
The following financial statements are included herein in response to Item 1:
Financial Statements (Unaudited) Page
--------------------
Consolidated Condensed Balance Sheets F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Comprehensive Income (Loss) F-3
Consolidated Condensed Statements of Cash Flows F-4
Consolidated Condensed Statement of Mandatorily Redeemable Preferred Stock and F-5 and
Stockholders Equity (Deficit) F-6
Notes to Consolidated Condensed Financial Statements F-7
-2-
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS (UNAUDITED)
AUGUST 31, 2010 MAY 31, 2010
----------------- ----------------
ASSETS
INVESTMENTS AND CASH:
Bonds and mortgaged-back securities available for sale, at market value $ 6,945,239 $ 6,618,472
(amortized cost - 8/31/10 $6,746,736; 05/31/10 $6,413,857)
Short-term investments, at cost (approximates market value) 172,638 264,079
Cash 125,423 74,571
----------------- ----------------
TOTAL INVESTMENTS AND CASH 7,243,300 6,957,122
Investment income due and accrued 31,227 31,833
Premiums and other accounts receivable 186,876 147,466
Prepaid reinsurance premium 263,723 214,385
Funds deposited with Reinsurers - 122,568
Deferred policy acquisition costs 175,268 128,453
Furniture, Automobile, and equipment, net of accumulated depreciation
of $146,320 and $144,102, respectively 37,820 18,380
Other assets 22,291 27,832
Intangible assets 150,000 150,000
----------------- ----------------
TOTAL ASSETS $ 8,110,505 $ 7,798,039
================= ================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 653,516 $ 611,190
Reserve for unearned premiums 780,313 618,095
Accrued expenses and professional fees payable 598,246 613,301
Accounts payable 165,176 150,673
Ceded reinsurance payable 29,721 -
Related party payable 96,185 96,160
Term note payable to related party 360,000 360,000
Demand notes payable to related party 96,666 82,104
Notes payable 4,266,907 4,159,119
Accrued interest payable 749,887 651,983
Accrued interest payable to related party 107,289 71,481
Other liabilities 232,217 212,995
Mandatorily redeemable Series B Preferred Stock, $.0001 Par
value per share; 3,136.405 Shares authorized; 2,817.004 Shares
issued and outstanding at August 31, 2010 and May 31,
2010; stated liquidation value of $1,000 per share 3,950,011 3,826,882
----------------- ----------------
TOTAL LIABILITIES 12,086,134 11,453,983
Series A Preferred Stock, $.0001 par value per share; 1 million shares
authorized; 2,675 shares issued and outstanding at August 31, 2010
and May 31, 2010, respectively; stated liquidation value of $1,000 per share 3,039,971 3,005,266
----------------- ----------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 3,039,971 3,005,266
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Series C Preferred Stock, $.0001 par value per share; 10,000 shares
authorized; 6,804.936 shares issued and outstanding at August 31, 2010
and May 31, 2010, respectively; includes $2,859,271 and $2,670,286
accrued Series C dividends, respectively 8,890,202 8,701,217
Common stock, $.0001 par value per share; 490 million shares
authorized; 215,859,012 and 214,464,012 shares issued and outstanding
at August 31, 2010 and May 31, 2010, respectively 21,586 21,446
Additional paid in capital 3,440,332 3,404,431
Accumulated deficit (19,566,223) (18,992,919)
Accumulated other comprehensive income (loss) 198,503 204,615
----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (7,015,600) (6,661,210)
----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,110,505 $ 7,798,039
================= =================
See accompanying notes.
F-1
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED AUGUST 31,
-----------------------------
2010 2009
------------- --------------
REVENUES:
Investment advisory services $ 54,170 $ 64,326
Insurance premiums and commissions 198,990 214,332
Net investment income 33,251 72,244
Net realized investment gains (losses) 51,019 -
Other income 1,633 4,822
------------- --------------
TOTAL REVENUES 339,063 355,724
OPERATING EXPENSES:
Incurred policy losses 42,327 48,185
Insurance policy acquisition costs 59,981 62,602
General and administrative 255,398 400,614
Mutual fund costs - 38,326
Depreciation 3,392 2,795
------------- --------------
TOTAL OPERATING EXPENSES 361,098 552,522
------------- --------------
NET INCOME (LOSS) FROM OPERATIONS (22,035) (196,798)
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (123,129) -
Interest expense (204,368) (327,284)
------------- --------------
NET INCOME (LOSS) (349,532) (524,082)
Accrued dividends on Series C Preferred Stock equity (188,985) -
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (34,705) (418,860)
------------- --------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (573,222) $ (942,942)
============= ==============
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ - $ (0.01)
============= ==============
WEIGHTED-AVERAGE SHARES OUTSTANDING 214,963,577 185,278,229
============= ==============
See accompanying notes.
F-2
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (UNAUDITED)
THREE MONTHS ENDED
AUGUST 31
------------------------------
2010 2009
-------------- -------------
COMPREHENSIVE INCOME (LOSS):
Net income (loss) attributable to common stockholders $ (573,222) $ (942,942)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale investments
arising during period 30,732 5,421
Reclassification adjustment for realized (gain) loss included
in net income (36,844) -
-------------- -------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized in other comprehensive income (6,112) 5,421
-------------- -------------
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (579,334) $ (937,521)
============== =============
See accompanying notes.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED CONDENSED STATEMENT OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED AUGUST 31
----------------------------
2010 2009
------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (349,532) $ (524,082)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Unearned premium 112,880 953
Stock option expense 13,452 138,890
Stock issued (or to be issued) in connection with financing arrangements 22,507 223,886
Accrual of Series B preferred stock dividends and accretion 123,129 -
Provision for loss reserves 42,326 48,185
Amortization of premium 57,458 14,873
Depreciation 3,392 2,795
Accretion of discount (166) (4,579)
Realized (gain) loss on sale of securities (51,018) -
Loss on disposal of equipment 336 -
Change in operating assets and liabilities:
Other assets 5,541 7,199
Premium and other receivables (39,410) (4,559)
Investment income due and accrued 1,260 (817)
Deferred policy acquisition costs (46,815) (15,561)
Related party accounts payable 25 15,525
Accounts payable and cash overdraft 14,503 57,917
Accrued expenses and other liabilities 290,168 (106,098)
------------- ------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES 200,036 (145,473)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments 91,441 75,508
Costs of bonds acquired (1,292,185) -
Costs of mortgaged-backed securities acquired (643,019) (396,343)
Sale of securities available for sale 840,684 -
Repayment of mortgage-backed securities 754,713 324,321
Purchase of furniture and equipment (23,168) -
------------- ------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (271,534) 3,486
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 334,870 106,597
Repayment of related party debt (320,308) (102,515)
Proceeds from borrowings 304,500 317,500
Repayment of borrowings (196,712) (86,396)
Proceeds from issuance of Series A preferred stock - 10,000
Proceeds from exercise of common stock warrants - 1,795
------------- ------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 122,350 246,981
NET INCREASE (DECREASE) IN CASH 50,852 104,994
CASH AT BEGINNING OF PERIOD 74,571 80,038
------------- ------------
CASH AT END OF PERIOD $ 125,423 $ 185,032
============= ============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 46,298 $ 257,471
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 22,507 223,886
See accompanying notes.
F-4
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2009
-------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------------------
ACCUM.
SERIES B OTHER
SERIES A MANDATORILY REDEEMABLE COMPRE-
MANDATORILY REDEEMABLE CONVERTIBLE ADDITIONAL HENSIVE
PREFERRED STOCK PREFERRED STOCK PAID-IN ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT (LOSS) TOTAL
------ ----------- --------- ---------- ----------- ------- ---------- ------------ ------ ------------
BALANCE,
MAY 31, 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)
Issuance of
Series A
and B Preferred
Stock and common
stock 10 10,000 - - - - - - - -
Issuance of
common stock as
additional
consideration for
financing arrange-
ments - - - - 500,000 50 19,025 - - 19,075
Exercise
of warrants - - - - 1,795,273 180 1,616 - - 1,796
Accretion of
mandatorily
redeemable
convertible
preferred stock - 4,380 - 143,920 - - - (148,300) - (148,300)
Accrued dividends
of mandatorily
redeemable
convertible
preferred stock - 27,020 - 243,539 - - - (270,559) - (270,559)
Expense of
common shares
to be issued
in connection
with financing
arrangements - - - - 5,171,993 517 204,294 - - 204,811
Common stock
option expense - - - - - - 138,890 - - 138,890
Unrealized net
gain on available
for sale
securities - - - - - - - - 5,421 5,421
Net income (loss),
three month
period ended
August 31, 2009 - - - - - - - (524,083) - (524,083)
------ ----------- --------- ---------- ----------- ------- ---------- ------------- ------ -------------
BALANCE,
AUGUST 31, 2009 2,675 $ 2,902,070 9,621.940 $11,816,899 187,150,178 $18,715 $2,990,061 $(17,222,667)$44,914 $(14,168,977)
------ ----------- --------- ---------- ----------- ------- ---------- ------------- ------ -------------
------------------------------------------- -------------------------------------------------------------------
See accompanying notes.
F-5
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED CONDENSED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) (UNAUDITED)
FOR THE THREE MONTH PERIOD ENDED AUGUST 31, 2010
----------------- ----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------
SERIES A SERIES C PREFERRED ACCUMULATED
MANDATORILY REDEEMABLE -------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE, MAY 31, 2010 2,675 $3,005,266 214,464,012 $21,446 $3,404,431 6,804.936 $ 8,701,217 $(18,992,919) $204,615 $(6,661,210)
Issuance of common
stock as compensa-
tion for services - - 500,000 50 1,998 - - - - 2,048
Issuance of common
stock as additional
consideration for
financing arrangements - - 895,000 90 3,769 - - - - 3,859
Accretion of Series A
mandatorily redeemable
convertible preferred
stock - 4,626 - - - - - (4,626) - (4,626)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 30,079 - - - - - (30,161) - (30,161)
Accrued dividends of
Series C equity
preferred stock - - - - - - 188,985 (188,985) -
Increase (Decrease) in
accural of common
shares to be issued
in connection with
financing arrangements - - - - 16,682 - - - - 16,682
Common stock option
expense - - - - 13,452 - - - - 13,452
Unrealized net gain
on available for sale
securities - - - - - - - - (6,112) (6,112)
Net income (loss),
three month period
ended August 31, 2010 - - - - - - - (349,532) - (349,532)
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE,
AUGUST 31, 2010 2,675 $3,039,971 215,859,012 $21,586 $3,440,332 6,804.936 $ 8,890,202 $(19,566,223) $198,503 $(7,015,600)
====== ========== =========== ======= ========== ========= =========== ============= ======== ============
----------------- ----------------------------------------------------------------------------------------
See accompanying notes.
F-6
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A - BASIS OF PRESENTATION
- ------------------------------
The accompanying unaudited financial statements are of Jacobs Financial Group,
Inc. (the "Company" or "JFG"). These financial statements were prepared in
accordance with generally accepted accounting principles for interim financial
information and Article 8-03 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for a fair presentation of the results of
operations and financial condition for the periods presented have been included.
Such adjustments are of a normal recurring nature. The results of operations for
the three month period ended August 31, 2010, are not necessarily indicative of
the results of operations that can be expected for the fiscal year ending May
31, 2011. For further information, refer to the Company's audited financial
statements and footnotes thereto included in Item 8. of Form 10-K filed on
September 14, 2010.
RECLASSIFICATIONS
Certain amounts have been reclassified in the presentation of the Consolidated
Financial Statements as of August 31, 2009 to be consistent with the
presentation in the Consolidated Financial Statements as of August 31, 2010.
This reclassification had no impact on previously reported net income, cash flow
from operations or changes in shareholder equity.
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 and has incurred losses of approximately $573,000 for the three month
period ended August 31, 2010. Losses are expected to continue until the
Company's insurance company subsidiary, First Surety Corporation ("FSC")
develops a more substantial book of business. While improvement is anticipated
as the business plan is implemented, restrictions on the use of FSC's assets
(See Management's Discussion and Analysis), 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.
Expansion of FSC's business to other states is a key component of fully
implementing the Company's business plan. Regulatory approval and licensing is
required for each state in which FSC seeks to conduct business. 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 new entry into this market, and based upon current
financial condition of the parent company. This is the case notwithstanding the
reinsurance agreement entered into by FSC with Lloyd's of London, in April 2009,
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
F-7
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 in addition to 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.
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. (See Note D).
Given current financial market conditions and the uncertainties as to when
stability will return to the financial markets, until permanent financing can be
secured, management will strive to reduce and then eliminate operating losses by
implementing further measures to control and reduce costs while maintaining and
growing the Company's current revenue base. Unless permanent financing can be
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
secured, future revenue growth can be expected to be achieved at a slower pace
than has been projected by the Company. Until such time that the Company's
operating costs can be serviced by the Company's revenue stream, management will
continue to seek to raise additional funds for operations through private
placements of stock, other long-term or permanent financing, or short-term
borrowings. However, the Company cannot be certain that it will be able to
continue to obtain adequate funding in order to reasonably predict whether it
will be able to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE B - 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.
F-9
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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.
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 AND FAIR VALUE DISCLOSURES
- -----------------------------------------------
The Company classifies its investments as available-for-sale, and as such, they
are carried at fair value. The amortized cost of investments is adjusted for
amortization of premiums and accretion of discounts which are included in net
investment income. Changes in fair value are reported as a component of other
comprehensive income, exclusive of other-than-temporary impairment losses, if
any. For the three month period ended August 31, 2010, there have been no
other-than-temporary impairments. The Company intends and believes it has the
ability to hold all investments in an unrealized loss position until the
expected recovery in value, which may be at maturity.
The following table sets forth the amortized cost and estimated market value of
bonds and equity securities available-for-sale and carried at market value on
August 31, 2010.
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
U.S. government agency
mortgage-backed securities $ 5,454,442 $ 201,402 $ 11,700 $ 5,644,144
State and municipal securities 970,715 4,231 623 974,323
Foreign obligations 321,579 5,193 - 326,772
------------------- -------------------- ------------------- --------------------
$ 6,746,736 $ 210,826 $ 12,323 $ 6,945,239
=================== ==================== =================== ====================
The following table sets forth the amortized cost and estimated market value of
bonds and equity securities available-for-sale and carried at market value on
May 31, 2010.
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
U.S. government agency
mortgage-backed securities $ 6,413,856 $ 208,315 $ 3,700 $ 6,618,472
------------------- -------------------- ------------------- --------------------
$ 6,413,856 $ 208,315 $ 3,700 $ 6,618,472
=================== ==================== =================== ====================
The Company's short-term investments of $172,638 and $264,079 at August 31, 2010
and May 31, 2010 consisted of money-market investment funds.
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during fiscal year 2010, 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 or August
31, 2010.
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:
F-11
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
O Level 1 - Quoted prices for identical instruments in active markets.
O Level 2 - Quoted prices for similar instruments in active markets;
quoted prices for identical or similar instruments in markets that are
not active; and model-derived valuations in which all significant
inputs are observable in active markets.
O Level 3 - Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
Fair 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 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:
August 31, 2010
---------------------------------------------------------------------
Fair Value Measurements Using
--------------- ----------------- ---------------- -----------------
Level 1 Level 2 Level 3 Assets At
Fair Value
---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,945,239 $ - $ 6,945,239
Short-term investments at fair value 172,638 - - 172,638
---------------- ----------------- ---------------- -----------------
Total Assets $ 172,638 $ 6,945,239 $ - $ 7,117,877
F-12
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
May 31, 2010
--------------------------------------------------- -----------------
Fair Value Measurements Using
---------------- ----------------- ---------------- -----------------
Level 1 Level 2 Level 3 Assets At
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
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 August 31, 20010.
During the three months ended August 31, 2010, the company recognized gross
realized gains on the sale of securities classified as available-for-sale. The
sales consisted of U.S. Government agency mortgage backed securities with an
amortized cost basis of $789,666, which were sold for a gain of $51,019.
NOTE D - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
- ------------------------------------------------------
The Company had the following unsecured notes payable to individuals and a
commercial bank as of August 31, 2010 and May 31, 2010 respectively:
August 31, May 31,
2010 2010
------------------ ------------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party) $ 1,182,000 $ 1,057,000
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 short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12.00 21,666 7,104
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 19,907 37,119
------------------ ------------------
Notes payable $ 4,723,573 $ 4,601,223
================== ==================
F-13
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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%
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.
During the three months ended August 31, 2010 and the year ended May 31, 2010, a
company owned by a board member provided consulting services. This company
provided services totaling $15,525 in the three months ended August 31, 2010 and
$15,525 in the three months ended August 31, 2009. Amounts owed to this company
are treated as related party payables in the amounts $96,185 and $96,160 at
August 31, 2010 and May 31, 2010.
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Advances have been made to the Company by its principal shareholder and chief
executive officer to fund ongoing operations under a pre-approved unsecured
financing arrangement bearing interest at the rate of 12.00%. During the three
months ended August 31, 2010, the principal shareholder personally assumed debt
that was payable by the Company in the amount of $169,180, of which $19,180 was
interest and $150,000 was principal. The following table summarizes the activity
under such arrangement for the three month period ended August 31, 2010.
Three month
period ended
August 31,
2010
------------------
Balance owed, beginning of period $ 7,104
Proceeds from borrowings 122,375
Assumption of company debt 169,180
Accrued payroll offsetting repayments 43,315
Repayments (320,308)
------------------
Balance owed, end of period $ 21,666
==================
Scheduled maturities and principal payments for each of the next five years
ending August 31 are as follows:
2011 (including demand notes) $ 4,723,573
2012 - 2015 -
-----------------
$ 4,723,573
=================
NOTE E-STOCKHOLDERS EQUITY
- --------------------------
In the three month period ending August 31, 2010, the Company issued 895,000
shares of the Company's common stock in connection with new and continued
borrowings totaling $895,000. The shares were valued at approximately $.004312
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 $3,859.
In the three month period ending August 31, 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. The shares were valued at approximately $.004095
per share based on the average quoted closing price of the Company's stock for
the 20-day period proceeding the date of the transaction and totaled $2,048.
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
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
"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. 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 are 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon
Liquidation senior and prior to the Common Stock and all other equity
securities to which the Series C ranks prior, with respect to
dividends and upon Liquidation (collectively, "JUNIOR SECURITIES"),
(b) pari passu with the Corporation's Series A Preferred Stock, par
value $0.0001 per share (the "SERIES A STOCK"), the Corporation's
Series B Stock, and any other series of Preferred Stock subsequently
established by the Board with equal ranking (any such other series of
Preferred Stock, together with the Series C Stock, the Series B Stock
and Series A Stock are collectively referred to as the "EQUAL RANKING
PREFERRED") and (c) junior to any other series of Preferred Stock
subsequently established by the Board with senior ranking.
4. Dividends.
(a) DIVIDEND ACCRUAL AND PAYMENT. The holders of the Series C Stock
shall be entitled to receive, in preference to the holders of
Junior Securities, dividends ("DIVIDENDS") on each outstanding
share of Series C Stock at the rate of 8% per annum of the sum of
(i) the Series C Face Amount plus (ii) an amount equal to any
accrued, but unpaid, dividends on such Series C Stock, including
for this purpose the exchanged Series B Amount outstanding with
respect to such Series C Stock. For purposes hereof, the "SERIES
B AMOUNT" means an amount equal to the dividend that would have
accrued on such Series C Stock held by such holder from and after
the Series B Original Issue Date applicable to such share of
Series C Stock, through the Original Issue Date as if such Series
C Stock had been issued on such Series B Original Issue Date,
less all amounts thereof distributed by the Corporation with
respect to such Series C Stock. Dividends shall be payable
quarterly in arrears on each January 1, April 1, July 1 and
October 1 following the Original Issue Date, or, if any such date
is a Saturday, Sunday or legal holiday, then on the next day
which is not a Saturday, Sunday or legal holiday (each a
"DIVIDEND PAYMENT DATE"), as declared by the Board and, if not
paid on the Dividend Payment Date, shall accrue. Amounts
available for payment of Dividends (including for 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
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
"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
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
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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. Accretion and dividends on Series B mandatorily redeemable
preferred stock deducted from net income amounted to $44,624 and $78,505 for the
three-month period ended August 31, 2010. 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. There were no
shares of Series B Stock surrendered or exchanged in the 3 month period ending
August 31, 2010.
NOTE F - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
- ------------------------------------------------------------
As of August 31, 2010, the Company had accrued and withheld approximately
$167,000 in Federal payroll taxes and approximately $31,000 in West Virginia
payroll withholdings. These amounts have not been remitted and are still payable
at October 20, 2010, as well as penalties and interest of approximately $31,000.
These amounts are reflected in the accompanying financial statements as accrued
expenses, and management intends to pay this obligation as soon as possible.
NOTE G - 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.
THREE MONTH PERIOD ENDED
INDUSTRY SEGMENT AUGUST 31, AUGUST 31,
2010 2009
---------------- --------------- --------------
REVENUES:
Investment advisory $ 55,804 $ 69,148
Surety insurance 283,259 286,575
Corporate - -
--------------- --------------
Total revenues $ 339,063 $ 355,723
=============== ==============
NET INCOME (LOSS):
Investment advisory $11,897 $ (11,042)
Surety insurance 120,321 129,930
Corporate (481,750) (642,970)
--------------- --------------
Total net income (loss) $ (349,532) $ (524,082)
=============== ==============
F-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE H - 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.
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 called 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. Year 2 of the contract is 12 months in duration, with premium
due within 30 days of the end of the second Agreement Year, June 1, 2011, at a
rate of 35% of gross written premium, subject to a minimum premium $490,000. At
August 31, 2010 and May 31, 2010, the Company had prepaid reinsurance premiums
of $263,723 and $214,385 and ceded reinsurance payable/(deposited) of $29,721
and ($122,568). At May 31, 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 three months ended August
31, 2010 or 2009
The effects of reinsurance on premium written and earned for fiscal 2010 and
2009 are as follows;
THREE MONTH THREE MONTH THREE MONTH THREE MONTH PERIOD
PERIOD ENDING PERIOD ENDING PERIOD ENDING ENDING AUGUST 31,
AUGUST 31, 2010 - AUGUST 31, 2010 AUGUST 31, 2009 - 2009 -
WRITTEN - EARNED WRITTEN EARNED
------------------- ------------------- ------------------ --------------------
DIRECT $ 448,924 $ 286,706 $ 313,598 $ 250,033
CEDED $ 152,287 $ 102,950 $ 105,752 $ 43,141
------------------- ------------------- ------------------ --------------------
NET $ 296,637 $ 183,756 $ 207,846 $ 206,892
=================== =================== ================== =====================
NOTE I-STOCK-BASED COMPENSATION
- -------------------------------
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 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.
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J - SUBSEQUENT EVENTS
- --------------------------
Subsequent to August 31, 2010, the Company obtained borrowings of $255,000 from
individuals and business' to fund ongoing operations and made repayments of
$100,000. Such borrowings were obtained under demand or short term notes bearing
interest at the rate of 10.00%. These borrowings, and the renewal of previous
borrowings, included the issuance of 680,000 shares of its common stock as
additional consideration. Additionally, the Company obtained borrowings of
$151,517 from its principal shareholder and chief executive officer under its
pre-approved financing arrangement bearing interest at the rate of 12.00% and
made repayments totaling $153,400.
In October 2010, warrants were exercised for a total of 2,627,381 shares of the
Company's common stock.
On September 10, 2010, the Company issued 6,213,285 shares of the Company's
common stock in connection with the semi-annual issuance of shares under the
bridge-financing arrangements (see Note D).
On September 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 accrued and unpaid quarterly dividends amounting to
$30,713, $80,951 and $194,873, respectively. As of September 30, 2010, the
accumulated accrued and unpaid dividend amounted to $401,945, $1,278,476, and
$3,054,144, respectively.
F-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
- --------------------------------------------------------------------------------
During fiscal 2010 and the three-month period ended August 31, 2010, the Company
has focused its primary efforts on the development and marketing of its surety
business in West Virginia and Ohio, arranging for 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 FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 2010
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) for the three-month period ended
August 31, 2010 of $573,222 as compared with a loss of $942,942 for the
corresponding period ended August 31, 2009.
REVENUES
Revenues from operations for the three-month period ended August 31, 2010 were
$339,063 as compared with $355,724 for the corresponding period ended August 31,
2009. The overall decrease in revenues is attributable to the timing of earned
premium by FSC, the removal of mutual fund fees upon the liquidation of the
Jacobs & Company Mutual Fund, and the receipt of large principal payments on
mortgage backed securities, which resulted in large amortization of premiums
recognized in the quarter.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $54,170 for the three-month
period ended August 31, 2010 as compared with $64,326 for the corresponding
period ended August 31, 2009. 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 quarter to quarter with any large fluctuations being
attributable to the growth or decline of assets under management. The decrease
in revenues is attributable to the liquidation of the Jacobs & Company Mutual
Fund in November 2009, as summarized below. (See "Expenses, Mutual Fund Costs,")
Three-month Period Ended
August 31,
----------
2010 2009
----------------- ----------------
Individually managed accounts $ 54,170 $ 58,419
Mutual fund - 5,907
----------------- ----------------
Total $ 54,170 $ 64,326
================= ================
-3-
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $283,260 for the three-month
period ended August 31, 2010 as compared with $286,575 for the corresponding
period ended August 31, 2009. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
Three-month Period Ended
August 31,
----------
2010 2009
----------------- ----------------
Premium earned $ 183,756 $ 206,892
Net investment income 84,270 72,243
Commissions earned 15,234 7,440
----------------- ----------------
Total $ 283,260 $ 286,575
================= ================
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. The decrease in premium earned for the three-month period
ended August 31, 2010 in comparison to the corresponding period from the prior
year is a result of having 12 months covered by reinsurance, and thus reduced by
12 months of ceded premiums, versus only 5 months of reinsurance in the prior
year. Investment income should remain relatively consistent, but can fluctuate
based on interest rates and market conditions as well as the average assets held
for investment. The increase in corresponding periods reflects growth in average
assets held for investment in FSC's investment portfolio from approximately
$6.452 million for the three-month period ended August 31, 2009 to approximately
$6.974 million for the three-month period ended August 31, 2010 offset by a
decrease in investment yield from approximately 4.31% for the three-month period
ended August 31, 2009 to approximately 3.72% for the three-month period ended
August 31, 2010. In addition, the sale of investments resulted in a realized
gain, which was offset by the amortization of premium for larger than usual
principal payments on mortgage backed securities.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of August 31, 2010. However,
"incurred but not reported" (IBNR) policy losses for the three-month period
ended August 31, 2010 and 2009 amounted to $42,327 and $48,185 respectively.
Such amounts represent the provision for loss and loss adjustment expense
attributable to surety bonds issued by FSC. Such estimates are based on industry
averages adjusted for factors that are unique to FSC's underwriting approach and
are constantly reviewed for adequacy based on current market conditions and
other factors unique to FSC's business. For each of these periods, IBNR policy
losses were approximately 23% of earned premium.
-4-
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $59,981 and $62,602 for the three-month
periods ended August 31, 20010 and 2009, respectively, represent charges to
operations for policy acquisition expense and premium tax attributable to surety
polices issued by FSC and are recognized ratably over the period in which
premiums are earned. Such cost as a percentage of earned premium was
approximately 33% and 30% for the periods ended August 31, 2010 and 2009
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended August 31,
2010 and 2009 were $255,398 and $400,614 respectively, representing a decrease
of $145,216, and were comprised of the following:
Three-month Period Ended
August 31,
------------------ ------------------
2010 2009 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 112,548 $ 233,504 $ (120,956)
General office expense 28,377 27,841 536
Legal and other professional fees and costs 25,326 67,076 (41,750)
Audit, accounting and related services 25,543 24,018 1,525
Travel, meals and entertainment 9,660 15,332 (5,672)
Other general and administrative 53,944 32,843 21,101
------------------ ------------------ -------------------
Total general and administrative $ 255,398 $ 400,614 $ (145,216)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $121,000 and are comprised of the following:
Three-month Period Ended
August 31,
--------------------------------------
2010 2009 Difference
------------------- ------------------ -------------------
Salaries and taxes $ 128,546 $ 126,761 $ 1,785
Commissions 7,631 11,332 (3,701)
Stock option expense 13,452 138,890 (125,438)
Fringe benefits 14,262 12,561 1,701
Key-man insurance 10,988 11,219 (231)
Deferred payroll costs (62,331) (67,259) 4,928
------------------- ------------------ -------------------
Total salaries and related costs $ 112,548 $ 233,504 $ (120,956)
=================== ================== ===================
The decrease in stock option expense is attributable to the award of stock
options on June 30, 2009.
-5-
Legal and other professional fees and costs were comprised of the following:
Three-month Period Ended
August 31,
--------------------------------------
2010 2009 Difference
-------------------- ------------------ ------------------
General corporate services $ 8,589 $ 38,218 $ (30,098)
Coal reclamation consulting 6,420 - 6,420
Acquisition and financing related costs 10,317 28,858 (18,541)
-------------------- ------------------ ------------------
Total legal and other professional fees $ 25,326 $ 67,076 $ (41,750)
==================== ================== ==================
The decrease in general corporate services results primarily from legal fees
incurred in the recapitalization and exchange of Series B Preferred shares for
Series C Preferred shares, as well as timing differences related to review and
assistance provided in connection with the filing of the Company's annual report
with the Securities and Exchange Commission. In the three-month period ended
August 31, 2010, the Company incurred expense of $6,420 related to a coal
reclamation consulting services agreement between FSC and an unrelated
individual. Legal and other professional services and costs related to the
Company's pending acquisitions and on-going efforts to obtain financing
necessary to expand the Company's business and penetrate new markets amounted to
$10,317 and $28,858 for the three-month periods ended August 31, 2010 and 2009,
respectively.
The decrease in travel, meals and entertainment expense for the three-month
period ended August 31, 2010 as compared to the corresponding 2009 period
related primarily to additional efforts made by management to reduce expense.
Other general and administrative expense increased approximately $21,000 for the
three-month period ended August 31, 2010 as compared to the corresponding 2009
period. This increase in general and administrative expense is due to additional
training and conferences for staff, timing of FSC board meetings, increased
licenses and fees for FSC related to obtaining a U.S. Treasury Listing and the
purchase of network and computer equipment.
MUTUAL FUND COSTS
J&C was the investment advisor to the Jacobs & Company Mutual Fund (the "Fund")
until its liquidation and distribution to its shareholders on December 1, 2009.
While the Fund was responsible for its own operating expenses, J&C, as the
investment advisor, had agreed to limit the Fund's aggregate annual operating
expenses to 2% of the average net assets. The cumulative reimbursement due the
Fund by J&C as of August 31, 2010 was $54,866.
J&C had no revenue or expenses attributable to the Fund for the period ending
August 31, 2010; it had absorbed $38,326 of the Fund's operating expenses during
the corresponding period from the previous year.
-6-
INTEREST EXPENSE
Interest expense for the three-month period ended August 31, 2010 was $204,368
as compared with $327,284 for the corresponding period ended August 31, 2009.
Components of interest expense are comprised of the following:
Three-month Period Ended
August 31,
-----------------------------------
2010 2009 Difference
----------------- ----------------- -----------------
Interest expense on bridge-financing $ 149,973 $ 83,911 $ 66,062
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 24,358 225,970 (201,612)
Interest expense on demand and term notes 28,448 17,047 11,401
Other finance charges 1,589 356 1,233
----------------- ----------------- -----------------
Total interest expense $ 204,368 $ 327,284 $ (122,916)
================= ================= =================
The decrease in the expense of common shares issued (or to be issued) for the
three-month period ended August 31, 2010 as compared to the corresponding period
of the previous year was largely attributable to the issuance of common stock on
June 5, 2009 in relation to the agreement with the bridge loan holders. Interest
expense on bridge-financing increased due to the increase in the interest rate
to 17% as part of the forebearance agreement terms. Interest expense on demand
and term notes increased due to increased borrowings.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended August 31, 2010 and
2009 are as follows:
Three-month Period Ended
August 31,
--------------------------------------
2010 2009 Difference
--------------------- ------------------ -----------------
Accretion of discount $ 4,626 $ 148,300 $ (143,674)
Accrued dividends - mandatorily redeemable preferred stock 30,079 270,559 (240,480)
Accrued dividends - equity preferred stock 188,985 - 188,985
--------------------- ------------------ -----------------
Total accretion and dividends $ 223,690 $ 418,859 $ (195,169)
===================== ================== =================
The Series B class of stock is treated as a liability as of November 30, 2009
after the majority was exchanged for Series C equity stock. Therefore, accretion
of $44,624 and dividends of $78,505 associated with the Series B remaining after
that date are deductions from net income and not included in the table above.
The decrease in the accretion of discount and the accrued dividends on
mandatorily redeemable preferred stock 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
-7-
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the 2005 acquisition of
FSC, the Company received cash and investments held by FSC totaling $2.75
million, with the difference being attributed to the multi-line property and
casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such
licenses have indefinite lives and are evaluated annually for recoverability and
impairment loss. Impairment loss, if any, is measured by estimating future cash
flows attributable to such assets based on forecasts and projections and
comparing such discounted cash flow amounts to the carrying value of the asset.
Should actual results differ from such forecasts and projections, such assets
may be subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of August 31, 2010.
FSC is licensed to write surety in West Virginia and Ohio and has focused its
efforts primarily on coal permit bonds. Reclamation of land that has been
disturbed by mining operations is highly regulated by federal and state
jurisdictions, and the surety bonds posted to assure that reclamation is
accomplished are generally long-term in nature, with mining operations and
reclamation work being conducted in unison as the property is being mined.
Additionally, no two principals or properties are alike due to varied company
structures and unique geography and geology of each site.
In underwriting coal reclamation bonds, management obtains estimates of costs to
reclaim the relevant 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 in an account in which FSC has a security
interest as collateral for the surety bond to significantly mitigate FSC's
exposure to loss. Should the principal default in its obligation to reclaim the
property as specified in the mining permit, FSC would then use the funds in the
collateral account to reclaim the property or as an offset in forfeiting 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 has experienced significant deterioration in value and FSC is not
otherwise able to recover under its contractual rights to indemnification.
-8-
Miscellaneous fixed-liability 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 experiences deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided after
periodic monitoring and inspections, 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 actuaries experienced in the surety field.
ANALYSIS OF LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION AND
RECENT DEVELOPMENTS AND FUTURE DIRECTION OF COMPANY
The Company has experienced significant 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, and a loss of approximately $573,000 for the three-month period
ended August 31, 2010. The Company had positive cash flow of approximately
$200,000 from operating activities for the three-month period ended August 31,
2010. A substantial portion of the Company's cash flow is generated by its
insurance subsidiary and is subject to certain withdrawal restrictions. Despite
the continued reduction of operating expenses, the Company has not been able to
pay certain amounts due to professionals and others, continues to be unable to
pay its preferred stock dividend obligation, certain payroll taxes and
withholdings from 2009 or to cure its default in certain quarterly payments due
its bridge-financing lenders. 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.
The Company is restricted in its ability to withdraw monies from FSC without the
prior approval of the Insurance Commissioner. Of the Company's investments and
cash of $7,243,300 as of August 31, 2010, $7,234,122 is restricted to FSC.
Furthermore, capital raised pursuant to the sale of Series A preferred stock of
the Company in connection with the issuance of partially-collateralized surety
bonds must be contributed by the Company into the surplus accounts of FSC.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to allow FSC to expand its market share and
to result in increased cash flow for each of the Company's operating
subsidiaries.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. In fiscal 2009, the Company was able
to increase the capital of FSC, reactivate FSC's insurance license in Ohio and
-9-
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 became stabilized, entry into other
states would be less challenging. Accordingly, management continues to pursue
avenues that can provide additional capital to 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 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
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 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.
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.
-10-
The Company's exposure to the subprime mortgage risk is minimal due to its
investment in mortgage-backed securities having been limited to only those
securities backed by the United States government (i.e. Government National
Mortgage Association or GNMA securities). The Company also holds municipal
obligations that have been fully defeased through the purchase of Resolution
Funding Corporation ("REFCORP") strips that were placed in escrow and provide
the means for the bond repayment. REFCORP was created by the Financial
Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") to provide
funds to the Resolution Trust Corporation ("RTC") in order to help resolve the
Savings and Loan failures. REFCORP operates as a United States Treasury agency
under the direction of the RTC Oversight Board, whose chair is the secretary of
the United States Treasury, and its obligations are ultimately backed by the
United States government.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- ------------------------------------------------------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 4T. CONTROLS AND PROCEDURES
- --------------------------------
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures.
Our management, with the participation of its Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of our disclosure controls
and procedures as defined in Rules 13a-15(e) under the Securities Exchange Act
of 1934, as of August 31, 2010. As previously reported in our Annual Report on
Form 10-K for the year ended 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. Based
upon their evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures, as of August
31, 2010, were ineffective. Changes will be considered as additional financial
resources and accounting staff become available.
Notwithstanding the above, management believes the unaudited consolidated
condensed financial statements in this Quarterly Report on Form 10-Q fairly
present, in all material respects, the Company's financial condition as of
August 31, 2010 and May 31, 2010 and the results of its operations and cash
flows for the three month period ended August 31, 2010 and 2009 in conformity
with U.S. generally accepted accounting principals (GAAP).
-11-
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
None.
ITEM 1A. RISK FACTORS
- -----------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
- -----------------------------------------------
Certificates 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 three months ended August 31, 2010, 1,395,000 common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings. Subsequent to August 31, 2010, 680,000 common shares were
issued in private placements to various individuals pursuant to short term
borrowings, 2,627,381 common shares were issued to holders exercising the
company's warrants, and 6,213,285 common shares were issued to the Bridge
lenders.
The issuance of the aforementioned securities is exempt from registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), by
reason of the provision of Section 4(2) of the Securities Act, as transactions
not involving any public offering, in reliance upon, among other things, the
representations made by the investors, including representations regarding their
status as accredited investors (as such term is defined under Rule 501
promulgated under the Securities Act), and their acquisition of the securities
for investment and not with a current view to distribution thereof. The
securities contain a legend to the effect that such securities are not
registered under the Securities Act pursuant to an exemption from such
registration. The issuance of the securities was not underwritten.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
- ---------------------------------------
The Company has incurred an event of default with respect to quarterly interest
and principal payments under its bridge-financing arrangement. As of the date of
filing this report, the amount required to cure the default is $1,458,510.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
- -------------------------
None.
-12-
ITEM 6. EXHIBITS
- ----------------
3.1 Company's Articles of Incorporation (1)
3.2 Company's By-laws (1)
3.3 Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
3.4 Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
4.1 Certificate of the Designations, Powers, Preferences and Rights of Series A Preferred Stock of Jacobs Financial Group (1)
4.2 Certificate of the Designations, Powers, Preferences and Rights of Series B Preferred Stock of Jacobs Financial Group (1)
10.1 Agreement to acquire by merger Reclamation Surety Holding Company, Inc. (2) (4)
10.2 Stock Purchase Agreement with National Indemnity Company to purchase Unione Italiana Insurance Company of America dated
August 20, 2008 (5) (6)
31.1 Certification of Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-146.1 promulgated under the
Securities Exchange Act of 1934
32.1 Certification of Chief Executive Officer and 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 (Bridge-financing) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Incorporated by reference to the Company's Current Report on form 8-K dated December 29, 2005.
(2) Incorporated by reference to the Company's Current Report on form 8-K dated February 8, 2008.
(3) Incorporated by reference to the Company's Current Report on form 8-K dated June 6, 2008
(4) Incorporated by reference to the Company's Current Report on form 8-K dated June 24, 2008
(5) Incorporated by reference to the Company's Current Report on form 8-K dated August 20, 2008
(6) Incorporated by reference to the Company's Current Report on form 8-K dated November 13, 2008
-13-
SIGNATURES
Pursuant to the requirements 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.
Date: October 20, 2010 JACOBS FINANCIAL GROUP, INC.
--------------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
--------------------------------------------------
John M. Jacobs, President
-14-