Attached files
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, 2009
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
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DELAWARE 84-0922335
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(State or other jurisdiction of (IRS Employer Identification No.)
incorporation)
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300 SUMMERS STREET, SUITE 970, CHARLESTON, WV 25301
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (304) 343-8171
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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: 193,673,214 shares of common
stock as of October 15, 2009.
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 F-5 and
Preferred Stock 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, 2009 MAY 31, 2009
--------------- ---------------
ASSETS
INVESTMENTS AND CASH:
Bonds available for sale, at market value $ 902,201 $ 908,766
(amortized cost - 08/31/09 $855,078; 05/31/09 $866,855)
Mortgage-back securities held to maturity, at amortized costs 5,159,445 5,085,300
(market value - 08/31/09 $5,230,512; 05/31/09 $5,157,936)
Short-term investments, at cost (approximates market value) 312,245 387,753
Cash 185,032 80,038
--------------- ---------------
TOTAL INVESTMENTS AND CASH 6,558,923 6,461,857
Investment income due and accrued 28,301 28,124
Premiums and other accounts receivable 65,743 61,184
Prepaid reinsurance premium 149,725 87,114
Deferred policy acquisition costs 158,734 143,173
Furniture and equipment, net of accumulated depreciation
of $136,288 and $133,493, respectively 20,374 23,169
Other assets 36,527 43,517
Intangible assets 150,000 150,000
--------------- ---------------
TOTAL ASSETS $ 7,168,327 $ 6,998,138
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 480,843 $ 432,658
Reserve for unearned premiums 594,359 530,795
Accrued expenses and professional fees payable 502,327 470,099
Accounts payable 325,983 268,066
Related party payable 90,534 75,009
Demand note payable to related party 7,163 3,081
Notes payable 4,280,895 4,049,791
Accrued interest payable 172,874 303,914
Ceded reinsurance payable 47,926 92,173
Other liabilities 115,431 78,470
--------------- ---------------
TOTAL LIABILITIES 6,618,335 6,304,056
Series a preferred stock, $.0001 Par value per share; 1 million shares
authorized; 2,675 and 2,665 shares issued and outstanding at August 31, 2009 and
May 31, 2009, respectively; stated liquidation value of $1,000 per share 2,902,070 2,860,670
Series B Preferred Stock, $.0001 par value per share; 9,941.341 shares
authorized; 9,621.940 shares issued and outstanding at August 31, 2009 and May
31, 2009; stated liquidation value of $1,000 per share 11,816,899 11,429,440
--------------- ---------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 14,718,969 14,290,110
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value per share; 490 million shares authorized;
187,150,178 and 179,682,912 issued outstanding at August 31, 2009
and May 31, 2009, respectively 18,715 17,968
Additional paid in capital 2,990,061 2,626,236
Accumulated deficit (17,222,667) (16,279,725)
Accumulated other comprehensive income (loss) 44,914 39,493
--------------- ---------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (14,168,977) (13,596,028)
--------------- ---------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 7,168,327 $ 6,998,138
=============== ===============
See accompanying notes.
F-1
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Operations (Unaudited)
THREE MONTHS ENDED AUGUST 31,
-----------------------------------
2009 2008
--------------- ---------------
Revenues:
Investment advisory services $ 64,326 $ 59,529
Insurance premiums and commissions 214,332 157,506
Net investment income 72,244 68,680
Other income 4,822 -
--------------- ---------------
Total Revenues 355,724 285,715
Expenses:
Incurred policy losses 48,185 44,785
Insurance policy acquisition costs 62,602 39,029
General and administrative 400,614 535,939
Mutual fund costs 38,326 41,567
Depreciation 2,795 3,195
--------------- ---------------
Total Expenses 552,522 664,515
--------------- ---------------
Net Income (Loss) from Operations (196,798) (378,800)
Interest expense (327,284) (118,778)
Interest income - 849
--------------- ---------------
Net Income (Loss) (524,082) (496,729)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (418,860) (389,299)
--------------- ---------------
Net Income (Loss) Attributable
to Common Stockholders $ (942,942) $ (886,028)
=============== ===============
Basic and Dilutive Net Income (Loss) Per Share:
Net Income (Loss) Per Share $ (0.01) $ (0.01)
=============== ===============
Weighted-Average Shares Outstanding 185,278,229 168,666,964
=============== ===============
See accompanying notes.
F-2
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended
August 31
-----------------------------
2009 2008
------------- -------------
Comprehensive income (loss):
Net income (loss) attributable to common stockholders $ (942,942) $ (886,028)
Other comprehensive income (loss):
Net unrealized gain (loss) of available-for-sale
investments arising during period 5,421 (4,872)
------------- -------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized in other comprehensive income 5,421 (4,872)
------------- -------------
Comprehensive income (loss) attributable to common stockholders $ (937,521) $ (890,900)
============= =============
See accompanying notes.
F-3
Jacobs Financial Group, Inc,
Consolidated Condensed Statement of Cash Flows (Unaudited)
THREE MONTHS ENDED AUGUST 31
-----------------------------
2009 2008
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (524,082) $ (496,729)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Unearned premium 953 45,354
Stock option expense 138,890 13,491
Stock issued (or to be issued) in connection
with financing arrangements 223,886 23,227
Provision for loss reserves 48,185 44,784
Amortization of premium 14,873 8,764
Depreciation 2,795 3,195
Premium and other receivables (4,559) (5,041)
Accretion of discount (4,579) (1,278)
Investment income due and accrued (817) (7,091)
Deferred policy acquisition costs (15,561) (3,156)
Change in operating assets and liabilities:
Other assets 7,199 112,629
Related party accounts payable 15,525 (6,758)
Accounts payable and cash overdraft 57,917 (51,301)
Accrued expenses and other liabilities (106,098) 96,560
------------- -------------
Net cash flows from (used in) operating activities (145,473) (223,350)
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments 75,508 852,572
Cost of bonds acquired - (200,712)
Costs of mortgaged-backed securities acquired (396,343) (921,795)
Purchases of securities available for sale - (620,059)
Repayment of mortgage-backed securities 324,321 193,125
------------- -------------
Net cash flows from (used in) investing activities 3,486 (696,869)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 106,597 28,000
Repayment of related party debt (102,515) (29,000)
Proceeds from borrowings 317,500 940,000
Repayment of borrowings (86,396) (119,584)
Proceeds from issuance of Series A preferred stock 10,000 118,000
Proceeds from issuance of Series B preferred stock - -
Proceeds from exercise of common stock warrants 1,795 -
------------- -------------
Net cash flows from financing activities 246,981 937,416
NET INCREASE (DECREASE) IN CASH 104,994 17,197
CASH AT BEGINNING OF PERIOD 80,038 48,640
------------- -------------
CASH AT END OF PERIOD $ 185,032 $ 65,837
============= =============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 257,471 $ 8,127
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 223,886 23,227
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, 2008
----------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------
SERIES A SERIES B
MANDATORILY REDEEMABLE MANDATORILY REDEEMABLE ACCUMULATED
CONVERTIBLE ADDITIONAL OTHER
PREFERRED STOCK PREFERRED STOCK PAID-IN ACCUMULATED COMPREHENSIVE
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT INCOME TOTAL
(LOSS)
-------- ----------- --------- ----------- ----------- ------- ----------- ------------- ------- -------------
BALANCE,
MAY 31, 2008 2,230 $ 2,308,933 9,621.940 $ 9,936,866 166,091,242 $16,610 $ 2,423,537 $(13,222,039) $ 6,483 $(10,775,409)
Issuance of
Series A 118 118,000 - - - - - - - -
and B
Preferred
Stock and
common stock
Issuance of
common stock - - - - 3,115,581 312 27,814 - - 28,126
stock as
additional
consideration
for financing
arrangement
Accretion of
mandatorily
redeemable
convertible
preferred stock - 4,149 - 134,085 - - - (138,234) - (138,234)
Accrued
dividends
of mandatorily
redeemable
convertible
preferred stock - 23,352 - 227,713 - - - (251,065) - (251,065)
Expense of
common shares
to be issued
in connection
with financing
arrangements - - - - - - 21,158 - - 21,158
Common stock
option
expense - - - - - - 13,491 - - 13,491
Unrealized net
gain on
available for
sale securities - - - - - - - - (4,872) (4,872)
Net income
(loss), three
month period
ended
August 31, 2008 - - - - - - - (496,729) - (496,729)
-------- ----------- --------- ----------- ----------- ------- ----------- ------------- ------- -------------
BALANCE,
AUGUST 31, 2008 2,348 $ 2,454,434 9,621.940 $10,298,664 169,206,823 $16,921 $ 2,486,000 $(14,108,066) $ 1,611 $(11,603,534)
---------------------------------------------- ----------------------------------------------------------------------
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, 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-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, 2009, are not necessarily indicative of
the results of operations that can be expected for the fiscal year ending May
31, 2010. 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, 2009.
RECLASSIFICATIONS
Certain amounts have been reclassified in the presentation of the Consolidated
Financial Statements as of August 31, 2008 to be consistent with the
presentation in the Consolidated Financial Statements as of August 31, 2009.
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 $3,058,000 and $3,333,000 for the years ended May 31, 2009 and
2008 and has incurred losses of approximately $943,000 for the three month
period ended August 31, 2009. Losses are expected to continue until the
Company's insurance company subsidiary, First Surety Corporation ("FSC")
develops substantial 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.
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 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
F-7
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
financial condition of the parent company. This is the case notwithstanding the
reinsurance agreement entered into by FSC with Lloyd's of London and the
resulting increase in bonding capacity. Management believes that if FSC's
capital and surplus reserves were significantly more substantial and the
financial condition of the Company was stabilized, entry into other states would
be less challenging. Accordingly, management continues to pursue avenues that
can provide additional capital to increase the capacity of its insurance
subsidiary and to fund continuing operations as the business is being fully
developed. In addition, as an alternative means of addressing access to markets,
management is seeking to establish a relationship with any one of several
possible sureties that are licensed in those states 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.
During fiscal 2008 and the three month period ended August 31, 2008, the Company
completed two rounds of bridge financing totaling an aggregate of $3,500,000 in
order to pay expenses of operations and to pay fees and expenses incurred or
expected to be incurred in connection with a larger permanent financing. The
Company was not able to meet its December 2008 or March 2009 loan amortization
payments with respect to this financing and, thus, incurred payment defaults
with respect to these obligations. On June 5, 2009 the Company reached agreement
with the Holders to forbear from exercising their rights and remedies arising
from the Acknowledged Events of Default. The Holders agreed that the Company may
satisfy its obligation to make the Initial Amortization Payments by making 8
consecutive quarterly payments of $67,185 each, commencing September 10, 2009,
and within 14 days after same (See Note K), and continuing on the payment dates
prescribed by the Amortization Schedule for the Promissory Notes and ending on
June 10, 2011 (collectively, the "Payments"), it being understood that the
Payments shall result in the payment of the principal of and interest on the
unpaid portion of the Initial Amortization Payments at the rate of 10% per annum
from and after the originally scheduled payment dates. (See Note E).
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
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.
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
Statement No. 160 was issued to improve the relevance, comparability, and
transparency of financial information for the reporting entity by establishing
accounting and reporting standards attributable to noncontrolling, or minority,
interests in subsidiaries included in the reporting entity's consolidated
financial statements. This Statement clarifies that a noncontrolling interest in
a subsidiary is an ownership interest in the consolidated entity that should be
reported as equity in the consolidated financial statements and requires
consolidated net income to be reported at amounts that include amounts
attributable to both the parent and the noncontrolling interest. The Statement
also provides a single method for accounting for changes in the parent's
ownership interest in a subsidiary that does not result in deconsolidation, as
well as recognition of gain or loss when a subsidiary is deconsolidated as a
result of an ownership change in which the parent ceases to have a controlling
financial interest in the subsidiary, and expanded disclosures to clearly
identify and distinguish between the interests of the parent's owners and the
interests of the noncontrolling owners of a subsidiary. This Statement is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is prohibited. This
Statement shall be applied prospectively as of the beginning of the fiscal year
in which this Statement is initially applied, except for the presentation and
disclosure requirements, which shall be applied retrospectively for all periods
presented. The application of Statement No. 160 does not have a material impact
on the Company's results of operations or financial position.
In March 2008, the FASB issued Statement No. 161 "Disclosures about Derivative
Instruments and Hedging Activities--an amendment of FASB Statement No. 133".
This Statement changes the disclosure requirements for derivative instruments
and hedging activities in order to provide improved transparency of financial
reporting with respect to derivative instruments and hedging activities. This
Statement is effective for financial statements issued for fiscal years and
interim periods beginning after November 15, 2008, with early adoption
encouraged. The Company does not currently employ the use of derivative
instruments or engage in hedging activities and thus the issuance of this
Statement does not have any impact on the Company's current financial statement
disclosure requirements.
In May 2008, the FASB issued Statement No. 163 "Accounting for Financial
Guarantee Insurance Contracts - an interpretation of FASB Statement No. 60".
This Statement clarifies how Statement No. 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities. A financial guarantee
insurance contract within the scope of this Statement generally insures
investment securities in the form of municipal bonds or asset-backed securities.
FASB's intent in setting the scope of this Statement was to address the narrow
issue relating to those contracts for which diversity existed in the accounting
for claim losses. This Statement is effective for financial statements issued
for fiscal years beginning after December 15, 2008, and all interim periods
within those fiscal years, except for some disclosures about the insurance
enterprise's risk management activities, which are effective for the first
interim period after issuance to the Statement. Except for those disclosures,
earlier application is not permitted. The application of Statement No. 163 does
not have a material impact on the Company's results of operations or financial
position.
In June 2009, the Financial Accounting Standards Board ("FASB") issued SFAS No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - A Replacement of FASB Statement No. 162." This
SFAS establishes the FASB Accounting Standards Codification as the single source
F-9
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
of authoritative US generally accepted accounting principles. SFAS No. 168 is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. Management does not expect the application of
Statement No. 168 to have a material impact on the Company's results of
operations or financial position.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)." This statement changes how a reporting entity determines when an
entity that is insufficiently capitalized or is not controlled through voting
(or similar rights) should be consolidated. New disclosures will be required
regarding involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. SFAS No. 167 will be effective
for the start of the first fiscal year beginning after November 15, 2009 (June
1, 2010 for the Company). This SFAS is not expected to have a material impact on
the Company's financial statements.
In June 2009, the FASB issued SFAS No. 166, "Accounting for Transfers of
Financial Assets." This is a revision to SFAS No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," and will
require more information about transfers of financial assets, including
securitization transactions, and where entities have continuing exposure to the
risks related to transferred financial assets. It eliminates the concept of a
"qualifying special-purpose entity," and changes the requirements for
derecognizing financial assets, and requires additional disclosures. SFAS No.
166 will be effective for the start of the first fiscal year beginning after
November 15, 2009 (June 1, 2010 for the Company). This SFAS is not expected to
have a material impact on the Company's financial statements.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events." This statement
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. SFAS No. 165 is effective for interim and annual
financial periods ending after June 15, 2009, and has been applied with no
material impact on the Company's financial statements.
In April 2009, the FASB issued FASB Staff Position ("FSP") FAS 157-4,
"Determining Fair Value When the Volume and Level of Activity for the Asset or
Liability Have Significantly Decreased and Identifying Transactions That Are Not
Orderly." This FSP provides additional clarification on the determination of
fair value, including illustrative examples. FSP FAS 157-4 is effective for
interim and annual periods ending after June 15, 2009, with early adoption
permitted for periods ending after March 15, 2009. This FSP did not have a
material impact on the Company's financial statements.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, "Recognition and
Presentation of Other-Than-Temporary Impairments." This FSP provides guidance on
determining whether an impairment is other than temporary, provides examples to
be considered and identifies reporting requirements related to such impairments.
FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending
after June 15, 2009, with early adoption permitted for periods ending after
March 15, 2009. This FSP did not have a material impact on the Company's
financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, "Interim Disclosures
about Fair Value of Financial Instruments." This FSP requires disclosure about
the fair value of financial instruments whenever summarized financial
information for interim periods is issued, and requires disclosure of the fair
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
value of all financial instruments (where practicable) in the body or
accompanying notes of interim and annual financial statements. FSP FAS 107-1 and
APB 28-1 is effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. This FSP did not
have a material impact on the Company's financial statements.
In December 2008, the FASB issued FSP 132(R)-1, "Employers' Disclosure about
Postretirement Benefit Plan Assets." This FSP provides guidance on an employer's
disclosures regarding plan assets of a defined benefit pension or other
postretirement plan. The objectives of the disclosures required under this FSP
are to provide users of financial statements with an understanding of:
a) How investment allocation decisions are made;
b) The major categories of plan assets;
c) The inputs and valuation techniques used to measure the fair value of
plan assets;
d) The effect of fair value measurements using significant unobservable
inputs on changes in plan assets for the period; and
e) Significant concentrations of risk within plan assets.
The disclosures about plan assets required by this FSP are required for fiscal
years ending after December 15, 2009, and earlier application is permitted.
In April 2008, the FASB issued FSP 142-3, "Determination of the Useful Life of
Intangible Assets." This FSP amends the factors that should be considered in
developing renewal or extension assumptions used to determine the useful life of
a recognized intangible asset under SFAS No. 142, "Goodwill and Other Intangible
Assets." The intent of this FSP is to improve the consistency between the useful
life of a recognized intangible asset under SFAS No. 142 and the period of
expected cash flows used to measure the fair value of the asset under SFAS No.
141(R), "Business Combinations," and other U.S. generally accepted accounting
principles. FSP 142-3 is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those fiscal
years. The application of this FSP does not have a material impact on the
Company's financial statements.
NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
The Company classifies a portion of 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, 2009,
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, 2009.
F-11
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 $ 497,683 $ 14,707 $ - $ 512,390
mortgage-backed securities
State and municipal securities 357,395 32,416 - 389,811
Equity securities 1 10,280 - 2,209 8,071
------------------- -------------------- ------------------- --------------------
$ 865,358 $ 47,123 $ 2,209 $ 910,272
=================== ==================== =================== ====================
1 Equity securities consist of an investment in the original amount of $25,000 made in the Jacobs & Company Mutual
Fund ("the Fund") by its investment advisor, Jacobs & Company, and is recorded in other assets at market value.
Dividends paid by the Fund at calendar year-end 2007 and 2008 were reinvested. A partial withdrawal of $11,000 was
made on March 25, 2009
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, 2009.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S. government agency $ 514,039 $ 13,342 $ - $ 527,381
mortgage-backed securities
State and municipal securities 352,816 28,570 - 381,386
Equity securities 1 10,280 - 2,418 7,862
------------------- -------------------- ------------------- --------------------
$ 877,135 $ 41,912 $ 2,418 $ 916,629
=================== ==================== =================== ====================
The Company's short-term investments at August 31, 2009 of $312,245 consisted of
money-market investment funds.
The Company held the following investments, by security type, with the positive
intent and ability to hold to maturity as of August 31, 2009, and as such, they
are carried at amortized cost. For the three month periods ended August 31,
2009, there have been no other-than-temporary impairments.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S government agency
mortgage-backed securities $ 5,159,445 $ 78,189 $ 7,122 $ 5,230,512
=================== ==================== =================== ====================
The Company held the following investments, by security type, with the positive
intent and ability to hold to maturity as of May 31, 2009, and as such, they are
carried at amortized cost.
F-12
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
U.S government agency
mortgage-backed securities $ 5,085,300 $ 79,739 $ 7,103 $ 5,157,936
=================== ==================== =================== ====================
Invested assets are exposed to various risks, such as interest rate, market and
credit risks. Due to the level of risk associated with certain of these invested
assets and the level of uncertainty related to changes in the value of these
assets, it is possible that changes in risks in the near term may significantly
affect the amounts reported in the Consolidated Condensed Balance Sheets and
Statements of Income.
Fair value is the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at
the measurement date. The Company uses the following fair value hierarchy in
selecting inputs, with the highest priority given to Level 1, as these are the
most transparent or reliable:
O Level 1 - Quoted prices for identical instruments in active
markets.
O Level 2 - Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in
which all significant inputs are observable in active markets.
O Level 3 - Valuations derived from valuation techniques in which
one or more significant inputs are unobservable.
Fair market values are provided by the Company's independent investment
custodians that utilize third-party quotation services for the valuation of the
fixed-income investment securities and money-market funds held. The Company's
investment custodians are large money-center banks. The Company's equity
investment is valued using quoted market prices.
The following section describes the valuation methodologies used to measure
different financial instruments at fair value, including an indication of the
level in the fair value hierarchy in which the instrument is generally
classified.
FIXED INCOME SECURITIES
Securities valued using Level 1 inputs include highly liquid government bonds
for which quoted market prices are available. Securities using Level 2 inputs
are valued using pricing for similar securities, recently executed transactions,
cash flow models with yield curves and other pricing models utilizing observable
inputs. Most fixed income securities are valued using Level 2 inputs. Level 2
includes corporate bonds, municipal bonds, asset-backed securities and mortgage
pass-through securities.
EQUITY SECURITIES
Level 1 includes publicly traded securities valued using quoted market prices.
F-13
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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, 2009
---------------------------------------- --------------------------------------------------- -----------------
Fair Value Measurements Using
---------------------------------------- --------------------------------------------------- -----------------
Level 1 Level 2 Level 3 Assets At
Fair Value
---------------------------------------- ---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 902,201 $ - $ 902,201
Equity securities at fair value 8,071 - - 8,071
Short-term investments at fair value 312,245 - - 312,245
---------------------------------------- ---------------- ----------------- ---------------- -----------------
Total Assets $ 320,316 $ 902,201 $ - $ 1,222,517
May 31, 2009
---------------------------------------- --------------------------------------------------- -----------------
Fair Value Measurements Using
---------------------------------------- --------------------------------------------------- -----------------
Level 1 Level 2 Level 3 Assets At
Fair Value
---------------------------------------- ---------------- ----------------- ---------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 908,766 $ - $ 908,766
Equity securities at fair value 7,862 - - 7,862
Short-term investments at fair value 387,753 - - 387,753
---------------------------------------- ---------------- ----------------- ---------------- -----------------
Total Assets $ 395,615 $ 908,766 $ - $ 1,304,381
The Company had no assets or liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) at either the adoption of
SFAS 157 on June 1, 2008 or at August 31, 2009.
There were no gross realized gains and losses on available-for-sale and
held-to-maturity securities sold or redeemed by the issuer, pursuant to call
features, in the three month period ended August 31, 2009.
NOTE D - OTHER ASSETS
Included in other assets are advance deposits for professional fees relating to
pending acquisitions and certain equity financing matters the Company has
endeavored to undertake in fiscal 2008 and 2009. As of August and May 31, 2009
such balances are comprised of the following:
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
August 31, May 31,
2009 2009
---------------- ----------------
Advance deposits for professional fees $ 1,311 $ 1,311
Mutual fund investment at market 8,071 7,862
Prepaid expense and other deposits 27,145 34,344
---------------- ----------------
Total $ 36,527 $ 43,517
================ ================
NOTE E - 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, 2009 and May 31, 2009 respectively:
August 31, May 31,
2009 2009
------------------ ------------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00% $ 640,500 $ 380,000
Unsecured note(s) payable to individual(s) under
a bridge-financing arrangement described below 3,500,000 3,500,000
Unsecured short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12.00 7,163 3,081
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 140,395 169,791
------------------ ------------------
Notes payable $ 4,288,058 $ 4,052,872
================== ==================
In accordance with the terms of the first round bridge-financing of $2.5
million, on March 10, 2008, the holders of such notes were paid accrued
interest-to-date and issued 5.00% of the Company's common shares. Holders of the
second round of bridge-financing notes of $1.0 million received 2.00% of the
Company's common shares (see Note F). Upon retirement of the notes upon
consummation of a qualified equity offering, the Company shall issue to the
holders of the bridge financing notes additional Company common stock that, when
added to the stock initially issued to the holders of the notes, will equal the
noteholder's pro rata share of the applicable percentage of the outstanding
common stock of the Company as follows: If the qualified financing consists of
$50 million or more, the holders of such notes will receive 28% of the common
stock of the Company that would otherwise be retained by the holders of the
Company's common shares immediately prior to the financing; if the qualified
financing is for an amount less than $50 million, the percentage will be reduced
on a sliding scale to a fraction of 28% of the amount retained by the holders of
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 and March 10, 2009,
4,870,449 and 5,010,640 common shares, respectively, were issued to those
noteholders.
Pursuant to the terms of the Promissory Notes, the first two of 20 equal
quarterly installments of principal and interest payable thereunder were to have
been paid on December 10, 2008 and March 10, 2009 (the "INITIAL AMORTIZATION
PAYMENTS"). As the result of upheavals and dislocations in the capital markets,
the Company was unable to either refinance the indebtedness evidenced by the
Promissory Notes or make the Initial Amortization Payments to the Holders when
due; and an Event of Default (as defined in the Promissory Notes) occurred under
the Promissory Notes as a result of the Company's failure to pay the Initial
Amortization Payments within 14 days after same became due and payable.
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, CMW, as security for repayment of the loans. The Holders agreed that
the Company may satisfy its obligation to make the Initial Amortization Payments
by making 8 consecutive quarterly payments of $67,185 each, commencing September
10, 2009, and within a 14 day grace period after the due date (See Note K) , and
continuing on the payment dates prescribed by the Amortization Schedule for the
Promissory Notes and ending on June 10, 2011 (collectively, the "PAYMENTS"), it
being understood that the Payments shall result in the payment of the principal
of and interest on the unpaid portion of the Initial Amortization Payments at
the rate of 10% per annum from and after the originally scheduled payment dates.
The Payments shall be allocated among and paid to the Holders in accordance with
the balances due to each. The Company may at any time prepay the balance
remaining due with respect to the principal of the Initial Amortization Payments
by paying the amount thereof, together with interest accrued through the date of
such prepayment.
During the three months ended August 31, 2009 and the year ended May 31, 2009, a
company owned by a board member provided consulting services. This company
provided services totaling $15,525 in the three months ended August 31, 2009 and
$15,525 in the three months ended August 31, 2008. Amounts owed to this company
at year end are treated as related party payables in the amounts $90,534 and
$75,009 at August 31, 2009 and May 31, 2009.
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%. The following
table summarizes the activity under such arrangement for the three month periods
ended August 31, 2009 and 2008.
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Three month Three month
period ended period ended
August 31, August 31,
2009 2008
------------------------------------------ ----------------- -----------------
Balance owed, beginning of period $ 3,081 $ 1,000
Proceeds from borrowings 106,597 28,000
Repayments (102,515) (29,000)
Balance owed, end of period $ 7,163 $ -
------------------------------------------ ================= =================
Scheduled maturities and principal payments for each of the next five years
ending August 31 are as follows:
2010 (including demand notes) $ 4,199,656
2011 60,650
2012 27,752
-----------------
$ 4,288,058
=================
NOTE F-STOCKHOLDERS EQUITY
In the three month period ended August 31, 2009, the Company issued 5,171,993
shares of the Company's common stock in connection with the June 5th agreement
with the Holders of the bridge financing arrangement. The shares were valued at
approximately $.0365 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction and
totaled $188,778.
In the three month period ending August 31, 2009, warrants totaling 1,795,273
were exercised for cash and issuance of 1,795,273 common shares of the Company.
In the three month period ending August 31, 2009, the Company issued 500,000
shares of the Company's common stock in connection with short term and demand
borrowing arrangements totaling $250,000. The shares were valued at
approximately $.03815 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 $19,075.
NOTE G - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
On February 8, 2008, the Company entered into an agreement (the "Merger
Agreement") with Reclamation Surety Holding Company, Inc. ("RSH") to acquire by
merger (the "Merger") all of the business and assets of RSH, including the stock
of RSH's subsidiaries, Cumberland Surety, Inc. ("Cumberland") and NewBridge
Services, Inc. ("NewBridge") for a purchase price of $3,400,000, less certain
indebtedness of RSH (the "Merger Consideration"). Upon execution of the Merger
Agreement, the Company made a nonrefundable deposit in the amount of $50,000 for
the benefit of the RSH shareholders, such amount to be applied towards the
Merger Consideration at closing. On June 24, 2008, the Company amended its
Merger Agreement with Reclamation Surety Holding Company, Inc. releasing the
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
deposit to the sellers and extending the date for closing until October 31, 2008
after which time either party may terminate the Merger Agreement. Discussions
continue with RSH, and the Merger Agreement has not been terminated. Among other
conditions, closing was subject to the closing by the Company of an equity
financing.
On August 20, 2008, the Company entered into a definitive Stock Purchase
Agreement (the "Agreement") with National Indemnity Company ("NICO"), pursuant
to which the Company agreed to acquire 100% of the outstanding stock of Unione
Italiana Reinsurance Company of America ("Unione"). Such agreement was amended
on November 13, 2008 to clarify certain definitions and calculation of the
purchase price, in addition to extending until December 31, 2008 the date by
which the Company must satisfy the financing condition prior to closing and
which after time either party may terminate the Agreement. The Company was
unable to provide certification to NICO that the Company had cash available or
had existing or committed borrowing facilities ("Financing Certificate") which
together were sufficient to enable it to consummate the acquisition of Unione by
December 31, 2008. Accordingly, under the terms of the Agreement, as amended,
the NICO has the right to terminate the Agreement at its discretion and retain
the good faith deposit of $75,000. Discussions continue with NICO, and the
Agreement has not been terminated.
Unione is a New York domiciled insurer licensed in 24 states and has license
applications pending with the Commonwealth of Kentucky and with the Financial
Management Service of the United States Department of Treasury. The purchase
price for the acquisition of Unione (the "Transaction") is equal to the sum of
(i) $2,750,000 plus (ii) an amount in cash equal to Unione's New York statutory
policyholders' surplus of not less than $20 million dollars as of the closing
date of the Transaction, less (iii) $75,000 (which amount is equal to a good
faith deposit previously provided to NICO). The Company's acquisition of Unione,
when coupled with a reinsurance agreement with NICO that is to be executed
simultaneously with closing, will consist of the purchase of marketable
investments and insurance licenses and will cede to NICO the existing policies
and customer base (pursuant to the reinsurance agreement) as the insurance lines
of business offered by Unione are not insurance lines that the Company intends
to pursue. The Transaction remains contingent upon necessary regulatory
approvals and the Company's obtaining necessary financing.
During fiscal year 2009 and the three months ended August 31, 2009, the Company
sold shares of Series A Preferred Stock in conjunction with the sale of surety
bonds. As of August 31, 2009, the Company has not transferred the monies
received from the sale of stock to FSC to be applied towards its surplus. The
amount of Preferred A Stock was $186,000. Pursuant to the terms of the Consent
Order dated December 23, 2005 (Consent Order) and the Amended Consent Order
dated June 8, 2007 (Amended Consent Order), each with the West Virginia
Insurance Commissioner (Commissioner) , all money received from the sale of
Series A Preferred Stock shall be placed into the surplus accounts of FSC. The
monies received from the above described transaction were not placed with FSC
but were retained by the Company. This action is viewed by the Commissioner to
be a violation of the Consent Order and Amended Consent Order. Under the terms
of the Amended Consent Order any knowing or intentional violation of the
conditions of the Order shall constitute grounds for the Commissioner to issue a
Confidential Order immediately suspending FSC from doing business in West
Virginia. FSC advised the Commissioner of this violation. Presently the
Commissioner has advised FSC that no action will be taken by the Commissioner
with respect to this violation. FSC has submitted a plan to correct this
violation as expeditiously as possible, and the Company has agreed with this
plan. Subsequent to August 31, 2009 approximately $50,000 of the amount owed to
FSC has been repaid by reducing the amount due to affiliates from FSC.
F-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
As of August 31, 2009, the Company had accrued and withheld approximately
$87,500 in Federal payroll taxes. These amounts have not been remitted and are
still payable at October 19, 2009. Management intends to pay this obligation as
soon as possible.
NOTE H - 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,
2009 2008
------------ ----------
REVENUES:
Investment advisory $ 69,148 $ 59,529
Surety insurance 286,575 226,186
Corporate - 849
------------ -----------
Total revenues $ 355,723 $ 286,564
============ ===========
NET INCOME (LOSS):
Investment advisory $ (11,042) $ (54,911)
Surety insurance 129,930 40,053
Corporate (642,970) (481,871)
------------ -----------
Total net income (loss) $ (524,082) $ (496,729)
============ ===========
NOTE I - REINSURANCE
On March 23, 2009, the Company announced that FSC has entered into a reinsurance
agreement with Lloyd's of London ("Reinsurer") for its coal reclamation surety
bonding programs that took effect April 1, 2009. The reinsurance agreement is an
excess of loss contract which protects the Company against losses up to certain
limits over stipulated amounts, has an initial term of three years and can be
terminated by either party by written notice of at least 90 days prior to any
April 1. The contract calls for a minimum premium to be paid to the Reinsurer of
$490,000 per year. At August 31, 2009, the Company had prepaid reinsurance
premiums of $149,725 and ceded reinsurance payable of $47,926.
The Company limits the maximum net loss that can arise from large risks by
reinsuring (ceding) certain levels of such risk with reinsurers. The Company's
reinsurer is comprised of five syndicates. Ceded reinsurance is treated as the
risk and liability of the assuming companies. The Company cedes insurance to
other companies and these reinsurance contracts do not relieve the Company from
its obligations to policyholders.
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
The effects of reinsurance on premium written and earned for the three month
period ended August 31, 2009 are as follows;
3 months ended 3 months ended
August 31, 2009 - August 31, 2009 -
Written Earned
------------------- -------------------
Direct $ 313,598 $ 250,033
------------------- -------------------
Ceded $ 105,752 $ 43,141
------------------- -------------------
Net $ 207,846 $ 206,892
There was no reinsurance effect on premium written for the three month period
ended August 31, 2008 due to the reinsurance agreement not being in effect until
April 1, 2009. There were no ceded losses for the three month periods ended
August 31, 2009 and 2008.
NOTE J-STOCK-BASED COMPENSATION
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 of incentive stock options to acquire common shares at an exercise
price of four cents ($.04) per share, of which 4,700,000 shares vested
immediately and the remaining 5,300,000 options vesting over the next three
years ending in June 2011. The term of the options is five years and expires in
June 2014.
NOTE K - SUBSEQUENT EVENTS
Subsequent events have been evaluated through October 20, 2009, the date these
financial statements were issued. Subsequent to August 31, 2009, the Company
obtained borrowings of $100,000 from individuals to fund ongoing operations and
made repayments of $8,500. Such borrowings were obtained under demand or 30-day
notes bearing interest at the rate of 10.00%. Additionally, the Company obtained
borrowings of $15,500 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 $20,400.
In September 2009, warrants were exercised for a total of 1,168,395 shares of
the Company's common stock.
On September 10, 2009, the Company issued 5,354,642 shares of the Company's
common stock in connection with the semi-annual issuance of shares under the
bridge-financing arrangements.(see Note E). On September 10, 2009, the Company
became obligated to make principal and interest payments to the holders of the
bridge-financing notes of approximately 291,700. The Company is currently in
default with respect to such payment. Under the terms of such bridge-financing
agreements, upon the occurrence of any Event of Default, the holders of said
bridge-financing notes have the right to declare, upon written notice to the
Company, that the entire principal amount and interest be due and payable
immediately.
On September 30, 2009, the Company elected to continue to defer payment of
dividends on its Series A Preferred stock and Series B Preferred stock with such
accrued and unpaid quarterly dividends amounting to $27,479 and $247,479,
respectively. As of September 31, 2009, the accumulated accrued and unpaid
dividend on the Series A Preferred stock and Series B Preferred stock amounted
to $278,936 and $3,258,937, respectively.
F-20
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During fiscal 2009 and the three-month period ended August 31, 2009, the Company
has focused its primary efforts on the development and marketing of its surety
business in West Virginia and Ohio, arranging for reinsurance and other
potential strategic relationships that will accelerate the progression of the
Company's business plan, and raising additional capital to increase the capital
base of its insurance subsidiary, First Surety Corporation ("FSC"), to
facilitate entry into other state markets.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 2009
The Company experienced a loss (after accretion of mandatorily redeemable
convertible preferred stock) for the three-month period ended August 31, 2009 of
$942,942 as compared with a loss of $886,028 for the corresponding period ended
August 31, 2008.
REVENUES
Revenues from operations for the three-month period ended August 31, 2009 were
$355,724 as compared with $285,715 for the corresponding period ended August 31,
2008. The overall increase in revenues is attributable to the continued growth
of the surety business of FSC.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $64,326 for the three-month
period ended August 31, 2009 as compared with $59,529 for the corresponding
period ended August 31, 2008. 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 increase
in revenues is attributable to the growth in individually managed accounts as
summarized below:
Three-month Period Ended
August 31,
----------
2009 2008
-------------- --------------
Individually managed accounts $58,419 $ 52,536
Mutual fund 5,907 6,993
-------------- --------------
Total $64,326 $ 59,529
============== ==============
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $286,575 for the three-month
period ended August 31, 2009 as compared with $226,186 for the corresponding
period ended August 31, 2008.
3
Revenues attributable to premium earned, net investment income and commissions
earned are as follows:
Three-month Period Ended
August 31,
----------
2009 2008
-------------- --------------
Premium earned $206,892 $149,309
Net investment income 72,243 68,680
Commissions earned 7,440 8,197
-------------- --------------
Total $286,575 $226,186
============== ==============
Revenues for this segment of the business are somewhat more seasonable from
quarter-to-quarter as commission revenue is dependent on the timing of issuance
or renewal of bonds placed by the Company, whereas premium revenue is recognized
ratably over the term of the policy period and thus is more stable from period
to period. Fluctuations in premium revenue for comparable periods largely
reflect the overall growth or loss of business. The increase in premium revenue
for the three-month period ended August 31, 2009 in comparison to the
corresponding period from the prior year is a result of the addition of new
clients to FSC's surety business and increased business from existing clients.
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
$5.59 million for the three-month period ended August 31, 2008 to approximately
$6.452 million for the three-month period ended August 31, 2009 offset by a
decrease in investment yield from approximately 4.92% for the three-month period
ended August 31, 2008 to approximately 4.31% for the three-month period ended
August 31, 2009.
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of August 31, 2009. However,
"incurred but not reported" (IBNR) policy losses for the three-month period
ended August 31, 2009 and 2008 amounted to $48,185 and $44,785 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 the 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% and 30% of earned premium, respectively.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $62,602 and $39,029 for the three-month
periods ended August 31, 2009 and 2008, 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 30% and 26% for the periods ended August 31, 2009 and 2008
respectively.
4
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended August 31,
2009 and 2008 were $400,614 and $535,939 respectively, representing a decrease
of $135,325, and were comprised of the following:
Three-month Period Ended
August 31,
-------------------------------------
2009 2008 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 233,504 $ $ 165,862 $ 67,642
General office expense 27,841 27,680 161
Legal and other professional fees and costs 67,076 252,287 (185,211)
Audit, accounting and related services 24,018 22,910 1,108
Travel, meals and entertainment 15,332 19,844 (4,512)
Other general and administrative 32,843 47,356 (14,513)
------------------ ------------------ -------------------
Total general and administrative $ 400,614 $ 535,939 $ (135,325)
================== ================== ===================
Salaries and related costs, net of deferred internal policy acquisition costs,
increased approximately $67,500 and are comprised of the following:
Three-month Period Ended
August 31,
--------------------------------------
2009 2008 Difference
------------------ ------------------ -------------------
Salaries and taxes $ 126,761 $ 151,689 $ (24,928)
Commissions 11,332 5,307 6,025
Stock option expense 138,890 13,491 125,399
Fringe benefits 12,561 17,017 (4,456)
Key-man insurance 11,219 12,224 (1,005)
Deferred payroll costs (67,259) (33,866) (33,393)
------------------ ------------------ -------------------
Total salaries and related costs $ 233,504 $ 165,862 $ 67,642
================== ================== ===================
The decrease in salaries and taxes for the three-month period ended August 31,
2009 as compared to the same period of the previous year was the result of the
decrease of two staff position. The increase in commissions is attributable to
the Company's commission structure that pays a larger commission on the
origination of a policy but reduced for subsequent policy renewals. The increase
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,
-------------------------------------
2009 2008 Difference
------------------ ------------------ -------------------
General corporate services $ 8,120 $ 14,163 $ (6,043)
Expansion of surety license to other states - 35,662 (35,662)
Acquisition and financing related costs 58,956 202,462 (143,506)
------------------ ------------------ -------------------
Total legal and other professional fees $ 67,076 $ 252,287 $ (185,211)
================== ================== ===================
The decrease in general corporate services results primarily from 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, 2008, the Company
incurred expense of $35,662 relating to expansion of FSC's surety license to the
State of Ohio and other license expansion related services. 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 $58,956 and $202,462 for the
three-month periods ended August 31, 2009 and 2008, respectively.
The decrease in travel, meals and entertainment expense for the three-month
period ended August 31, 2009 as compared to the corresponding 2008 period
related primarily to additional efforts made by management to reduce expense.
Other general and administrative expense decreased approximately $14,513 for the
three-month period ended August 31, 2009 as compared to the corresponding 2008
period. This decrease in general and administrative expense is result of
management's efforts to curtail its operating costs.
MUTUAL FUND COSTS
J&C is the investment advisor to the Jacobs & Company Mutual Fund (the "Fund").
While the Fund is responsible for its own operating expenses, J&C, as the
advisor, has agreed to limit the Fund's aggregate annual operating expenses to
2% of the average net assets. Under this expense limitation agreement, J&C
absorbed $38,326 of the Fund's operating expenses during the three-month period
ended August 31, 2009 as compared to $41,567 for corresponding period from the
previous year. Expense reimbursement accruals are recorded monthly based on
billings received from the Fund of estimated expense reimbursement. Such
estimates are adjusted to actual expenses incurred by the Fund as of January 31
of each year, the fiscal year-end for the Fund.
As the Fund grows in size (of assets under management), expenses (in excess of
the 2% level) absorbed by J&C will decrease until the Fund reaches sufficient
size to support its on-going operating costs, while revenues from investment
advisory fees will increase. In contrast, as the Fund declines in size (of
assets under management), expenses (in excess of the 2% level) absorbed by J&C
will increase, while revenues from investment advisory fees will decrease. For
the three-month period ended August 31, 2009, the Fund's investment advisory
fees decreased to $5,907 as compared with $6,993 for the corresponding
6
three-month period ended August 31, 2008 as a result of a decrease in the Fund
size. The Fund's average assets under management declined from approximately
$2.33 million for the three-month period ended August 31, 2008 to approximately
$1.82 million for the three-month period ended August 31, 2009. As of August 31,
2009, assets under management were approximately $1.84 million.
The Fund was initially established by J&C to provide the ability to manage
smaller accounts in a more efficient and diversified manner than could be
achieved on an individual account basis. Additionally, the Fund provided an
investment vehicle that would fit within the Company's broader business plan of
issuing smaller bonds under its collateralized surety programs. While the Fund's
lackluster performance has contributed to its gradual decline in size, and the
maintenance of the Fund continues to be a significant cost to the Company, it
remains a key component in the Company's broader business plan. Moreover, if
successful in these broader efforts, the opportunity exists to significantly
increase the assets under management within the Fund. Should the Company be
successful in increasing the size of the Fund to such a level that the Fund's
operating expense ratio falls below the 2.00% level, the costs absorbed by J&C
are currently reimbursable to it for a period of up to three years. Management
continually evaluates the cost/benefit of maintaining the Fund.
INTEREST EXPENSE
Interest expense for the three-month period ended August 31, 2009 was $327,284
as compared with $118,778 for the corresponding period ended August 31, 2008.
Components of interest expense are comprised of the following:
Three-month Period Ended
August 31,
-----------------------------------
2009 2008 Difference
----------------- ----------------- -----------------
Interest expense on bridge-financing $ 83,911 $ 83,884 $ 27
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 225,970 24,008 201,962
Interest expense on demand and term notes 17,047 10,365 6,682
Other finance charges 356 521 (165)
----------------- ----------------- -----------------
Total interest expense $ 327,284 $ 118,778 $ 208,506
================= ================= =================
The increase in the expense of common shares issued (or to be issued) for the
three-month period ended August 31, 2009 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 demand and term notes increased due to increased borrowings.
7
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended August 31, 2009 and
2008 are as follows:
Three-month Period Ended
August 31,
-----------------------------------
2009 2008 Difference
----------------- ----------------- -----------------
Accretion of discount $ 148,300 $ 138,233 $ 10,067
Accrued dividends 270,559 251,066 19,493
----------------- ----------------- -----------------
Total accretion and dividends $ 418,859 $ 389,299 $ 29,560
================= ================= =================
The increase in the accretion of discount results from the application of the
interest or constant yield method to the initial discount recorded with respect
to the mandatorily redeemable preferred stock over a period of five years from
the date of issuance of the stock. The increase in accrued dividends results
from the issuance of additional shares of the company's Series A Preferred stock
(in connection with additional bonding provided), and the compounding of
dividends on accrued but unpaid dividends.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the 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, 2009.
FSC is currently 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 that are 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.
8
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 a collateral account in which FSC has
a security interest as collateral for the surety bond, to significantly mitigate
the 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
held in the collateral account to reclaim the property or forfeit the face
amount of the surety bond. Losses can occur if the costs of reclamation exceed
the estimates obtained at the time the bond was underwritten or upon subsequent
re-evaluations, if sufficient collateral is not obtained and increased, if
necessary, or if the collateral held has experienced significant deterioration
in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided in
conjunction with the periodic monitoring and inspections performed, the value of
the collateral accounts held for the benefit of FSC, along with industry
averages and historical experience. At the inception of surety operations,
management estimated such losses based on industry experience, adjusted for
factors that are unique to the Company's approach, and in consultation with
consulting actuaries experienced in the surety field.
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, including accrued dividends) of
approximately $3,058,000 and $3,333,000 for the fiscal years ended May 31, 2009
and 2008, respectively, and a loss of approximately $942,942 for the three-month
period ended August 31, 2009. The Company continues to face significant working
capital deficiencies and cash flow concerns. The Company used $163,000 in cash
flow from operating activities for the three-month period ended August 31, 2009.
This has resulted in the deferral of payments to professionals and others, an
inability to pay its preferred stock dividend obligation and defaults in certain
quarterly payments due its bridge-financing lenders (see Note E in the
accompanying unaudited consolidated condensed financial statements). A
substantial portion of the Company's cash flow is generated by its insurance
subsidiary and is subject to certain withdrawal restrictions. While management
expects revenue growth and cash flow to increase significantly as its business
plan is fully implemented, it is anticipated that losses will continue and the
Company will be cash constrained until FSC is able to develop a substantial book
of business.
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 $6,558,923 as of August 31, 2009, $6,552,786 is restricted to FSC.
Furthermore, additional 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. As of August 31, 2009, $186,000 in proceeds from
the sale of Series A preferred stock had been collected but not yet contributed
to the surplus and capital of FSC.
9
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
obtain authority to issue surety bonds in that state. However, management has
found that entry into other states (as a surety) has been difficult without the
benefit of more substantial capital and reserves due to FSC's status as a recent
entry into this market and the financial condition of the Company. This is the
case notwithstanding the reinsurance agreement entered into by FSC with Lloyd's
of London and the resulting increase in bonding capacity. Management believes
that if FSC's capital and surplus reserves were significantly more substantial
and the financial condition of the Company was stabilized, entry into other
states would be less challenging. Accordingly, management continues to pursue
avenues that can provide additional capital to increase the capacity of its
insurance subsidiary and to fund continuing operations as the business is being
fully developed. In addition, as an alternative means of addressing access to
markets, management is seeking to establish a relationship with any one of
several possible sureties that are licensed in those states other than West
Virginia and Ohio that comprise significant markets for the bonding programs of
FSC and could issue surety bonds that are underwritten and reinsured by FSC.
Under such a "fronting" arrangement, the need for additional capital at the
level of FSC to facilitate entry to other state markets would become secondary,
since the payment of a fronting fee to the insurance company with active
licenses would provide access to the state market without formal entry.
As a means of alleviating obligations associated with the Company's Series B
Preferred Stock, which by its terms matures at the end of 2010, management is
considering a recapitalization. The goal of any such recapitalization will be to
stabilize the financial position of the Company, which management believes will
improve the Company's prospects for a relationship with potential capital
sources, assist FSC as it applies to enter other state markets and be an impetus
to the growth of the Company's business. Any such recapitalization is expected
to involve the voluntary participation of the holders of Series B Preferred
Stock, and no assurance can be given that a recapitalization will be
accomplished.
Through the sharing of resources (primarily personnel) to minimize operating
costs, the Company and its subsidiaries attempt to minimize operating expenses
and preserve resources. Although FSC is now cash flow positive, the use of its
assets and profits are restricted to its stand-alone operation by regulatory
authority until its capital and surplus reserves reach more substantial levels.
And while growth of the FSC business continues to provide additional cash flow
to the Company's other subsidiaries, Jacobs and Triangle Surety, it is
anticipated that working capital deficiencies will continue and will need to be
met either through the raising of additional capital or borrowings. However,
there can be no assurance that additional capital (or debt financing) will be
available when and to the extent required or, if available, on terms acceptable
10
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.
In order to best position the Company to accomplish the larger financing
necessary to expand the Company's business and penetrate new markets, the
Company contracted to accomplish two acquisitions (see Note G in the
accompanying unaudited consolidated condensed financial statements) that the
Company believed would substantially enhance the business and prospects of the
Company. The acquisitions were contingent upon the Company's obtaining necessary
financing and one (for an insurance company) was and remains contingent upon
necessary regulatory approvals. The Company failed to obtain the necessary
financing within the time periods prescribed by the acquisition agreements; but
remains in discussions with both parties. Neither agreement has been formally
terminated.
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.
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 have been 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.
11
ITEM 4T. CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are 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 May 31, 2009. As previously reported in our Annual Report on Form
10-K for the year ended May 31, 2009, control deficiencies were identified that
constitute a material weakness in internal control over financial reporting.
Such control deficiencies relate to inadequate segregation of duties, lack of
effective board of directors oversight, use of internally developed
non-integrated accounting systems, lack of internal review of account
reconciliations, and lack of internal review of general journal entries,
elimination entries and the financial statement consolidation process. Based
upon their evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the Company's disclosure controls and procedures, as of May 31,
2009, were ineffective.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness
previously identified. Additionally, management identified steps at both
management and the board of directors' level to increase the effectiveness of
review as it relates to the financial reporting process. Such changes have been
implemented during the first fiscal quarter of the Company's 2008-2009 fiscal
year. While management believes that the changes implemented have strengthened
the overall control over financial reporting, such changes were not sufficient
to conclude that the Company's disclosure and control procedures, as of August
31, 2009, were effective. Accordingly, the Chief Executive Officer/Chief
Financial Officer concluded that the Company's disclosure controls and
procedures, as of August 31, 2009, were ineffective. Management continues to
monitor changes made in fiscal 2008 and 2009 and will continue to implement
improvements. Other changes will be considered as additional financial resources
and accounting staff become available.
Notwithstanding the above, 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, 2009 and May 31, 2009 and the results of its operations and cash
flows for the three month period ended August 31, 2009 and 2008 in conformity
with U.S. generally accepted accounting principals (GAAP).
12
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
In June 2009, 10 shares of Series A Preferred Stock were issued pursuant to
ongoing bonding programs of FSC in exchange for cash of $10,000.
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
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 $291,700.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
13
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
14
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, 2009 JACOBS FINANCIAL GROUP, INC.
--------------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
--------------------------------------------------
John M. Jacobs, President
1
