Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2011
Commission file number 0-21210
JACOBS FINANCIAL GROUP, INC.
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(Exact name of registrant as specified in its charter)
===================================== ==================================
DELAWARE 84-0922335
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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: 251,822,963 shares of common
stock as of October 20, 2011.
EXPLANATORY NOTE
Jacobs Financial Group, Inc., (the "Company"), is filing this amendment to its
quarterly report on Form 10-Q for the period ended August 31, 2011 filed with
the Securities and Exchange Commission on October 24, 2011, for the purpose of
furnishing XBRL Interactive Data Files as Exhibit 101 in accordance with Rule
405 of Regulation S-T.
This amendment does not reflect events occurring after the original filing.
Except for the foregoing amended information, this Form 10-Q/A continues to
speak as of the date of the original filing and the Company has not otherwise
updated disclosures contained therein or herein to reflect events that occurred
at a later date.
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The following financial statements are included herein in response to Item 1:
Financial Statements (Unaudited) Page
--------------
Consolidated Condensed Balance Sheets F-1
Consolidated Condensed Statements of Operations F-2
Consolidated Condensed Statements of Comprehensive Income (Loss) F-3
Consolidated Condensed Statements of Cash Flows F-4
Consolidated Condensed Statement of Mandatorily Redeemable
Preferred Stock and Stockholders Equity (Deficit) F-5 and F-6
Notes to Consolidated Condensed Financial Statements F-7
-2-
Jacobs Financial Group, Inc.
Consolidated Condensed Balance Sheets (Unaudited)
August 31, 2011 May 31, 2011
------------------ -----------------
ASSETS
Investments and Cash:
Bonds and mortgaged-back securities available for sale, at market value $ 6,637,754 $ 6,038,718
(amortized cost - 08/31/11 $6,380,170; 05/31/11 $5,858,595)
Equity investments available for sale, at market value, net 451,303 453,456
(amortized cost - 08/31/11 $510,419; 05/31/11 $450,908)
Short-term investments, at cost (approximates market value) 695,262 1,007,617
Cash 265,567 290,569
------------------ -----------------
Total Investments and Cash 8,049,886 7,790,360
Investment income due and accrued 30,300 38,736
Premiums and other accounts receivable 187,222 171,702
Prepaid reinsurance premium 251,599 264,763
Deferred policy acquisition costs 191,642 190,711
Furniture, automobile, and equipment, net of accumulated depreciation of
$94,574 and $158,267, respectively 30,447 33,140
Other assets 15,146 21,986
Intangible assets 150,000 150,000
------------------ -----------------
TOTAL ASSETS $ 8,906,242 $ 8,661,398
================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 875,924 $ 815,512
Reserve for unearned premiums 813,593 851,783
Advanced premium 1,477 20,195
Accrued expenses and professional fees payable 570,051 573,568
Accounts payable 275,531 144,997
Ceded reinsurance payable 57,240 77,635
Related party payable 103,734 99,209
Term and demand notes payable to related party 287,301 405,035
Notes payable 4,926,500 4,874,500
Accrued interest payable 1,284,089 1,148,730
Accrued interest payable to related party 157,497 140,181
Other liabilities 127,506 89,257
Mandatorily redeemable Series B Preferred Stock, $.0001 par value per share;
3,136.405 shares authorized; 2,817.004 shares issued and outstanding at August
31, 2011 and May 31, 2011; stated liquidation value of $1,000 per share 4,342,804 4,257,703
------------------ -----------------
Total Liabilities 13,823,247 13,498,305
Series A Preferred Stock, $.0001 par value per share; 1 million shares
authorized; 2,675 shares issued and outstanding at August 31, 2011 and May 31,
2011, respectively; stated liquidation value of $1,000 per share 3,169,923 3,138,623
------------------ -----------------
Total Mandatorily Redeemable Preferred Stock 3,169,923 3,138,623
Commitments and Contingencies (See Notes)
Stockholders' Equity (Deficit)
Series C Preferred Stock, $.0001 par value per share; 10,000 shares
authorized; 6,804.936 shares issued and outstanding at August 31, 2011 and
May 31, 2011, respectively; includes $3,655,912 and $3,451,348 accrued
Series C dividends, respectively 9,686,843 9,482,279
Common stock, $.0001 par value per share; 490 million shares authorized;
244,709,253 and 242,304,304 shares issued and outstanding at August 31, 2011
and May 31, 2011, respectively 24,471 24,230
Additional paid in capital 3,580,519 3,549,443
Accumulated deficit (21,577,230) (21,214,153)
Accumulated other comprehensive income (loss) 198,469 182,671
------------------ -----------------
Total Stockholders' Equity (Deficit) (8,086,928) (7,975,530)
------------------ -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 8,906,242 $ 8,661,398
================== =================
See accompanying notes.
F-1
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Operations (Unaudited)
Three Months Ended August 31,
2011 2010
---------------- ---------------
Revenues:
Investment advisory services $ 74,970 $ 54,170
Insurance premiums and commissions 499,039 198,990
Net investment income 70,017 33,251
Net realized investment gains (losses) 12,093 51,019
Other income 645 1,633
---------------- ---------------
Total Revenues 656,764 339,063
Operating Expenses:
Incurred policy losses 60,413 42,327
Insurance policy acquisition costs 84,919 59,981
General and administrative 321,105 255,398
Depreciation 2,693 3,392
---------------- ---------------
Total Operating Expenses 469,130 361,098
---------------- ---------------
Income (Loss) from Operations 187,634 (22,035)
Accrued dividends and accretion of Series B Mandatorily
Redeemable Preferred Stock (85,102) (123,129)
Interest expense (229,573) (204,368)
---------------- ---------------
Net Income (Loss) (127,041) (349,532)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (31,300) (34,705)
Accrued dividends on Series C Preferred Stock equity (204,564) (188,985)
---------------- ---------------
Net Income (Loss) Attributable to Common Stockholders $ (362,905) $ (573,222)
================ ===============
Basic and Dilutive Net Income (Loss) Per Share:
Net Income (Loss) Per Share $ - $ -
================ ===============
Weighted-Average Shares Outstanding 243,496,194 214,963,577
================ ===============
See accompanying notes.
F-2
Jacobs Financial Group, Inc,
Consolidated Condensed Statements of Comprehensive Income (Loss) (Unaudited)
Three Months Ended
August 31
2011 2010
------------------ -------------------
Comprehensive income (loss):
Net income (loss) attributable to common stockholders $ (362,905) $ (573,222)
Other comprehensive income (loss):
Net unrealized gain (loss) of available-for-sale investments arising during period 22,540 30,732
Reclassification adjustment for realized (gain) loss included in net income (6,742) (36,844)
------------------ -------------------
Net unrealized gain (loss) attributable to available-for-sale investments
recognized in other comprehensive income 15,798 (6,112)
------------------ -------------------
Comprehensive income (loss) attributable to common stockholders $ (347,107) $ (579,334)
================== ===================
See accompanying notes.
F-3
Jacobs Financial Group, Inc,
Consolidated Condensed Statement of Cash Flows (Unaudited)
Three Months Ended August 31
2011 2010
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CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) $ (127,041) $ (349,532)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Unearned premium (43,744) 112,880
Stock option expense 370 13,452
Stock issued (or to be issued) in connection with financing arrangements 20,215 22,507
Stock issued (or to be issued) in connection with dividend arrangements 10,560 -
Accrual of Series B preferred stock dividends and accretion 85,101 123,129
Provision for loss reserves 60,412 42,326
Amortization of premium 17,207 57,458
Depreciation 2,693 3,392
Accretion of discount - (166)
Realized (gain) loss on sale of securities (12,093) (51,018)
Loss on disposal of equipment - 336
Change in operating assets and liabilities:
Other assets 6,840 5,541
Premium and other receivables (15,520) (39,410)
Investment income due and accrued 8,381 1,260
Deferred policy acquisition costs (931) (46,815)
Related party accounts payable 4,525 25
Accounts payable and cash overdraft 130,534 14,503
Accrued expenses and other liabilities 167,012 290,168
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Net cash flows from (used in) operating activities 314,521 200,036
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in short-term investments 312,355 91,441
Costs of bonds acquired (434,412) (1,292,185)
Costs of mortgaged-backed securities acquired (345,298) (643,019)
Purchase of equity securities (133,964) -
Sale of securities available for sale 113,939 840,684
Repayment of mortgage-backed securities 213,591 754,713
Purchase of furniture and equipment - (23,168)
--------------- --------------
Net cash flows from (used in) investing activities (273,789) (271,534)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 120,252 334,870
Repayment of related party debt (237,986) (320,308)
Proceeds from borrowings 258,000 304,500
Repayment of borrowings (206,000) (196,712)
Proceeds from issuance of Series A preferred stock - -
Proceeds from exercise of common stock warrants - -
--------------- --------------
Net cash flows from (used in) financing activities (65,734) 122,350
NET INCREASE (DECREASE) IN CASH (25,002) 50,852
CASH AT BEGINNING OF PERIOD 290,569 74,571
--------------- --------------
CASH AT END OF PERIOD $ 265,567 $ 125,423
=============== ==============
SUPPLEMENTAL DISCLOSURES
Interest paid $ 44,590 $ 46,298
Income taxes paid - -
Non-cash investing and financing transaction:
Additional consideration paid for issuance of debt 20,215 22,507
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, 2010
----------------- ----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------
SERIES A SERIES C PREFERRED ACCUMULATED
MANDATORILY REDEEMABLE -------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE, MAY 31, 2010 2,675 $3,005,266 214,464,012 $21,446 $3,404,431 6,804.936 $ 8,701,217 $(18,992,919) $204,615 $(6,661,210)
Issuance of common
stock as compensa-
tion for services - - 500,000 50 1,998 - - - - 2,048
Issuance of common
stock as additional
consideration for
financing arrangements - - 895,000 90 3,769 - - - - 3,859
Accretion of Series A
mandatorily redeemable
convertible preferred
stock - 4,626 - - - - - (4,626) - (4,626)
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 30,079 - - - - - (30,161) - (30,161)
Accrued dividends of
Series C equity
preferred stock - - - - - - 188,985 (188,985) -
Increase (Decrease) in
accural of common
shares to be issued
in connection with
financing arrangements - - - - 16,682 - - - - 16,682
Common stock option
expense - - - - 13,452 - - - - 13,452
Unrealized net gain
on available for sale
securities - - - - - - - - (6,112) (6,112)
Net income (loss),
three month period
ended August 31, 2010 - - - - - - - (349,532) - (349,532)
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE,
AUGUST 31, 2010 2,675 $3,039,971 215,859,012 $21,586 $3,440,332 6,804.936 $ 8,890,202 $(19,566,223) $198,503 $(7,015,600)
====== ========== =========== ======= ========== ========= =========== ============= ======== ============
----------------- ----------------------------------------------------------------------------------------
See accompanying notes.
F-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, 2011
----------------- ----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------------------------------------------------
SERIES A SERIES C PREFERRED ACCUMULATED
MANDATORILY REDEEMABLE -------------------- OTHER
ADDITIONAL COMPREHENSIVE
PREFERRED STOCK PAID-IN AMOUNT ACCUMULATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL SHARES AND APIC DEFICIT (LOSS) TOTAL
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE, MAY 31, 2011 2,675 $3,138,623 242,304,304 $24,230 $3,549,443 6,804.936 $ 9,482,279 $(21,214,153) $182,671 $(7,975,530)
Issuance of common
stock as additional
consideration for
financing arrangements - - 2,404,949 241 17,112 - - - - 17,353
Accrued dividends of
Series A mandatorily
redeemable convertible
preferred stock - 31,300 - - - - - (31,300) - (31,300)
Accrued dividends of
Series C equity
preferred stock - - - - - - 204,564 (204,736) (172)
Increase (Decrease) in
accural of common
shares to be issued
in connection with
financing arrangements - - - - 13,594 - - - - 13,594
Common stock option
expense - - - - 370 - - - - 370
Unrealized net gain
on available for sale
securities - - - - - - - - 15,798 15,798
Net income (loss),
three month period
ended August 31, 2011 - - - - - - - (127,041) - (127,041)
------ ---------- ----------- ------- ---------- --------- ----------- ------------- -------- ------------
BALANCE,
AUGUST 31, 2011 2,675 $3,169,923 244,709,253 $24,471 $3,580,519 6,804.936 $ 9,686,843 $(21,577,230) $198,469 $(8,086,928)
====== ========== =========== ======= ========== ========= =========== ============= ======== ============
----------------- ----------------------------------------------------------------------------------------
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, 2011, are not necessarily indicative of
the results of operations that can be expected for the fiscal year ending May
31, 2012. 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 13, 2011.
RECLASSIFICATIONS
Certain amounts have been reclassified in the presentation of the Consolidated
Financial Statements for the three-months ended August 31, 2010 to be consistent
with the presentation in the Consolidated Financial Statements for the
three-months ended August 31, 2011. 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 of approximately $22,000
and $458,000 for the years ended May 31, 2011 and 2010. The Company's losses
increase when accretion of mandatorily redeemable convertible preferred stock
and accrued dividends on mandatorily redeemable preferred stock are taken into
account to approximately $1,440,000 and $2,339,000 for the years ended May 31,
2011 and 2010.
For the three month period ended August 31, 2011, the Company had income from
operations of approximately $188,000, or a loss of approximately $158,000 after
accretion of mandatorily redeemable convertible preferred stock and accrued
dividends on mandatorily redeemable preferred stock are taken into account .
Losses are expected to continue until the Company's insurance company
subsidiary, First Surety Corporation ("FSC") develops a more substantial book of
business. While improvement is anticipated as the business plan is implemented,
restrictions on the use of FSC's assets (See Management's Discussion and
Analysis), the Company's significant deficiency in working capital and
stockholders' equity raise substantial doubt about the Company's ability to
continue as a going concern.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled FSC to write more
bonds and of greater size for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to continue FSC's expansion of market share
and to result in increased cash flow for each of the Company's operating
subsidiaries.
F-7
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 by 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 the financial
condition of the parent company, 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. As an alternative means of
generating premium revenue in additional state markets, management is seeking to
establish a relationship with sureties licensed in other states that comprise
significant markets for the bonding programs of FSC therefore permitting the
issuance of surety bonds that are underwritten and reinsured by FSC. Under such
a "fronting" arrangement, the need for additional capital at the level of FSC to
facilitate entry to other state markets would become secondary, since the
payment of a fronting fee to the insurance company with active licenses would
provide access to the state market without formal entry.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009,
the Company obtained two rounds of bridge financing totaling an aggregate of
$3,500,000. The purpose of the financing was to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing and, in addition, to increase the capital surplus
of FSC to make possible the reactivation of FSC's surety license in the state of
Ohio. The terms of the bridge-financing arrangement provide for payment in full
upon consummation by the Company of a qualified equity offering providing net
proceeds of at least $15 million on or before September 10, 2013; and because
such a qualified equity offering was not consummated by September 10, 2008,
accrued interest-to-date was payable, and quarterly installments of principal
and interest became payable over five years commencing in December 2008. The
interest rates on such notes were fixed at 10.00%. Payments due December 2008
and March 2009 were not made by the Company as scheduled, but a forbearance
agreement was subsequently entered into with the bridge lenders on June 5, 2009,
modifying payment terms to cure the default (including increasing the interest
rate on the loans to 17%), issuing additional common stock to the loan holders,
and pledging the stock of the Company's subsidiary, CMW, as security for
repayment of the loans. The modification required the Company to pay interest of
$224,515 on June 10, 2009 and increase the quarterly payments by $67,185 (to a
total of $291,700) for eight consecutive quarters beginning September 10, 2009
to satisfy the arrearage. Although the Company has failed to make the payment
that was due September 10, 2009 and the payments that were due in the ensuing
quarters, management has remained in close contact with the bridge lenders,
providing reports regarding its efforts to refinance or otherwise repay the
bridge loans. To date, none of the bridge lenders has elected to pursue legal
remedies.
Certain equity inducements in the form of common stock of the Company were
provided under the terms of the bridge loan documents. Upon issuance of the
bridge notes, an aggregate of 7% of the outstanding common stock of the Company
was issued to the bridge lenders. Upon retirement of the notes upon consummation
of a qualified equity offering, the Company will issue to the bridge lenders a
percentage of the outstanding common stock of the Company which, when added to
the stock initially issued, may equal as much as 28% of the common stock of the
Company that would otherwise have been retained by the holders of the Company's
F-8
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
common shares immediately prior to the financing. Finally, because a qualified
financing was not completed by September 10, 2008, the Company was required to
issue to the bridge lenders under the terms of the loan documents a total of
2.8% of the Company's outstanding common shares at such date. An additional 2.8%
of the Company's outstanding common shares are required to be issued upon each
six-month anniversary date thereof until retirement of the notes. (See Note D).
Given current financial market conditions and the uncertainties as to when
stability will return to the financial markets, until permanent financing can be
secured, management will strive to reduce and then eliminate operating losses by
implementing further measures to control and reduce costs while maintaining and
growing the Company's current revenue base. Unless permanent financing can be
secured, future revenue growth can be expected to be achieved at a slower pace
than has been projected by the Company. Until such time that the Company's
operating costs can be serviced by the Company's revenue stream, management will
continue to seek to raise additional funds for operations through private
placements of stock, other long-term or permanent financing, or short-term
borrowings. However, the Company cannot be certain that it will be able to
continue to obtain adequate funding in order to reasonably predict whether it
will be able to continue as a going concern. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE B - RECENT ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In June 2011, the FASB issued Accounting Standards Update 2011-05,
"Comprehensive Income: Presentation of Comprehensive Income". This object of
this Update is to improve the comparability, consistency, and transparency of
financial reporting and to increase the prominence of items reported in other
comprehensive income. This update is effective for annual reporting periods
beginning on or after December 15, 2011 and interim periods within that fiscal
year. Management does not expect this update to have a material effect on the
Company's financial statements.
In May 2011, the FASB issued Accounting Standards Update 2011-04,"Fair Value
Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and AFRSs". The amendments in this Update will improve
the comparability of fair value measurements presented and disclosed in
financial statements prepared in accordance with U.S. generally accepted
accounting principles and International Financial Reporting Standards. This
update is effective for annual reporting periods beginning on or after December
15, 2011 and interim periods within that fiscal year. Management does not expect
this update to have a material effect on the Company's financial statements.
In October 2010, the FASB issued Accounting Standards Update 2010-26, "Financial
Services - Insurance: Accounting for Costs Associated with Acquiring or Renewing
Insurance Contracts." This FASB is intended to specify costs incurred in the
acquisition of new and renewal contracts that should be capitalized as deferred
acquisition costs and amortized over time using amortization methods dependent
upon the nature of the underlying insurance contract. This update is effective
for annual reporting periods beginning on or after December 15, 2011 and interim
periods within that fiscal year. Management does not expect this update to have
a material effect on the Company's financial statements.
In August 2010, the FASB issued Accounting Standards Update 2010-21, "Accounting
for Technical Amendments to Various SEC Rules and Schedules". This Accounting
Standards Update amends various SEC paragraphs pursuant to the issuance of
F-9
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Release No. 33-9026; Technical Amendments to Rules, Forms, Schedules and
Codifications of Financial Reporting Policies. This update has no material
effect on the Company's financial statements.
In July 2010, the FASB issued Accounting Standards Update 2010-20, "Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses." This FASB is intended to provide additional information to assist
financial statement users in assessing an entity's credit risk exposure and
evaluating the adequacy of its allowance for credit losses. This update affects
all entities with financing receivables, excluding short-term trade accounts
receivable or receivables measured at fair value or lower of cost or fair value.
The effective date of this update is deferred by ASU-2011-01, "Deferral of the
Effective Date of Disclosures about Troubled Debt Restructuring". It is now
effective for interim and annual reporting periods beginning on or after June
15, 2011. Management does not expect this update to have a material effect on
the Company's financial statements.
In February 2010, the FASB issued Accounting Standards Update 2010-09,
"Subsequent Events: Amendments to Certain Recognition and Disclosure
Requirements." This FASB retracts the requirement to disclose the date through
which subsequent events have been evaluated and whether that date is the date
the financial statements were issued or were available to be issued. ASU 2010-09
is effective for interim and annual financial periods ending after February 24,
2010, and has been applied with no material impact on the Company's financial
statements.
In February 2010, the FASB issued Accounting Standards Update 2010-08,
"Technical Corrections to Various Topics." This FASB eliminates inconsistencies
and outdated provisions in GAAP and provides needed clarification on others. ASU
2010-08 is effective for interim and annual financial periods ending after
February 2010, and has been applied with no material impact on the Company's
financial statements.
In January 2010, the FASB issued Accounting Standards Update 2010-06, "Fair
Value Measurements and Disclosures: Improving Disclosures About Fair Value
Measurements." This FASB requires additional disclosures about the fair value
measurements including transfers in and out of Levels 1 and 2 and a higher level
of disaggregation for the different types of financial instruments. For the
reconciliation of Level 3 fair value measurements, information about purchases,
sales, issuances and settlements should be presented separately. ASU 2010-06 is
effective for interim and annual financial periods beginning after December
2009, and does not expected to have a material impact on the Company's financial
statements.
In August 2009, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update 2009-04, "Accounting for Redeemable Equity
Instruments - Amendment to Section 480-10-S99". This updates Section 480-10-S99,
"Distinguishing Liabilities from Equity", to reflect the SEC staff's views
regarding the application of Accounting Series Release No. 268, "Presentation in
Financial Statements of "Redeemable Preferred Stocks." The exchange for Series B
Preferred shares into Series C shares as elected by those shareholders utilizes
the view of the SEC in classifying the Series C Preferred shares as equity.
There is no stated maturity on the Series C Preferred shares and at the time of
redemption the Company will accrete changes in the redemption value at the
appropriate time. These amounts will be adjusted at the end of each reporting
period as applicable.
In August 2009, the FASB issued Accounting Standards Update 2009-05, "Fair Value
Measurements and Disclosures (Topic 820) - Measuring Liabilities at Fair Value".
This update includes amendments to Subtopic 820-10 "Fair Value Measurements and
Disclosures - Overall" for the fair value measurements of liabilities and
provides clarification that in circumstances in which quoted price in an active
market for the identical liability is not available, a reporting entity is
F-10
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
required to measure fair value using one or more of the techniques provided for
in this update. This Statement is effective for fiscal years, and interim
periods within those fiscal years, beginning on or after August 26, 2009. The
application of this update did not have a material impact on the Company's
results of operations or financial position.
In September 2009, the FASB issued Accounting Standards Update 2009-08,
"Earnings Per Share-Amendments to Section 260-10-S99". This update includes
technical corrections to Topic 260-10-S99, "Earnings Per Share", based on EITF
Topic D-53, "Computation of Earnings Per Share for a Period that Includes a
Redemption or an Induced Conversion of a Portion of a Class of Preferred Stock"
and EITF Topic D-42, "The Effect of the Calculation of Earnings Per Share for
the Redemption or Induced Conversion of Preferred Stock". The application of
this update did not have an impact on the Company's results of operations,
therefore not requiring additional earnings per share computation.
NOTE C - INVESTMENTS AND FAIR VALUE DISCLOSURES
-----------------------------------------------
The Company classifies its investments as available-for-sale, and as such, they
are carried at fair value. The amortized cost of investments is adjusted for
amortization of premiums and accretion of discounts which are included in net
investment income. Changes in fair value are reported as a component of other
comprehensive income, exclusive of other-than-temporary impairment losses, if
any. For the three month period ended August 31, 2011, 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 Company uses derivatives in the form of covered call options sold to
generate additional income and provide limited downside protection in the event
of a market correction. These transactions expose the Company to potential
market risk for which the Company receives a premium up front. The market risk
relates to the requirement to deliver the underlying security to the purchaser
of the call within a definite time at an agreed price regardless of the then
current price of the security. As a result the Company takes the risk that it
may be required to sell the security at the strike price, which could be a price
less than the then market price. Should the security decline in price over the
holding period of the call option, the Company realizes the option premium
received as income and the Company lessens or mitigates this risk which may be
eliminated by a closing transaction for the covered call and sale of the
underlying security.
The Company invests in large capitalized US securities traded on major US
exchanges and writes standardized covered calls only against these positions
(covered calls), which are openly traded on major US exchanges. The use of such
underlying securities and standardized calls lessens the credit risk to the
furthest extent possible. The Company is not exposed to significant cash
requirements through the use of covered calls in that it sells a call for a
premium and may use these proceeds to enter a closing transaction for the call
at a later date.
F-11
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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, 2011.
Gross Unrealized Gross Unrealized
Amortized Cost Gains Losses Fair Market Value
------------------- -------------------- ------------------- --------------------
State and municipal securities $ 1,297,391 $ 10,770 $ 3,934 $ 1,304,227
Equity securities 510,419 - 59,116 451,303
Foreign obligations 208,627 - 334 208,293
U.S. government agency
mortgage-backed securities 4,874,152 251,114 32 5,125,234
------------------- -------------------- ------------------- --------------------
$ 6,890,589 $ 261,884 $ 63,416 $ 7,089,057
=================== ==================== =================== ====================
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, 2011.
Amortized Cost Gross Unrealized Gross Unrealized Fair Market Value
Gains Losses
------------------- -------------------- ------------------- --------------------
State and municipal securities $ 1,073,724 $ - $ 26,955 $ 1,046,769
Equity securities 461,524 11,685 7,002 466,207
Derivatives (10,616) (3,010) (875) (12,751)
U.S. government agency
mortgage-backed securities $ 4,784,871 $ 208,356 $ 1,278 $ 4,991,949
------------------- -------------------- ------------------- --------------------
$ 6,309,503 $ 217,031 $ 34,360 $ 6,492,174
=================== ==================== =================== ====================
The Company's short-term investments of $695,262 and $1,007,617 at August 31,
2011 and May 31, 2011 consisted of money-market investment funds.
Management believes the Company has the ability to hold all fixed income
securities to maturity. However, during fiscal year 2010, the Company determined
it may dispose of securities prior to their scheduled maturity due to changes in
interest rates, prepayments, tax and credit considerations, liquidity or
regulatory capital requirements, or other similar factors. As a result, the
Company reclassified all of its fixed income securities (bonds) and equity
securities as available-for-sale. These securities are reported at fair value,
with unrealized gains and losses, net of deferred income taxes, reported in
stockholders' equity as a separate component of accumulated other comprehensive
income.
There are no securities classified as held to maturity at May 31, 2011 or August
31, 2011.
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.
F-12
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
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 following section describes the valuation methodologies used to measure
different financial instruments at fair value, including an indication of the
level in the fair value hierarchy in which the instrument is generally
classified.
FIXED INCOME SECURITIES
Securities valued using Level 1 inputs include highly liquid government bonds
for which quoted market prices are available. Securities using Level 2 inputs
are valued using pricing for similar securities, recently executed transactions,
cash flow models with yield curves and other pricing models utilizing observable
inputs. Most fixed income securities are valued using Level 2 inputs. Level 2
includes corporate bonds, municipal bonds, asset-backed securities and mortgage
pass-through securities.
EQUITY SECURITIES
Level 1 includes publicly traded securities valued using quoted market prices.
SHORT-TERM INVESTMENTS
The valuation of securities that are actively traded or have quoted prices are
classified as Level 1. These securities include money market funds and U.S.
Treasury bills. Level 2 includes commercial paper, for which all significant
inputs are observable.
F-13
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Assets measured at fair value on a recurring basis are summarized below:
August 31, 2011
----------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------------
Assets At
Level 1 Level 2 Level 3 Fair Value
------------------ --------------- ----------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,637,754 $ - $ 6,637,754
Equity securities at fair value 451,303 - - 451,303
(includes derivatives)
Short-term investments at fair value 695,262 - - 695,262
------------------ --------------- ----------------- -----------------
Total Assets $ 1,146,565 $ 6,637,754 $ - $ 7,784,319
================== =============== ================= =================
May 31, 2011
----------------------------------------------------------------------
Fair Value Measurements Using
----------------------------------------------------
Assets At
Level 1 Level 2 Level 3 Fair Value
------------------ --------------- ----------------- -----------------
Assets:
Fixed income securities at fair value $ - $ 6,038,718 $ - $ 6,038,718
Equity securities at fair value 453,456 - - 453,456
(includes derivatives)
Short-term investments at fair value 1,007,617 - - 1,007,617
------------------ --------------- ----------------- -----------------
Total Assets $ 1,461,073 $ 6,038,718 $ - $ 7,499,791
================== =============== ================= =================
The Company had no assets or liabilities measured at fair value on a recurring
basis using significant unobservable inputs (Level 3) at either May 31, 2011 or
at August 31, 2011.
During the three months ended August 31, 2011, the company recognized gross
realized gains on the sale of securities classified as available-for-sale as
follows:
Gross Gross
Gross Realized Realized
Proceeds Gains Losses
------------------- ------------------ ------------------
Mortgage-backed securities $ 27,393 $ 1,479 $ -
Equity securities 77,451 2,168 -
Equity securities (derivatives) 16,064 8,467 (21)
------------------- ------------------ ------------------
Total $ 120,908 $ 12,114 $ (21)
=================== ================== ==================
F-14
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE D - NOTES PAYABLE AND ADVANCES FROM RELATED PARTY
------------------------------------------------------
The Company had the following unsecured notes payable to individuals and
businesses as of August 31, 2011 and May 31, 2011 respectively:
August 31, May 31,
2011 2011
------------------ ------------------
Unsecured demand notes payable to individuals
and others; interest rate fixed @ 10.00%
($75,000 to related party) $ 1,559,500 $ 1,492,500
Unsecured demand notes payable to individuals
and others 103,000 103,000
Secured demand note payable to individuals;
interest rate fixed @ 10%; secured
by accounts receivable for investment advisory
fees for the quarter ending September 30, 2011 50,000 -
Secured demand note payable to individuals;
interest rate fixed @ 14%; secured
by accounts receivable for investment advisory
fees for the quarter ending June 30, 2011 - 45,000
Secured demand note payable to individuals;
interest rate fixed @ 12%; secured by accounts
receivable for investment advisory fees 20,000 40,000
Secured demand note payable to individuals;
interest rate fixed @ 12%; secured
by accounts receivable for investment advisory
fees for the quarters ending September 30 and
December 2011 129,000 129,000
Unsecured short-term advances from principal
shareholder and chief executive officer;
interest rate fixed @ 12% (147,699) (29,965)
Unsecured note(s) payable to individual(s) under
a bridge-financing arrangement described below
($360,000 to related party) 3,500,000 3,500,000
------------------ ------------------
Notes payable $ 5,213,801 $ 5,279,535
================== ==================
In accordance with the terms of the first round bridge-financing of $2.5 million
on March 10, 2008, the holders of such notes were paid accrued interest-to date
and issued 5.00% of the Company's common shares. Holders of the second round of
bridge-financing notes of $1.0 million received 2.00% of the Company's common
shares. Upon retirement of the notes subsequent to consummation of a qualified
F-15
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
equity offering, the Company shall issue to the holders of the bridge financing
notes additional Company common stock that, when added to the stock initially
issued to the holders of the notes, will equal the noteholder's pro rata share
of the applicable percentage of the outstanding common stock of the Company as
follows: If the qualified financing consists of $50 million or more, the holders
of such notes will receive 28% of the common stock of the Company that would
otherwise be retained by the holders of the Company's common shares immediately
prior to the financing; if the qualified financing is for an amount less than
$50 million, the percentage will be reduced on a sliding scale to a fraction of
28% of the amount retained by the holders of the Company's common shares (where
the numerator is the amount of financing and the denominator is $50 million).
Beginning September 10, 2008, because a qualified financing had not been
completed, the Company became required under the terms of the bridge financing
to issue 2.80% of the Company's outstanding common shares and shall issue 2.80%
of the Company's outstanding common shares upon each six-month anniversary date
thereof until retirement of the notes. The following table summarizes the common
shares issued to those note holders.
Date of Issuance Shares Issued
-------------------------- ----------------
September 10, 2008 4,870,449
March 10, 2009 5,010,640
September 10, 2009 5,354,642
March 10, 2010 6,005,925
September 10, 2010 6,213,285
March 10, 2011 6,738,900
----------------
34,193,841
================
Pursuant to the terms of the Promissory Notes, the first two of 20 equal
quarterly installments of principal and interest payable thereunder were to have
been paid on December 10, 2008 and March 10, 2009 (the "INITIAL AMORTIZATION
PAYMENTS"). As the result of upheavals and dislocations in the capital markets,
the Company was unable to either refinance the indebtedness evidenced by the
Promissory Notes or make the Initial Amortization Payments to the Holders when
due; and an Event of Default (as defined in the Promissory Notes) occurred under
the Promissory Notes as a result of the Company's failure to pay the Initial
Amortization Payments within 14 days after same became due and payable.
On June 5, 2009 the Company entered into an agreement with the bridge lenders to
forbear from exercising their rights and remedies arising from the Acknowledged
Events of Default. As consideration for the forbearance, the Company issued
5,171,993 shares of Common stock, and pledged the stock of the Company's
subsidiary, Crystal Mountain Water (CMW), as security for repayment of the
loans. The original repayment schedule called for quarterly payments of
$224,515. The Holders agreed that under the forbearance the Company may satisfy
its obligation by increasing the quarterly payments by $67,185, (to a total of
$291,700) for eight consecutive quarters beginning September 10, 2009 to satisfy
the arrearage. In addition, the interest rate was increased to 17.00%. Although
the Company has failed to make the payment that was due September 10, 2009 and
the payments that were due in the ensuing quarters, management has remained in
close contact with the bridge lenders, providing reports regarding its efforts
to refinance or otherwise repay the bridge loans. To date, none of the bridge
lenders has elected to pursue legal remedies.
F-16
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
During the three months ended August 31, 2011 and the year ended May 31, 2011, a
company owned by a board member provided consulting services. This company
provided services totaling $15,525 in the three months ended August 31, 2011 and
$15,525 in the three months ended August 31, 2010. Amounts owed to this company
are treated as related party payables in the amounts $103,209 and $99,209 at
August 31, 2011 and May 31, 2011.
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 period
ended August 31, 2011.
Three month
period ended
August 31,
2011
--------------------
Balance owed, beginning of period $ (29,965)
Proceeds from borrowings 70,560
Accrued payroll offsetting repayments
49,692
Repayments (237,986)
--------------------
Balance owed, end of period $ (147,699)
====================
Scheduled maturities and principal payments for each of the next five years
ending August 31 are as follows:
2013 (including demand notes) $ 5,213,801
2014 - 2016 -
-----------------
$ 5,213,801
=================
NOTE E-STOCKHOLDERS EQUITY
--------------------------
In the three month period ending August 31, 2011, the Company issued 1,032,000
shares of the Company's common stock in connection with new and continued
borrowings totaling $732,000. The shares were valued at approximately $.006581
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 $6,792.
On July 1, 2011 the Company issued 1,372,949 shares of the Company's common
stock in connection with the additional 2% stock dividend associated with Series
B Preferred shares that were requested to be redeemed upon maturity. The shares
were valued at approximately $.007691 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 $10,560.
F-17
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE F-PREFERRED STOCK
----------------------
REDEEMABLE PREFERRED STOCK
On December 30, 2005, through a private placement, the Company issued 350 shares
of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with
1,050,000 warrants for common shares of Company stock as additional
consideration, for a cash investment in the amount of $350,000, in connection
with the Company's acquisition of FSC. Holders of Series A Preferred Stock are
entitled to participate in FSC's partially collateralized bonding programs,
subject to continuing satisfaction of underwriting criteria, based upon the
bonding capacity of FSC attributable to capital reserves of FSC established with
the subscription proceeds (i.e., bonding capacity equal to ten times
subscription proceeds) and for so long as the subscriber holds the Series A
shares. Holders of the Series A Preferred Stock are entitled to receive, when
and as declared by the board of directors, cumulative preferential cash
dividends at a rate of four percent of the $1,000 liquidation preference per
annum (equivalent to a fixed annual rate of $40 per share). The Series A
Preferred Stock ranks senior to the Company's common stock and pari passu with
the Company's Series B Preferred and Series C Preferred Stock with respect to
dividend rights and rights upon liquidation, dissolution or winding up of the
Company. The holder may redeem the Series A Preferred Stock on or after the
seventh anniversary of the Issue Date, if the holder provides a written
statement to the Company that it will no longer require surety bonds issued by
the Company's insurance subsidiary (FSC) under its partially collateralized
bonding programs and, if no such surety bonds are then outstanding, the Company,
at the option of the holder, will redeem all or any portion of the Series A
Preferred Stock of such holder at a price per share equal to the Series A
Preferred Stock Issue Price plus all accrued and unpaid dividends with respect
to the shares of the Series A Preferred Stock of such holder to be redeemed. The
conditional redemption shall not be available to any holder of Series A
Preferred Stock for so long as surety bonds of the Company's insurance
subsidiary issued on a partially collateralized basis remain outstanding for the
benefit of such holder, and upon redemption, such holder shall no longer be
eligible to participate in the partially collateralized bonding programs of the
insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares
of the Series A Preferred Stock. As of May 31, 2011, the Company has issued
2,675 shares of Series A Preferred Stock in exchange for cash investments in the
amount of $2,675,000. No shares were issued in the three month period ending
August 31, 2011.
On December 30, 2005, through a private placement, the Company issued 3,980
shares of 8% Non-Voting Series B Convertible Preferred Stock (Series B Preferred
Stock), along with 19,900,000 warrants for common shares of Company stock as
additional consideration, for a cash investment in the amount of $2,985,000; and
issued 4,890.599 shares of Series B Preferred Stock, along with 24,452,996
warrants for common shares of Company stock as additional consideration, for a
conversion of $3,667,949 of indebtedness of the Company, in connection with the
Company's acquisition of FSC. Holders of the Series B Preferred Stock are
entitled to receive, when and as declared by the board of directors, cumulative
preferential cash dividends at a rate of eight percent of the $1,000 liquidation
preference per annum (equivalent to a fixed annual rate of $80 per share). The
Series B Preferred Stock ranks senior to the Company's common stock and pari
passu with the Company's Series A Preferred and Series C Preferred Stock with
respect to dividend rights and rights upon liquidation, dissolution or winding
up of the Company. Each share of the Series B Preferred Stock is convertible at
the option of the holder, at any time after the original issue date, into 1,000
fully paid and non-assessable shares of the Company's common stock at a
conversion price of $1.00 per common share. The Company may redeem the Series B
Preferred Stock at any time after the first anniversary of the Original Issue
Date at a price per share equal to the Series B Preferred Stock Face Amount plus
all accrued and unpaid dividends with respect to the shares of the Series B
F-18
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
Preferred Stock of such holder to be redeemed. To the extent that the Series B
Preferred Stock has not been redeemed by the Company, the holder may redeem the
Series B Preferred Stock on or after the fifth anniversary of the Original Issue
Date at a price per share equal to the Series B Preferred Stock Face Amount plus
all accrued and unpaid dividends with respect to the shares of the Series B
Preferred Stock of such holder to be redeemed. The Company is authorized to
issue up to 10,000 shares of the Series B Preferred Stock. The Company has not
issued any additional shares of Series B Preferred Stock during this fiscal
year.
The Company's outstanding Series B Preferred stock matured on December 30, 2010,
meaning that the holders of the Series B Stock became entitled to request that
the Company redeem their Series B Shares. As of this report, the Company has
received requests for redemption of 2,141.341 shares of Series B Preferred. The
aggregate amount to which the holders requesting redemption are entitled as of
September 30, 2011, is $3,377,585.
Under the terms of the Series B Preferred Stock, upon receipt of such a request,
the Company's Board was required to make a good faith determination regarding
(A) whether the funds of the Company legally available for redemption of shares
of Series B Stock are sufficient to redeem the total number of shares of Series
B Stock to be redeemed on such date and (B) whether the amounts otherwise
legally available for redemption would, if used to effect the redemption, not
result in an impairment of the operations of the Insurance Subsidiary. If the
Board determines that there is a sufficiency of legally available funds to
accomplish the redemption and that the use of such funds to affect the
redemption will not result in an impairment of the operations of the Insurance
Subsidiary, then the redemption shall occur on the Redemption Date. If, however,
the Board determines either that there are not sufficient funds legally
available to accomplish the redemption or that the use of such funds to effect
the redemption will result in an impairment of the operations of the Insurance
Subsidiary, then (X) the Company shall notify the holders of shares that would
otherwise have been redeemed of such fact and the consequences as provided in
this paragraph, (Y) the Company will use those funds which are legally available
therefor and which would not result in an impairment of the operations of the
Insurance Subsidiary to redeem the maximum possible number of shares of Series B
Stock for which Redemption Notices have been received ratably among the holders
of such shares to be redeemed based upon their holdings of such shares, and (Z)
thereafter, until such shares are redeemed in full, the dividends accruing and
payable on such shares of Series B Stock to be redeemed shall be increased by 2%
of the Series B Face Amount, with the amount of such increase (i.e., 2% of the
Series B Face Amount) to be satisfied by distributions on each Dividend Payment
Date of shares of Common Stock having a value (determined by reference to the
average closing price of such Common Stock over the preceding 20 trading days)
equal to the amount of such increase. The shares of Series B Stock not redeemed
shall remain outstanding and entitled to all the rights and preferences provided
herein. At any time thereafter when additional funds of the Company are legally
available for the redemption of shares of Series B Stock and such redemption
will not result in an impairment of operations of the Insurance Subsidiary, such
funds will immediately be used to redeem the balance of the shares of Series B
Stock to be redeemed. No dividends or other distributions shall be declared or
paid on, nor shall the Company redeem, purchase or acquire any shares of, the
Common Stock or any other class or series of Junior Securities or Equal Ranking
Preferred of the Company unless the Redemption Price per share of all shares for
which Redemption Notices have been given shall have been paid in full, provided
that the redemption price of any Equal Ranking Preferred subject of redemption
F-19
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
shall be paid on a pari passu basis with the Redemption Price of the Series B
Stock subject of redemption in accordance herewith. Until the Redemption Price
for each share of Series B Stock elected to be redeemed shall have been paid in
full, such share of Series B Stock shall remain outstanding for all purposes and
entitle the holder thereof to all the rights and privileges provided herein, and
Dividends shall continue to accrue and, if unpaid prior to the date such shares
are redeemed, shall be included as part of the Redemption Price.
On March 8, 2011, the Company's Board of Directors determined based on the
criteria established under the terms of the Series B Preferred Stock that there
were insufficient funds available for the redemption of Series B Stock.
For the three months ended August 31, 2011, the Company experienced a loss after
accretion of mandatorily redeemable convertible preferred stock, and accrued
dividends on mandatorily redeemable preferred stock of $158,341 as compared with
a loss after accretion of mandatorily redeemable convertible preferred stock,
and accrued dividends on mandatorily redeemable preferred stock of $384,237 for
the three months ended August 31, 2010.
EQUITY PREFERRED STOCK
As a means of alleviating obligations associated with the Company's Series B
Preferred Stock, which by its terms matures at the end of 2010, management
proposed a recapitalization to assist in stabilizing the financial position of
the Company. The Company's Certificate of Incorporation provides for two classes
of capital stock, known as common stock, $0.0001 par value per share (the
"COMMON STOCK"), and preferred stock, $0.0001 par value per share (the
"PREFERRED STOCK"). The Company's Board is authorized by the Certificate of
Incorporation to provide for the issuance of the shares of Preferred Stock in
series, and by filing a certificate pursuant to the applicable law of the State
of Delaware, to establish from time to time the number of shares to be included
in such series and to fix the designations, preferences and rights of the shares
of each such series and the qualifications, limitations and restrictions
thereof. Board deemed it advisable to designate a Series C Preferred Stock and
fixed and determined the preferences, rights, qualifications, limitations and
restrictions relating to the Series C Preferred Stock as follows:
1. Designation. The shares of such series of Preferred Stock are
designated "Series C Preferred Stock" (referred to herein as the
"SERIES C STOCK"). The date on which the first share of Series C Stock
is issued shall hereinafter be referred to as the "ORIGINAL ISSUE
DATE".
2. Authorized Number. The number of shares constituting the Series C
Stock are 10,000.
3. Ranking. The Series C Stock ranks, (a) as to dividends and upon
Liquidation senior and prior to the Common Stock and all other equity
securities to which the Series C ranks prior, with respect to
dividends and upon Liquidation (collectively, "JUNIOR SECURITIES"),
(b) pari passu with the Corporation's Series A Preferred Stock, par
value $0.0001 per share (the "SERIES A STOCK"), the Corporation's
Series B Stock, and any other series of Preferred Stock subsequently
established by the Board with equal ranking (any such other series of
Preferred Stock, together with the Series C Stock, the Series B Stock
and Series A Stock are collectively referred to as the "EQUAL RANKING
PREFERRED") and (c) junior to any other series of Preferred Stock
subsequently established by the Board with senior ranking.
F-20
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
4. Dividends.
(a) DIVIDEND ACCRUAL AND PAYMENT. The holders of the Series C
Stock shall be entitled to receive, in preference to the holders of
Junior Securities, dividends ("DIVIDENDS") on each outstanding share
of Series C Stock at the rate of 8% per annum of the sum of (i) the
Series C Face Amount plus (ii) an amount equal to any accrued, but
unpaid, dividends on such Series C Stock, including for this purpose
the exchanged Series B Amount outstanding with respect to such Series
C Stock. For purposes hereof, the "SERIES B AMOUNT" means an amount
equal to the dividend that would have accrued on such Series C Stock
held by such holder from and after the Series B Original Issue Date
applicable to such share of Series C Stock, through the Original Issue
Date as if such Series C Stock had been issued on such Series B
Original Issue Date, less all amounts thereof distributed by the
Corporation with respect to such Series C Stock. Dividends shall be
payable quarterly in arrears on each January 1, April 1, July 1 and
October 1 following the Original Issue Date, or, if any such date is a
Saturday, Sunday or legal holiday, then on the next day which is not a
Saturday, Sunday or legal holiday (each a "DIVIDEND PAYMENT DATE"), as
declared by the Board and, if not paid on the Dividend Payment Date,
shall accrue. Amounts available for payment of Dividends (including
for this purpose the Series B Amount) shall be allocated and paid with
respect to the shares of Series C Preferred and any other Equal
Ranking Preferred, FIRST, among the shares of Equal Ranking Preferred
pro rata in accordance with the amounts of dividends accruing with
respect to such shares at the current Dividend Payment Date, and,
THEN, any additional amounts available for distribution in accordance
with the accrued, but unpaid, dividends (and the Series B Amount then
outstanding) at each prior Dividend Payment Date, in reverse
chronological order, with respect to all shares of the Equal Ranking
Preferred then outstanding in accordance with amounts accrued, but
unpaid. For purposes hereof, the term "SERIES B ORIGINAL ISSUE DATE"
shall mean, with respect to any share of Series C Stock issued by the
Corporation in exchange for a share of Series B Stock, the date on
which the Corporation originally issued such share of Series B Stock.
The Recapitalization consisted of the exchange of Series B Shares for a
combination of Series C Shares and Common Stock. For each Series B Share, the
participating holder received (i) one Series C Share and (ii) 2,000 shares of
JFG Common Stock (for no additional consideration).
For the year ending May 31, 2010, 6,804.936 shares of Series B Stock were
surrendered and exchanged for 6,804.936 shares of Series C Stock. This exchange
amounted to $6,269,051 of carrying value of Series B stock being exchanged for
Series C and Common Stock. 13,609,872 shares of Common Stock were issued to the
Series C Stock holders at the rate of 2,000 Common shares for each exchanged
Series B Stock, with the related cost associated with the Common issuance
offsetting the Series C carrying value by $265,120. The shares were valued at
approximately $.01948 per share based on the average quoted closing price of the
Company's stock for the 20-day period proceeding the date of the transaction.
Series C stock may be redeemed by the Company but does not have a fixed maturity
date and, thus, is classified as permanent equity.
The accrual of dividends on the equity preferred stock resulted in a charge to
common stockholders' equity and a credit to the equity of equity preferred stock
of $204,564 for the three month period ending August 31, 2011, as compared with
a charge to common stockholders' equity of $188,985 for the three month period
ending August 31, 2010.
F-21
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
DIVIDEND PREFERENCE AND ACCRETION
The Series A Shares are entitled to receive cumulative dividends at the rate of
4.00% per annum.
The Series B Shares have an 8.0% per annum compounding dividend preference, are
convertible into Common Shares of JFG at the option of the holders at a
conversion price of $1.00 per Share (as adjusted for dilution) and, to the
extent not converted, must be redeemed by the Corporation at any time after
December 31, 2010 at the option of the holder. Any such redemption is subject to
legal constraints, such as the availability of capital or surplus out of which
to pay the redemption, and to a determination by our Board of Directors that the
redemption will not impair the operations of First Surety.
The Series C Shares issued in the Recapitalization have the same 8.0% per annum
compounding dividend preference and carry over from the Series B Shares the same
accrued but unpaid dividends. While dividends had never been declared on the
Series B shares, they had been accrued, increasing the dividend preference and
the redemption price and liquidity preference of such shares and increasing the
liability represented thereby based upon the Series B Shares fixed maturity
date. The accrued (but undeclared) dividends associated with the Series C
exchange amounted to $2,295,624 and are included in the total amount exchanged
for Series C Shares. Unlike the Series B Shares with their fixed maturity date,
the Series C Shares are permanent equity, with accruing dividends only
increasing the preference amount that must be satisfied before junior securities
may participate in dividends or on liquidation. Accordingly, the effect of the
accrual of dividends with respect to the Series C Shares on the Company's
balance sheet is to increase the aggregate claim of the Series C Shares on the
equity of the corporation and to increase the deficit in common equity, while
having no effect on the net equity of the corporation as a whole. The
entitlement of the Series C Shares to a priority in relation to junior
securities with respect to dividends and on liquidation does not create an
obligation to the Company and therefore no liability is recorded until the
dividends are declared by the Board of the Company. The Series C Shares are pari
passu with the Corporation's Series A Preferred Stock and Series B Shares (to
the extent any remain outstanding following the Recapitalization) and no
dividends or other distributions will be paid upon Common Shares or any other
class of Shares that is junior in priority to the Series C Preferred while
dividends are in arrears. In addition, the Series C Shares are convertible into
Common Shares of JFG at the option of the holders at a conversion price of $0.10
per Share. The Series C Shares may be redeemed by the Corporation, at its
option, when it is in a financial position to do so.
Holders of over 70% of the outstanding Series B Preferred Shares elected to
participate in the recapitalization. Those Series B Preferred Shareholders that
chose not to convert at this time are listed in the Liabilities section of the
Balance Sheet, and therefore the accretion and dividends associated with the
Series B stock after November 30, 2009 are deductions from net income. As the
redemption date on the Series B shares got closer, it became apparent that it
was unlikely that the shares would be converted to common at $1.00, and thus the
classification was changed. Accretion and dividends on Series B mandatorily
redeemable preferred stock deducted from net income amounted to $125 and $84,977
for the three-month period ended August 31, 2011. The remaining Series B shares
are continuing to be accreted from carrying value to the face amount for the 5
year period from the date of issuance. Series C stock has no accretion. There
were no shares of Series B Stock surrendered or exchanged in the 3 month period
ending August 31, 2011.
As of August 31, 2011 the Company has chosen to defer payment of dividends on
the Series A Preferred Stock with such accrued and unpaid dividends amounting to
$494,921 through August 31, 2011.
F-22
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
As of August 31, 2011 the Company has chosen to defer payment of dividends on
the Series B and Series C Preferred Stock with such accrued and unpaid dividends
amounting to $1,528,451 and $3,655,912 through August 31, 2011.
NOTE G - COMMITMENTS, CONTINGENCIES, AND MATERIAL AGREEMENTS
------------------------------------------------------------
As of August 31, 2011, the Company had accrued and withheld approximately
$82,000 in noncurrent Federal payroll taxes which are reflected in the financial
statements as other liabilities. Management intends to satisfy this obligation
as soon as possible.
As of August 31, 2011, the Company had accrued and withheld approximately
$14,000 in West Virginia payroll withholdings, of which $3,500 was non-current
and is being remitted as part of a monthly payment plan negotiated with the
State of West Virginia. This 12 month plan runs through November 2011 and will
result in the full payment of all non current withholding taxes, including
interest and penalties of approximately $5,000 which are reflected in the
accompanying financial statements as accrued expenses.
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, 2011 AUGUST 31, 2010
---------------- -------------------------- -----------------------
REVENUES:
Investment advisory $ 75,616 $ 55,804
Surety insurance 581,148 283,259
Corporate - -
-------------------------- -----------------------
Total revenues $ 656,764 $ 339,063
========================== =======================
NET INCOME (LOSS):
Investment advisory $ 24,913 $ 11,897
Surety insurance 328,766 120,321
Corporate (480,720) (481,750)
-------------------------- -----------------------
Total net income (loss) $ (127,041) $ (349,532)
========================== =======================
F-23
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE I - REINSURANCE
--------------------
The Company limits the maximum net loss that can arise from large risks by
reinsuring (ceding) certain levels of such risk with reinsurers. Ceded
reinsurance is treated as the risk and liability of the assuming companies. The
Company cedes insurance to other companies and these reinsurance contracts do
not relieve the Company from its obligations to policyholders.
Effective April 1, 2009, FSC entered into a reinsurance agreement with various
syndicates at Lloyd's of London and one Bermuda based reinsurer ("Reinsurer")
for its coal reclamation surety bonding programs. The reinsurance agreement is
an excess of loss contract which protects the Company against losses up to
certain limits over stipulated amounts, has an initial term of 39 months and can
be terminated by either party by written notice of at least 90 days prior to any
July 1. The contract called for the first year of the agreement to consist of 15
months with premium due within 30 days of the end of the first Agreement Year,
June 1, 2010, at a rate of 35% of gross written premium, subject to a minimum
premium $490,000. For the second agreement year, which covered the twelve months
beginning July 1, 2010, the premium rate remained the same at 35% with the
premium due within 30 days of the close of the second agreement year, subject to
a minimum premium of $490,000. For the third year agreement year, which covers
the twelve months beginning July 1, 2011, the premium rate remains the same at
35% with the premium due within 30 days of the close of the agreement year,
subject to a minimum premium of $490,000. Deposits are made to the reinsurers
quarterly in arrears in equal amounts of $140,000. At August 31, 2011 and May
31, 2011, the Company had prepaid reinsurance premiums of $251,599 and $264,763
and ceded reinsurance payable of $57,240 and $77,635.
There were no ceded losses and LAE expenses for the three months ended August
31, 2011 or 2010.
The effects of reinsurance on premium written and earned for fiscal 2011 and 2010 are as follows;
THREE MONTH THREE MONTH THREE MONTH THREE MONTH
PERIOD ENDING PERIOD ENDING PERIOD ENDING PERIOD ENDING
AUGUST 31, 2011 AUGUST 31, 2011 AUGUST 31, 2010 AUGUST 31, 2011
- WRITTEN - EARNED - WRITTEN - EARNED
------------------- ------------------- ------------------ --------------------
DIRECT $ 369,070 $ 407,259 $ 448,924 $ 286,706
CEDED $ 126,551 $ 139,715 $ 152,287 $ 102,950
------------------- ------------------- ------------------ --------------------
NET $ 242,519 $ 267,544 $ 296,637 $ 183,756
=================== =================== ================== ====================
Under the terms of its reinsurance treaty, the Company is entitled to a No
Claims Bonus from the reinsurers for each claim year in which no claims are
received. The bonus is 20% of the annual reinsurance premium and is to be
recorded upon the completion of each contract year. On August 31, 2011 the
Company recorded receipt of $213,281 from its reinsurers representing the
cumulative No Claims Bonus under the terms of its reinsurance treaty for the
claim years ending June 30, 2010 and June 30, 2011. The No Claims Bonus is not
included in the analysis of written and earned premium above.
F-24
JACOBS FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
NOTE J-STOCK-BASED COMPENSATION
-------------------------------
On June 30, 2009 the compensation committee of the board of directors awarded
10,000,000 incentive stock options to acquire common shares at an exercise price
of four cents ($.04) per share, of which 4,700,000 shares vested immediately and
the remaining 5,300,000 options vested 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 to August 31, 2011, the Company obtained new borrowings of $35,000
from a business to fund ongoing operation and made repayments of $70,000 on
existing debt. Such borrowings were obtained under demand notes bearing interest
at the rate of 10%. These borrowings included the issuance of 70,000 shares of
its common stock as additional consideration. The Company also obtained short
term borrowing of $29,000 from a business to fund ongoing operations and made
repayments of $29,000 as well as $2,000 in interest. Additionally, the Company
obtained borrowings of $297,315 ($181,733 of which was Company debt assumed
personally by owner) 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 $140,513, to bring the balance owed to the
principal shareholder to $9,104 at the date of this filing.
On September 10, 2011, the Company issued 7,043,710 shares of the Company's
common stock in connection with the semi-annual issuance of shares under the
bridge-financing arrangements (see Note D).
On September 30, 2011, the Company elected to continue to defer payment of
dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series
C Preferred Stock, with such accrued and unpaid quarterly dividends amounting to
$31,960, $87,699 and $210,936, respectively. As of September 30, 2011, the
accumulated accrued and unpaid dividend amounted to $526,881, $1,616,151, and
$3,866,848, respectively.
F-25
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
--------------------------------------------------------------------------------
During fiscal 2011 and the three-month period ended August 31, 2011, the Company
has focused its primary efforts on the development and marketing of its surety
business in West Virginia and Ohio, arranging for potential strategic
relationships that will accelerate the progression of the Company's business
plan and raising additional capital to increase the capital base of its
insurance subsidiary, First Surety Corporation ("FSC"), to facilitate entry into
other state markets.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIOD ENDED AUGUST 31, 2011
The Company experienced income from operations for the three-month period ended
August 31, 2011 of $187,634 as compared with a loss from operations of $22,035
for the corresponding period ended August 31, 2010.
REVENUES
Revenues from operations for the three-month period ended August 31, 2011 were
$656,764 as compared with $339,063 for the corresponding period ended August 31,
2010. The overall increase in revenues is largely attributable to the continued
growth of the surety business of FSC, as well the receipt of a cumulative No
Claims Bonus from its reinsurers for the years ended June 30, 2010 and June 30,
2011. In addition, for the three month period ending August 31, 2010 net
investment income was less than usual due to the receipt of large principal
payments on mortgage backed securities, which resulted in large amortization of
premiums recognized in that period.
INVESTMENT ADVISORY REVENUES
Quarterly revenues from the Company's investment management segment (Jacobs &
Company or J&C), net of advisory referral fees, were $74,970 for the three-month
period ended August 31, 2011 as compared with $54,170 for the corresponding
period ended August 31, 2010. 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.
INSURANCE AND INVESTMENT REVENUES
Quarterly revenues from the Company's surety insurance segment, consisting of
FSC and Triangle Surety Agency, Inc ("TSA"), were $581,149 for the three-month
period ended August 31, 2011 as compared with $283,260 for the corresponding
period ended August 31, 2010. Revenues attributable to premium earned, net
investment income and commissions earned are as follows:
-3-
Three-month Period Ended
August 31,
2011 2010
----------------- -----------------
Premium earned $ 267,544 $ 183,756
Commissions earned 18,214 15,234
No Claims Bonus from Reinsurers 213,281 -
Net investment income 70,017 33,251
Net realized investment gains 12,093 51,019
----------------- -----------------
Total $ 581,149 $ 283,260
================= =================
Premium revenue is recognized ratably over the term of the policy period and
thus is relatively stable from period to period with fluctuations for comparable
periods generally reflecting the overall growth or loss of business. Whereas,
commission revenue, which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations for comparable periods largely reflecting the overall growth or
loss of business. The increase in premium earned for the three-month period
ended August 31, 2011 in comparison to the corresponding period from the prior
year is a result of growth in bonds issued for new and existing clients.
On August 31, 2011 the Company's insurance subsidiary, FSC, recorded receipt of
$213,281 from its reinsurers representing cumulative No Claims Bonus under the
terms of its reinsurance treaty for the claim years ending June 30, 2010 and
June 30, 2011.
Investment income should remain relatively consistent, but can fluctuate based
on interest rates and market conditions as well as the average assets held for
investment. The increase in corresponding periods reflects growth in average
assets held for investment in FSC's investment portfolio from approximately
$6.974 million for the three-month period ended August 31, 2010 to approximately
$7.653 million for the three-month period ended August 31, 2011 offset by a
decrease in investment yield from approximately 3.72% for the three-month period
ended August 31, 2010 to approximately 3.47% for the three-month period ended
August 31, 2011. In addition, the amortization of premium for larger than usual
principal payments on mortgage backed securities during the three-month period
ended August 31, 2010 resulted in decreased investment income.
During the three-month period ending August 31, 2011, the Company sold certain
US Government agency mortgage backed securities and equity investments for
$120,908, resulting in realized gains of $12,093. In the three-month period
ending August 31, 2010, the Company sold certain available for sale US
Government agency mortgage backed securities for $840,684, resulting in a
realized gain of $51,019.
-4-
EXPENSES
INCURRED POLICY LOSSES
The Company has experienced no claims for losses as of August 31, 2011. However,
"incurred but not reported" (IBNR) policy losses for the three-month period
ended August 31, 2011 and 2010 amounted to $60,413 and $42,327 respectively.
Such amounts represent the provision for loss and loss adjustment expense
attributable to surety bonds issued by FSC. Such estimates are based on industry
averages adjusted for factors that are unique to FSC's underwriting approach and
are constantly reviewed for adequacy based on current market conditions and
other factors unique to FSC's business. For each of these periods, IBNR policy
losses were approximately 23% of earned premium.
POLICY ACQUISITION COSTS
Insurance policy acquisition costs of $84,919 and $59,981 for the three-month
periods ended August 31, 2011 and 2010, 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 32% and 33% for the periods ended August 31, 2011 and 2010
respectively.
GENERAL AND ADMINISTRATIVE
General and administrative expenses for the three-month periods ended August 31,
2011 and 2010 were $321,105 and $255,398 respectively, representing an increase
of $65,707, and were comprised of the following:
Three-month Period Ended
August 31,
-------------------------------------
2011 2010 Difference
------------------ ------------------ -------------------
Salaries and related costs $ 145,730 $ 112,548 $ 33,182
General office expense 28,301 28,377 (76)
Legal and other professional fees and costs 54,602 25,326 29,276
Audit, accounting and related services 34,307 25,543 8,764
Travel, meals and entertainment 22,891 9,660 13,231
Other general and administrative 35,274 53,944 (18,670)
------------------ ------------------ -------------------
Total general and administrative $ 321,105 $ 255,398 $ 65,707
================== ================== ===================
-5-
Salaries and related costs, net of deferred internal policy acquisition costs,
increased approximately $33,000 and are comprised of the following:
Three-month Period Ended
August 31,
--------------------------------------
2011 2010 Difference
--------------------- ----------------- ----------------
Salaries and taxes $ 132,766 $ 128,546 $ 4,220
Commissions 50,047 7,631 42,416
Stock option expense 370 13,452 (13,082)
Fringe benefits 21,341 14,262 7,079
Key-man insurance 12,224 10,988 1,236
Deferred payroll costs (71,018) (62,331) (8,687)
--------------------- ----------------- ----------------
Total salaries and related costs $ 145,730 $ 112,548 $ 33,182
===================== ================= ================
The increase in commissions is attributable to FSC's commission structure that
pays a larger commission percentage on the origination of a policy but reduced
for subsequent policy renewals. In addition, the Company adopted a new policy
that broadens the pool of policies that generate commissions. The decrease in
stock option expense is attributable to the final vesting from the award of
stock options on June 30, 2009, which had the majority of options vested in the
first year of the award.
Legal and other professional fees and costs were comprised of the following:
Three-month Period Ended
August 31,
---------------------------------------
2011 2010 Difference
--------------------- ---------------- -----------------
General corporate services $ 3,866 $ 8,589 $ (4,723)
Coal reclamation consulting 7,916 6,420 1,496
Statutory examination costs 7,675 - 7,675
Acquisition and financing related costs 7,645 10,317 (2,672)
Acquisition and financing related costs - due diligence 27,500 - 27,500
--------------------- ---------------- -----------------
Total legal and other professional fees $ 54,602 $ 25,326 $ 29,276
===================== ================ =================
The decrease in general corporate services results primarily from timing
differences and less assistance required in connection with the filing of the
Company's annual report with the Securities and Exchange Commission. In the
three-month period ending August 31, 2011, the Company incurred costs associated
with a statutory examination of its insurance subsidiary by the West Virginia
Insurance Commission. 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
$7,645 and $10,317 for the three-month periods ended August 31, 2011 and 2010,
respectively. The Company incurred $27,500 in costs associated with the
performance of due diligence by third parties for the benefit of an investor
considering a substantial investment in the Company.
-6-
The increase in travel, meals and entertainment expense for the three-month
period ended August 31, 2011 as compared to the corresponding 2010 period
related primarily to expanded efforts by management to obtain financing
necessary for the Company's business and penetration of additional markets.
Other general and administrative expense decreased approximately $19,000 for the
three-month period ended August 31, 2011 as compared to the corresponding 2010
period. This decrease in is due to non-recurring training and conferences for
staff in the prior year, decreased licenses and fees for FSC related to
obtaining a U.S. Treasury Listing, and overall decreases in several less
significant items.
INTEREST EXPENSE
Interest expense for the three-month period ended August 31, 2011 was $229,573
as compared with $204,368 for the corresponding period ended August 31, 2010.
Components of interest expense are comprised of the following:
Three-month Period Ended
August 31,
-----------------------------------
2011 2010 Difference
----------------- ----------------- -----------------
Interest expense on bridge-financing $ 149,973 $ 149,973 $ -
Expense of common shares issued or to be issued in
connection with bridge financing and other arrangements 32,308 24,358 7,950
Interest expense on demand and term notes 47,292 28,448 18,844
Other finance charges - 1,589 (1,589)
----------------- ----------------- -----------------
Total interest expense $ 229,573 $ 204,368 $ 25,205
================= ================= =================
The increase in the expense of common shares issued (or to be issued) for the
three-month period ended August 31, 2011, as compared to the corresponding
period of the previous year is attributable to the issuance of common stock
representing the additional 2% stock dividend for the quarter ending June 30,
2011 to the holders of Series B Preferred shares that had requested to be
redeemed upon maturity. Interest expense on demand and term notes increased due
to increased borrowings and increased interest rate on some of those borrowings.
ACCRETION AND DIVIDENDS
Accretion of mandatorily redeemable convertible preferred stock issued at a
discount and accrued dividends for three-month periods ended August 31, 2011 and
2010 are as follows:
-7-
Three-month Period Ended
August 31,
--------------------------------------
2011 2010 Difference
--------------------- ---------------- -----------------
Accretion of discount $ - $ 4,626 $ (4,626)
Accrued dividends - mandatorily redeemable preferred stock 31,300 30,079 1,221
Accrued dividends - equity preferred stock 204,564 188,985 15,579
--------------------- ---------------- -----------------
Total accretion and dividends $ 235,864 $ 223,690 $ 12,174
===================== ================ =================
The Series B class of stock is treated as a liability as of November 30, 2009
after the majority was exchanged for Series C equity stock. Therefore, for the
three-month period ending August 31, 2011, accretion of $125 and dividends of
$84,977 associated with the Series B remaining after that date are deductions
from net income and not included in the table above. The decrease in accretion
of discount and accrued dividends on mandatorily redeemable preferred stock
results from application of the interest or constant yield method to the
discount initially recorded with the mandatorily redeemable preferred stock over
a period of five years from the date of issuance of the stock, and recognition
in December 2010 of the final month's accretion of discount on Series A
Preferred stock. Series C equity stock accrues dividends at the same rate as the
Series B for which it was exchanged but is separated in the table above due to
Series C not being mandatorily redeemable. Series C does not accrete.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
In exchange for the purchase price of $2.9 million for the 2005 acquisition of
FSC, the Company received cash and investments held by FSC totaling $2.75
million, with the difference being attributed to the multi-line property and
casualty licenses of FSC in the states of West Virginia, Ohio and Indiana. Such
licenses have indefinite lives and are evaluated annually for recoverability and
impairment loss. Impairment loss, if any, is measured by estimating future cash
flows attributable to such assets based on forecasts and projections and
comparing such discounted cash flow amounts to the carrying value of the asset.
Should actual results differ from such forecasts and projections, such assets
may be subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of August 31, 2011.
FSC is licensed to write coal permit and miscellaneous fixed-liability limit
surety bonds in West Virginia and Ohio. Coal permit bonds are required by
regulatory agencies to assure the reclamation of land that has been disturbed by
mining operations, and accordingly, is a highly regulated process by federal and
state agencies. Such bonds are generally long-term in nature with mining
-8-
operations and reclamation work conducted in unison as the property is mined.
Additionally, no two principals and properties are alike due to varied company
structures and unique geography and geology of each site.
In underwriting coal reclamation bonds, management obtains estimates of costs to
reclaim the relevant properties in accordance with the specifications of the
mining permit prepared by independent outside professionals experienced in this
field of work. Such estimates are then periodically updated and compared with
marketable securities pledged and held in an account in which FSC has a security
interest as collateral for the surety bond, significantly mitigating FSC's
exposure to loss. Should the principal default in its obligation to reclaim the
property as specified in the mining permit, FSC would then use the funds in the
collateral account to reclaim the property or as an offset in forfeiting the
face amount of the surety bond. Losses can occur if the costs of reclamation
exceed the estimates obtained at the time the bond was underwritten or upon
subsequent re-evaluations if sufficient collateral is not obtained or if the
collateral has experienced significant deterioration in value and FSC is not
otherwise able to recover under its contractual rights to indemnification.
In general, miscellaneous fixed-liability surety bonds are collateralized in
full by the principal's cash investment in a collateral investment account
managed by the Company's investment advisory subsidiary (Jacobs & Co.) that
mitigates FSC's exposure to loss. Losses can occur should the principal default
on the performance required by the bond and the collateral investment account
experiences deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
routinely reviews its exposure to loss based on periodic monitoring and
inspection reports, along with industry averages and historical experience.
Management estimates such losses based on industry experience adjusted for
factors that are unique to the Company's approach, and in consultation with
actuaries experienced in the surety field.
ANALYSIS OF LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL POSITION AND RECENT
DEVELOPMENTS AND FUTURE DIRECTION OF COMPANY
The Company has experienced operating losses of approximately $22,000 and
$458,000 for the fiscal years ended May 31, 2011 and 2010, respectively. The
Company's losses increase when accretion of mandatorily redeemable convertible
preferred stock and accrued dividends on mandatorily redeemable preferred stock
are taken into account, to approximately $1,440,090 and $2,338,531 for the
fiscal years ended May 31, 2011 and 2010, respectively.
For the three-month period ended August 31, 2011 the Company had operating
income of approximately $188,000, which, when accretion of mandatorily
redeemable convertible preferred stock and accrued dividends on mandatorily
redeemable preferred stock are taken into account, results in a loss of
approximately $158,000. The Company had positive cash flow of approximately
$315,000 from operating activities for the three-month period ended August 31,
2011. A substantial portion of the Company's cash flow is generated by its
insurance subsidiary and is subject to certain withdrawal restrictions. Despite
the continued reduction of operating expenses, the Company has not been able to
pay certain amounts due to professionals and others, continues to be unable to
-9-
pay its preferred stock dividend obligation or to cure its default in certain
quarterly payments due its bridge-financing lenders. While management expects
revenue growth and cash flow to increase significantly when its business plan is
fully implemented, it is anticipated that losses will continue and the Company
will be cash constrained until FSC develops a more substantial book of business.
The Company is restricted in its ability to withdraw monies from FSC without
prior approval of the Insurance Commissioner. Of the Company's investments and
cash of $8,049,886 as of August 31, 2011, $8,049,304 is restricted to FSC.
Furthermore, capital received pursuant to the sale of Series A preferred stock
of the Company must be contributed by the Company into the surplus accounts of
FSC.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's
of London for its coal reclamation surety bonding programs. This agreement has
provided additional bonding capacity to FSC and has enabled the underwriting of
more and greater size bonds for its coal reclamation bonding clients. Management
expects this reinsurance arrangement to allow FSC to expand its market share and
increase 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 more substantial and the
financial condition of the Company was to stabilize, entry into other states
would be less challenging. Accordingly, management continues to pursue avenues
that will provide additional capital to its insurance subsidiary and fund
operations as the business fully develops. As an alternative means of addressing
access to markets, management is seeking to establish a relationship with any
one of several possible sureties licensed in states other than West Virginia and
Ohio that comprise significant markets for the bonding programs of FSC and would
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
effectively 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 matured at the end of 2010, management
proposed a recapitalization to assist in stabilizing the financial position of
the Company. Holders of the Series B Preferred Stock were offered the
opportunity to exchange their Series B Shares for an equal number of shares of a
new series of JFG preferred stock designated as Series C Preferred Stock plus
2,000 shares of JFG Common Stock. Series C Preferred Stock is equal in priority
to the Series B Preferred Stock, is entitled to dividends at the same rate as
Series B Preferred Stock, is entitled to convert to common stock of the Company
at a conversion rate of $.10 per common share (in contrast to $1.00 per share
for Series B Preferred) and may be redeemed by the Company but does not have a
fixed maturity date and, thus, is classified as permanent equity. Holders of
over 70% of the outstanding Series B Preferred Shares elected to participate in
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the recapitalization. Management believes the recapitalization improves the
Company's prospects for engaging in a larger financing and will assist FSC as it
applies to enter other state markets.
Through the sharing of resources (primarily personnel) to minimize operating
costs, the Company and its subsidiaries attempt to minimize operating expenses
and preserve resources. Although FSC is cash flow positive, the use of its
assets and profits are restricted to its stand-alone operation by regulatory
authority until its capital and surplus reserves reaches a more substantial
level. Although the growth of FSC provides additional cash flow to the Company's
other subsidiaries, Jacobs and Triangle Surety, it is anticipated that working
capital deficiencies will continue and need to be met either through the raising
of additional capital or borrowings. However, there can be no assurance that
additional capital (or debt financing) will be available when and to the extent
required or, if available, on terms acceptable to the Company. Accordingly,
concerns as to the Company's ability to continue as a going concern are
substantial. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
The Company's exposure to the subprime mortgage risk is minimal due to its
investment in mortgage-backed securities being limited to only those securities
backed by the United States government (i.e. Government National Mortgage
Association or GNMA securities). The Company also holds municipal obligations
that have been fully defeased through the purchase of Resolution Funding
Corporation ("REFCORP") strips that were placed in escrow and provide means for
the bond repayment. REFCORP was created by the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") to provide funds to the
Resolution Trust Corporation ("RTC") in order to help resolve the Savings and
Loan failures. REFCORP operates as a United States Treasury agency under the
direction of the RTC Oversight Board, whose chair is the secretary of the United
States Treasury, and its obligations are ultimately backed by the United States
government.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------------------------------------------------------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 4T. CONTROLS AND PROCEDURES
--------------------------------
We maintain disclosure controls and procedures designed to ensure that
information required to be disclosed in the reports that the Company files or
submits under the Securities and Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in the SEC's rules
and forms, and that such information is accumulated and communicated to the
Company's management, including its Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding required
disclosures. Our management, with the participation of its Chief Executive
Officer and Chief Financial Officer, has evaluated the effectiveness of our
disclosure controls and procedures as defined in Rules 13a-15(e) under the
Securities Exchange Act of 1934, as of August 31, 2011. As previously reported
in our Annual Report on Form 10-K for the year ended May 31, 2011, control
deficiencies were identified that constitute a material weakness in internal
control over financial reporting. Such control deficiencies relate to the use of
internally developed non-integrated accounting systems, lack of internal review
of account reconciliations, and lack of internal review of general journal
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entries, elimination entries and the financial statement consolidation process.
Based upon their evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures, as of
August 31, 2011, were ineffective. Changes will be considered as additional
financial resources and accounting staff become available.
Notwithstanding the above, management believes the unaudited consolidated
condensed financial statements in this Quarterly Report on Form 10-Q fairly
present, in all material respects, the Company's financial condition as of
August 31, 2011 and May 31, 2011 and the results of its operations and cash
flows for the three month period ended August 31, 2011 and 2010 in conformity
with U.S. generally accepted accounting principals (GAAP).
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-------------------------
None.
ITEM 1A. RISK FACTORS
-----------------------
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
-----------------------------------------------
Certificates of Designations, Powers, Preferences and Rights of Series A
Preferred Stock adopted by the Board of Directors of the Company on December 22,
2005 is set forth as Exhibit 4.1
In the three months ended August 31, 2011, 1,032,000 common shares were issued
as additional consideration to various lenders in private placements pursuant to
short-term borrowings. In the three months ended August 31, 2011, 1,372,949
common shares were issued as additional 2% stock dividend for holders of Series
B Preferred shares that had requested to be redeemed upon maturity. Subsequent
to August 31, 2011, 7,043,710 common shares were issued to the Bridge lenders
and 70,000 common shares were issued as additional consideration for borrowings.
The issuance of the aforementioned securities is exempt from registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), by
reason of the provision of Section 4(2) of the Securities Act, as transactions
not involving any public offering, in reliance upon, among other things, the
representations made by the investors, including representations regarding their
status as accredited investors (as such term is defined under Rule 501
promulgated under the Securities Act), and their acquisition of the securities
for investment and not with a current view to distribution thereof. The
securities contain a legend to the effect that such securities are not
registered under the Securities Act pursuant to an exemption from such
registration. The issuance of the securities was not underwritten.
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ITEM 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 $2,333,600.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
None.
ITEM 5. OTHER INFORMATION
-------------------------
None.
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)
101.INS XBRL Instance Document (7)
101.SCH XBRL Taxonomy Extension Schema Document (7)
101.CAL XBRL Taxomony Extension Calculation Linkbase Document (7)
101.DEF XBRL Taxonomy Extension Definition Linkbase Document (7)
101.LAB XBRL Taxonomy Extension Label Linkbase Document (7)
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document (7)
--------------------------------------------------------------------------------------------------------------------
(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
(7) Pursuant to Rule 406T of Regulation S-T, this interactive data file
is deemed not filed or part of a registration statement or
prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, is deemed not filed for purposes of Section 18 of the
Securities Exchange Act of 1934, and otherwise is not subject to
liability under these sections.
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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: November 11, 2011 JACOBS FINANCIAL GROUP, INC.
-----------------------------------------------
(Registrant)
By:
/s/John M. Jacobs
-----------------------------------------------
John M. Jacobs, President
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