Jacobs Financial Grp - Recent Material Event
<![CDATA[Indicate by check mark if registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
Yes[ ] No[X]
Indicated by a check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the proceeding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes[X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
[X]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Act).
Yes[ ] No[X]
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked price of such common equity, as of the
last business day of the registrant's most recently completed second fiscal
quarter. As of November 30, 2007: $942,737 (157,122,836 shares at $.006 / share)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date: 169,206,823 shares of common
stock as of August 20, 2008.
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PART I Page
<S> <C> <C>
Item 1 Business 4
Item 1A Risk Factors 7
Item 2 Properties 7
Item 3 Legal Proceedings 7
Item 4 Submission of Matters to a Vote of Security Holders 7
PART II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities 8
Item 6 Selected Financial Data 9
Item 7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 7A Quantitative and Qualitative Disclosures About Market Risk 19
Item 8 Financial Statements and Supplementary Data 19
Item 9 Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 20
Item 9A(T) Controls and Procedures 20
Item 9B Other Information 21
PART III
Item 10 Directors, Executive Officers and Corporate Governance 22
Item 11 Executive Compensation 24
Item 12 Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters 26
Item 13 Certain Relationships and Related Transactions and Director
Independence 29
Item 14 Principal Accounting Fees and Services 30
PART IV
Item 15 Exhibits, Financial Statement Schedules 32
</TABLE>
3
PART I
Item 1. BUSINESS
The predecessor of Jacobs Financial Group, Inc. ( the "Registrant", "JFG" or the
"Company"), NELX, Inc., was incorporated in the State of Kansas in March 1983 as
Nelson Exploration, Inc. for the purpose of acquiring, dealing in, and if
warranted, developing oil and gas properties. In October 1993 the Company
changed its name to NELX, Inc. Prior to May 2001, the Company owned certain
non-producing oil and gas properties as well as various real estate properties.
Due to continuing lack of capital partners for oil and gas exploration and/or
real estate development, in fiscal year 1997 the Company turned its attention to
divesting its interests in said properties. For the next three years, the
principal activities of the Company involved disposing of assets, settling
claims and liabilities and considering potential business combinations with
related or complementary businesses. During fiscal year 2001, the Company's
principal assets consisted of a leasehold interest in an undeveloped mineral
spring in Arkansas and certain oil and gas properties located in West Virginia.
The oil and gas properties were sold in May 2001.
On May 29, 2001, the Company acquired two businesses, FS Investments, Inc.
("FSI") and Jacobs & Company ("Jacobs & Co." or "Jacobs"), in exchange for 75
million shares of common stock of NELX. The transaction was accounted for as a
recapitalization of FSI and Jacobs & Co. effected by a reverse acquisition. For
accounting purposes, NELX was treated as the acquiree, and no goodwill or other
intangible asset was recorded.
FSI, incorporated in 1997 in West Virginia, is a holding company that was
organized to develop surety business through the formation or acquisition of
subsidiaries engaged in the issuance of surety bonds collateralized by
investment accounts that are professionally managed by Jacobs & Co. Through its
wholly-owned subsidiary, Triangle Surety Agency, Inc. ("Triangle Surety" or
"TSA"), FSI is actively engaged in the placement with insurance companies of
surety bonds, with an emphasis on clients engaged in regulated industries.
Jacobs & Co., incorporated in 1988 in West Virginia, is a SEC registered
investment advisory firm whose executive offices are located in Charleston, West
Virginia. Jacobs & Co. provides fee based investment advisory services to
institutions, companies and individuals, including the Jacobs & Company Mutual
Fund (the "J&C Fund" or the "Fund"), which was organized in June 2001 as a
series of the Advisors Series Trust. On June 27, 2005, the Fund was reorganized
as a series of Northern Lights Fund Trust.
Since the May 29, 2001 business combination, the Company has expanded its focus
to include the ongoing business and activities of FSI and Jacobs, namely the
surety business and investment management and related services.
On or about December 29, 2005, NELX was merged with and into its newly-formed
wholly-owned subsidiary, Jacobs Financial Group, Inc., a Delaware corporation.
JFG survived the merger as the Registrant. The merger effected a change in the
Registrant's name, a change in the state of incorporation of the Registrant from
Kansas to Delaware, and amendments to the Articles of Incorporation and Bylaws
of the Registrant.
4
On December 30, 2005, the Company acquired all of the outstanding stock of West
Virginia Fire and Casualty Company (WVFCC), an insurance company licensed to
engage in business in West Virginia, Ohio and Indiana. The acquisition followed
the approval of the transaction by the West Virginia Department of Insurance,
which included approval of the Company's business plan to operate the acquired
insurance company as a surety. The financing of the transaction consisted of a
combination of a private placement of preferred stock and warrants to acquire
common stock of the Company in exchange for cash totaling $3,335,000, of which
$2,900,000 was used for the acquisition of WVFCC. In addition, approximately
$3,668,000 of indebtedness of the Company was converted into preferred stocks
and warrants.
The acquisition of WVFCC consisted of the purchase of marketable investments and
insurance licenses and did not include any existing policies or customer base as
the insurance lines of business offered by WVFCC were not insurance lines that
the Company intended to pursue. Following the acquisition, the name of WVFCC was
changed to First Surety Corporation ("First Surety" or "FSC").
The acquisition of FSC allowed the Company to pursue its business plan to market
and issue surety bonds utilizing programs developed by the Company's subsidiary,
FSI. FSI's subsidiary, Triangle Surety, serves as the marketing agent for First
Surety, and collateralized accounts required as a condition of the issuance of
surety bonds under FSC's programs are managed by the investment advisory
subsidiary of the Company, Jacobs & Co. Implementation of this business plan
provides revenue streams to the Company in the form of insurance premium from
the issuance of surety bonds, investment advisory fees from the management of
the collateral accounts securing surety bonds and other investment accounts, and
investment income relating to investment of its insurance subsidiary's surplus
and reserves. The principal bonding programs offered are specialized in nature
and are targeted to the coal and oil & gas industries.
FSC currently writes only the surety line of business, is licensed to write
surety in West Virginia and Ohio (effective August 5, 2008) and has focused its
primary efforts towards coal permit bonds. Such business, including investment
advisory fees from managed collateral accounts, accounted for approximately 58%
and 50% of the Company's fiscal 2008 and 2007 revenues, respectively.
Furthermore, FSC provides surety bonds to companies that share common ownership
interests that constitute 48% and 42% of the Company's fiscal 2008 and
2007revenues, respectively.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. Regulatory approval and licensing is
required for each state in which FSC seeks to conduct business. 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 new
entry into this market.
In order to best position the Company to accomplish the larger financing
necessary to expand the Company's business and penetrate new markets, the
Company has contracted to accomplish two acquisitions that the Company expects
to substantially enhance the business and prospects of the Company.
On February 8, 2008, the Company entered into an agreement and plan of merger
with Reclamation Surety Holding Company ("RSH") pursuant to which the Company
will acquire by merger all of the business and assets of RSH, including the
stock of its subsidiaries Cumberland Surety, Inc. and NewBridge Services, Inc.
5
for a purchase price of $3,400,000, less certain indebtedness. RSH and
subsidiaries perform surety underwriting services and service surety bonding
programs and the acquisition is expected to add a substantial depth of
experience and expertise to the Company.
On August 20, 2008, the Company entered into a stock purchase agreement with
National Indemnity Company ("NICO"), pursuant to which the Company agreed to
acquire all of the outstanding stock of Unione Italiana Reinsurance Company of
America ("Unione"). Unione is a New York domiciled insurer licensed in 24 states
and has license applications pending with the Commonwealth of Kentucky and with
the Financial Management Service of the United States Department of Treasury.
The purchase price for the acquisition of Unione (the "Transaction") is equal to
the sum of (i) $2,750,000 plus (ii) an amount in cash equal to Unione's New York
statutory policyholders' surplus as of the closing date of the transaction. The
Company's acquisition of Unione, when coupled with a reinsurance agreement with
NICO that is to be executed simultaneously with closing, will consist of the
purchase of marketable investments and insurance licenses and will not include
any existing policies or customer base as the insurance lines of business
offered by Unione are not insurance lines that the Company intends to pursue.
The insurance licenses are expected to enable the Company to more rapidly enter
and penetrate the various state markets that it has targeted in its business
plan.
The acquisition of Unione remains contingent upon necessary regulatory
approvals, and both the acquisition of RSH and the acquisition of Unione are
contingent upon the Company's obtaining necessary financing.
During fiscal 2008, the Company completed two rounds of bridge financing
totaling an aggregate of $3,500,000 in order to pay expenses of operations and
to pay fees and expenses incurred or expected to be incurred in connection with
a larger permanent financing. The 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 if such a qualified equity offering is not consummated
by September 10, 2008, accrued interest-to-date shall be payable, and quarterly
installments of principal and interest shall be payable over five years
commencing in December 2008. The interest rates on such notes are fixed at
10.00%. Upon issuance of the bridge notes, an aggregate of 7% of the outstanding
common stock of the Company was issued to the bridge lenders. Upon retirement of
the notes upon consummation of a qualified equity offering, the Company will
issue to the bridge lenders a percentage of the outstanding common stock of the
Company which, when added to the stock initially issued, may equal as much as
28% of the common stock of the Company that would otherwise have been retained
by the holders of the Company's common shares immediately prior to the
financing. Finally, if a qualified financing is not completed by September 10,
2008, the terms of the loan documents obligate the Company to issue a total of
2.8% of the Company's outstanding common shares at such date and shall issue an
additional 2.8% of the Company's outstanding common shares upon each six-month
anniversary date thereof until retirement of the notes.
The ability of the Company to consummate the acquisitions of RSH and Unione is
contingent upon the Company's completing its permanent financing. To date, no
commitment has been secured, and there remains substantial doubt regarding
whether the Company will be able to obtain the necessary financing within the
time frames provided in the acquisition agreements to complete the acquisitions.
The Company is headquartered in Charleston, West Virginia, and through its
wholly-owned subsidiaries, employs a total of nine (9) full-time employees.
6
Item 1A.RISK FACTORS
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
Item 2. PROPERTIES
Through its wholly-owned subsidiary, Crystal Mountain Water, Inc. ("CMW"), the
Company has an undeveloped leasehold interest in a mineral water spring located
near Hot Springs, Arkansas. Under this leasehold arrangement, CMW is obligated
for minimum lease payments in the amount of approximately $170 per month with
automatic options to extend the leasehold through October 2026. CMW has the
right to cancel the lease upon sixty (60) days written notice at any time. The
property is presently not being actively explored or developed. During the 2002
fiscal year, management evaluated the lease and determined the development was
not currently feasible. Accordingly, the Company recorded an impairment of
$116,661 to its investment in the lease. Opportunities will continue to be
explored as they arise with respect to the development or sale of the leasehold
interest.
Item 3. LEGAL PROCEEDINGS
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
7
PART II
Item 5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER
PURCHASES OF EQUITY SECURITIES.
The Company's common stock is traded in the over-the-counter market under the
symbol JFG (OTC Bulletin Board Symbol). The table below sets forth the high and
low price information for the Company's common stock for the periods indicated.
Such prices are inter-dealer prices, without mark-up, mark-down or commission
and may not represent actual transactions.
HIGH LOW
---- ---
FISCAL YEAR ENDED MAY 31, 2008
4th Quarter .025 .00831
3rd Quarter .07 .006
2nd Quarter .03 .006
1st Quarter .03 .01
FISCAL YEAR ENDED MAY 31, 2007
4th Quarter .04 .011
3rd Quarter .04 .015
2nd Quarter .06 .02
1st Quarter .07 .025
As of May 31, 2008, there were approximately 856 holders of record of the
Company's common stock.
The Company has neither declared nor paid any cash dividends on its common stock
during the last two fiscal years, and it is not anticipated that any such
dividend will be declared or paid in the foreseeable future.
Regulatory approval of the acquisition of FSC by JFG was provided under the
condition that no dividends or monies are to be paid to JFG from FSC without
regulatory approval. For further information, see Notes C and O to the
Consolidated Financial Statements and "Restrictions on Use of Assets" within the
section of "Capital Resources and Financial Condition" of Management's
Discussion and Analysis of Financial Condition and Results of Operations
contained in Part II Item 7 of this Annual Report on Form 10-K.
As of May 31, 2008, shares of the Company's common stock authorized for issuance
under the Registrant's 2005 Stock Incentive Plan, that was approved by the
stockholders of the Company on December 8, 2005, are as follows:
8
EQUITY COMPENSATION PLAN INFORMATION
<TABLE>
<CAPTION>
-------------------------------------------- ------------------------------------------ ------------------------------------------
Number of Shares to be Issued Weighted-Average Number of Shares
Upon Exercise of Exercise Price of Remaining Available
Outstanding Options Outstanding Options For Future Issuance
-------------------------------------------- ------------------------------------------ ------------------------------------------
<S> <C> <C> <C>
26,500,000 .06649 8,500,000
-------------------------------------------- ------------------------------------------ ------------------------------------------
</TABLE>
There are no other equity compensation plans not approved by stockholders of the
Company.
UNREGISTERED SALES OF EQUITY SECURITIES
In the three-month period ended May 31, 2008, 32 shares of Series A Preferred
Stock were issued pursuant to ongoing bonding programs of FSC in exchange for
cash in the amount of $32,000.
The Certificate of Designations, Powers, Preferences and Rights of Series A
Preferred Stock adopted by the Board of Directors of the Company on December 22,
2005 is set forth as Exhibit 4.1
The issuance of the aforementioned securities is exempt from registration
provisions of the Securities Act of 1933, as amended (the "Securities Act"), by
reason of the provision of Section 4(2) of the Securities Act, as transactions
not involving any public offering, in reliance upon, among other things, the
representations made by the investors, including representations regarding their
status as accredited investors (as such term is defined under Rule 501
promulgated under the Securities Act), and their acquisition of the securities
for investment and not with a current view to distribution thereof. The
securities contain a legend to the effect that such securities are not
registered under the Securities Act pursuant to an exemption from such
registration. The issuance of the securities was not underwritten.
Item 6. SELECTED FINANCIAL DATA
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
During fiscal 2008, the Company has focused its primary efforts on the
development and marketing of its surety business in West Virginia, arranging for
strategic acquisitions to accelerate the progression of the Company's business
plan, and raising additional capital to increase the capital base of FSC and
facilitate entry into other state markets.
9
RESULTS OF OPERATIONS AND FINANCIAL CONDITION AS OF AND FOR THE YEAR ENDED MAY
31, 2008
RESULTS OF OPERATIONS
The Company experienced a loss of $3,332,942 (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) in fiscal
2008 as compared with a loss of $2,661,431 in fiscal 2007. While total revenues
increased from approximately $823,000 in fiscal 2007 to approximately $957,000
in fiscal 2008, total expenses increased from approximately $2,042,000 in fiscal
2007 to approximately $2,465,000 in fiscal 2008, resulting in an increase in the
loss from operations of approximately $289,000.
The increase in revenues is largely attributable to new business acquired by FSC
and increased investment holdings of FSC. The increase in expenses is
attributable to increased expense related to the growth in business within the
insurance segment and increased general and administrative expense related to
professional fees incurred in the Company's ongoing efforts to raise additional
capital to expand its business.
Interest expense increased from approximately $153,000 in fiscal 2007 to
approximately $479,000 in fiscal 2008 due to additional borrowings incurred to
pay professional fees and expenses related to the Company's efforts to raise
additional capital financing and to provide financing of current operations.
Such increase was partially offset by the recognition of a gain of approximately
$115,500 relating to the settlement of the Company's delinquent pre-2006 payroll
tax obligations and largely represents the waiver of accrued penalties in
connection with payment of the obligation in full.
Accretion and accrued dividends on preferred stock increased from approximately
$1,333,000 in fiscal 2007 to approximately $1,471,000 in fiscal 2008. This
increase is attributable the accrual of dividends associated with the issuance
of the Company's Series A preferred stock in connection with its partially
collateralized bonding programs and the compounding of accrued dividends on
previously accrued but unpaid dividends.
CAPITAL RESOURCES AND FINANCIAL CONDITION
MANDATORILY REDEEMABLE PREFERRED STOCK
In conjunction with the acquisition of FSC at December 31, 2005, a restructuring
of the Company's financing was accomplished through the private placement of
preferred stock and warrants to acquire common stock of the Company in exchange
for cash totaling $3,335,000. $2,860,000 was used in the acquisition and funding
of the insurance subsidiary, with the remaining funds used to pay expenses
attributable to the acquisition and the funding of on-going operations.
Additionally, approximately $3,668,000 of indebtedness of the Company was
converted into preferred stock and warrants reducing the Company's borrowings
under short-term financing arrangements to approximately $167,000 as of December
30, 2005.
As an inducement to the initial preferred stock shareholders, warrants to
purchase 45,402,996 shares of common stock at an exercise price of one-tenth of
one cent ($.001) per share were issued with a five-year expiration period. Such
warrants were valued at approximately $533,000 using the Black-Scholes pricing
model. Additionally, the Series B preferred shares were issued at a twenty-five
percent (25%) discount to the stated face value of $1,000 per share or
10
approximately $2,217,650 in total. Additional shares of the Series B were
subsequently sold at a discount of approximately four and one-half percent
(4.5%) or approximately $36,000. Accordingly, the recorded values of the Series
A and B preferred stock are being increased to their stated liquidation values
using the interest method over a period of five years and such amounts are
categorized as accretion of mandatorily redeemable preferred stock in the
consolidated statement of operations.
The preferred stock issued consisted of non-voting Series A and Series B
redeemable preferred stock; the Series A designation being entitled to receive
cumulative dividends at the rate of 4.00% per annum and the Series B designation
being entitled to receive cumulative dividends at the rate of 8.00% per annum,
with both the Series A and B designations having equal ranking and preference as
to dividends and liquidation rights and in priority to the Company's common
stockholders. At this time, management has chosen to defer payment of dividends
to the holders of the Series A and B preferred stock until the Company has
sufficient cash flow from operations to service the obligation.
The Series A designation was designed for issuance to principals desiring surety
bonds under FSC's partially collateralized bonding programs. As designed,
proceeds from the sale of Series A preferred stock is down-streamed to FSC to
increase its capital and insurance capacity, although to the extent that
proceeds from the sale of Series B preferred shares was used in the initial
acquisition and funding of FSC, the Company was allowed to use such proceeds to
redeem Series B preferred stock (Company option to redeem) or for funding of
on-going operations. In the fiscal year ended May 31, 2007, proceeds from the
sale of Series A preferred stock amounted to $318,000 of which $62,000 was used
to redeem Series B preferred shares, $79,000 was retained for use in funding of
on-going operations and $177,000 being down-streamed to FSC to increase its
capital and surplus. Effective June1, 2007, the Company agreed to the request by
the West Virginia Insurance Department to downstream all future proceeds from
the sale Series A preferred stock in order to build capital and surplus reserves
of the insurance subsidiary to more substantial levels. In fiscal 2008, proceeds
from the sale of Series A preferred stock amounted to $803,000 that was
contributed to the surplus and capital of FSC.
The Series A designation contains a conditional redemption feature providing for
the redemption of the Series A shares at any time after the seventh (7th)
anniversary of the Issue Date, provided that the principal no longer requires
surety bonds issued by FSC. Furthermore, once redeemed, the principal will no
longer be eligible to participate in partially collateralized bonding programs
offered by FSC. Surety bonds currently being issued by FSC are primarily for
coal mining and reclamation permits, which are long-term in nature and
continually evolve whereby outstanding bonds are periodically released as
properties are mined and reclaimed and new bonds issued for properties to be
mined in the future. Accordingly, this source of financing was designed to be
long-term by nature.
The Series B designation was designed for issuance to investors in JFG and
contains both conversion rights to common stock and redemption features. Each
share of the Series B preferred stock is convertible, at the option of the
holder, into 1,000 shares of JFG common stock and can be converted at any time.
Additionally, the Series B preferred stock can be redeemed, at the option of the
holder, at full-face value plus accrued and unpaid cumulative dividends,
commencing with the fifth (5th) anniversary of the original issue date. The
Company has the option to redeem the Series B preferred shares at any time after
the first (1st) anniversary of the original issue date, subject to the holder
exercising its conversion privileges prior to the stated redemption date.
11
Management's ability to execute its business plan and increase the market value
of its common stock will largely determine whether the Series B preferred shares
are converted to common shares or eventually redeemed.
BRIDGE-FINANCING, COMMITMENTS AND MATERIAL AGREEMENTS
-----------------------------------------------------
Of primary importance to the Company's ability to fully implement its business
plan is the expansion of that business into additional states. Regulatory
approval and licensing is required for each state where FSC seeks to conduct
business. Management found entry into additional states (as a surety) was
proving difficult without the benefit of more substantial capital and reserves
due to FSC's status as new entry into this market. Accordingly, management began
pursuing avenues that would provide additional capital to facilitate such
expansion.
Beginning in September 2007, the Company secured loans totaling $2.5 million to
provide interim bridge-financing until the Company was able to accomplish a
larger, more permanent financing, and engaged an investment bank to serve as
financial advisor to assist in accomplishing the larger financing. Additionally,
the Company entered into letters of intent to acquire two additional companies,
Unione Italiana Insurance Company ("Unione"), a New York domiciled insurance
company with licenses in 24 states for a purchase price of $2.75 million plus
the surplus of Unione; and Reclamation Surety Holding Company ("RSH") for a
purchase price of $3.4 million, an acquisition that would provide marketing,
underwriting and coal reclamation engineering capabilities. The proposed
acquisitions, when coupled with the proposed financing, would provide the
ability for the Company to enhance and accelerate its business plan. The
Company's accomplishing the permanent financing and consummation of the
acquisitions of Unione and RSH are mutually dependent and remain substantial
contingencies.
The terms of the bridge-financing arrangement, as revised (See Note H to
Financial Statements), provide for payment in full upon consummation by the
Company of a qualified equity offering providing net proceeds of at least $15
million by September 10, 2013; and if such a qualified equity offering is not
consummated by September 10, 2008, then accrued interest-to-date shall be
payable, with quarterly installments of principal and interest based on a
five-year term payout beginning in December 2008.
RESTRICTIONS ON USE OF ASSETS
-----------------------------
Regulatory approval of the acquisition of FSC by JFG was provided under the
condition that no dividends or monies are to be paid to JFG from FSC without
regulatory approval. Accordingly, cash, marketable investments, and other
receivables held by FSC are restricted from use to fund operations or meet cash
needs outside of the insurance company's domain. As of May 31, 2008, such assets
amounted to approximately $5.14 million.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
INTANGIBLE ASSETS
-----------------
In exchange for the purchase price of $2.9 million for the acquisition of FSC,
the Company received cash and investments held by FSC totaling $2.75 million,
with the difference being attributed to the property and casualty licenses of
FSC in the states of West Virginia, Ohio and Indiana. Such licenses have
indefinite lives and are evaluated annually for recoverability and impairment
12
loss. Impairment loss, if any, is measured by estimating future cash flows
attributable to such assets based on forecasts and projections and comparing
such discounted cash flow amounts to the carrying value of the asset. Should
actual results differ from such forecasts and projections, such assets may be
subject to future impairment charges.
RESERVE FOR LOSSES AND LOSS EXPENSES
------------------------------------
Reserves for unpaid losses and loss adjustment expenses of the insurance
subsidiary are estimated using individual case-basis valuations in conjunction
with estimates derived from industry and company experience. FSC has experienced
no claims for losses as of May 31, 2008.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability
limit surety bonds in West Virginia (and Ohio effective August 5, 2008). Coal
permit bonds are required by regulatory agencies to assure the reclamation of
land that has been disturbed by mining operations, and accordingly, is a highly
regulated process by federal and state agencies. Such bonds are generally
long-term in nature with mining operations and reclamation work being conducted
in unison as the property is mined. Additionally, no two principals and
properties are alike due to varied company structures and unique geography and
geology of each site.
In underwriting such bonds, management obtains estimates of costs to reclaim
such properties, in accordance with the specifications of the mining permit,
prepared by independent outside professionals experienced in this field of work.
Such estimates are then periodically updated and compared with marketable
securities pledged, and held for the benefit of FSC as collateral for the surety
bond, to mitigate the exposure to significant loss. Should the principal default
in its obligation to reclaim the property as specified in the mining permit, FSC
would then use the funds held in the collateral account to reclaim the property
or forfeit the face amount of the surety bond. Losses can occur if the costs of
reclamation exceed the estimates obtained at the time the bond was underwritten
or upon subsequent re-evaluations, if sufficient collateral is not obtained, or
if the collateral held has experienced significant deterioration in value.
Miscellaneous fixed-liability limit surety bonds are generally fully
collateralized by the principal's cash investment into a collateral investment
account, managed by the Company's investment advisory subsidiary (Jacobs & Co.)
that mitigates FSC's exposure to loss. Losses can occur should the principal
default on the performance required by the bond and the collateral held in the
investment account experience deterioration in value.
In establishing its reserves for losses and loss adjustment expense, management
continually reviews its exposure to loss based on reports provided in
conjunction with the periodic monitoring and inspections performed, the value of
the collateral accounts held for the benefit of FSC, along with industry
averages and historical experience. Management has estimated such losses based
on industry experience, adjusted for factors that are unique to the Company's
approach, and in consultation with consulting actuaries experienced in the
surety field.
LIQUIDITY AND GOING CONCERN
The Company has experienced operating losses of approximately $3,333,000 (after
accretion of mandatorily redeemable convertible preferred stock, including
13
accrued dividends) and $2,661,000 for the fiscal years ended May 31, 2008 and
2007, respectively. The Company continues to face significant working capital
deficiencies and has not had adequate funds to pay its preferred stock dividend
obligation. While management expects revenue growth and cash flow to increase
significantly as its business plan is fully implemented, it is anticipated that
losses will continue until FSC is able to develop a substantial book of
business.
Expansion of FSC's business to other states is a key component to fully
implementing the Company's business plan. 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 new entry into this
market. Management believes that if FSC's capital and surplus reserves were
significantly more substantial, 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.
Through the sharing of resources (primarily personnel) to minimize operating
costs, the Company and its subsidiaries attempt to minimize operating expenses
and preserve resources. Although FSC is now cash flow positive, the use of its
assets and profits are restricted to its stand-alone operation by regulatory
authority until its capital and surplus reserves reach more substantial levels.
And while growth of the FSC business continues to provide additional cash flow
to the Company's other subsidiaries, Jacobs and Triangle Surety, it is
anticipated that working capital deficiencies will continue and will need to be
met either through the raising of additional capital or borrowings. However,
there can be no assurance that additional capital (or debt financing) will be
available when and to the extent required or, if available, on terms acceptable
to the Company. Accordingly, concerns as to the Company's ability to continue as
a going concern are substantial. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
COMPARISON OF RESULTS OF OPERATIONS FOR FISCAL 2008 WITH 2007
The Company experienced a loss of $3,332,942 (after accretion of mandatorily
redeemable convertible preferred stock, including accrued dividends) in fiscal
2008 as compared with a loss of $2,661,431 in fiscal 2007.
REVENUES
--------
Revenues in fiscal 2008 amounted to $957,142 as compared with $823,339 in fiscal
2007. The increase in revenues is largely attributable to new business acquired
by FSC and increased investment holdings of FSC.
Revenue from the investment management segment, net of advisory referral fees,
was $262,806 in fiscal 2008 as compared with $275,328 in fiscal 2007,
representing a decrease of $12,522. As investment advisory fees are based on the
market value of assets under management, some fluctuation will occur due to
overall market conditions. For the most part, however, such revenues will remain
relatively constant from year to year with any large fluctuations being
attributable to the growth or loss of assets under management. The decrease in
revenues is primarily attributable to a decrease in advisory fees received from
the J&C Fund resulting from a decline in assets under management. Investment
advisory fees for management of individual and corporate investment accounts
14
increased by approximately $11,000 from the addition of new clients and were
offset by a decrease of approximately $18,000 in advisory and distribution fees
received from the Fund. The remaining decrease is attributable to fees received
in fiscal year 2007 relating to other advisory services provided.
Revenue from the surety insurance segment, consisting of FSC and TSA, was
$694,336 for fiscal 2008 as compared with $548,011 for fiscal 2007. Revenues
attributable to the insurance segment are as follows:
Year Ended May 31,
2008 2007
----------- --------------
Premiums and commissions $ 465,286 $ 358,055
Net investment income 225,461 189,956
Net realized investment gains 3,589 -
----------- --------------
Total $ 694,336 $ 548,011
=========== ==============
Premium revenue is recognized ratably over the term of the policy period and
thus is relatively stable from period to period with fluctuations for comparable
periods generally reflecting the overall growth or loss of business. Whereas,
commission revenue, which is dependent on the timing of issuance or renewal of
bonds, is expected to be somewhat more "seasonable" from quarter-to-quarter with
fluctuations for comparable periods largely reflecting the overall growth or
loss of business. Investment income is expected to remain relatively consistent
from period to period, but can fluctuate based on interest rates, market
conditions, growth or loss of business, and investment funds expended in the
payment of claims.
The increase in revenues reflected above is attributable to increased surety
business that has been secured in fiscal year 2008. Net premium written in
fiscal 2008 amounted to $586,498 as compared with $264,639 in fiscal 2007, and
is more reflective of the growth experienced in this segment of the business for
the comparable periods. Commission income earned for the placement of bonds with
outside insurers has remained relatively stagnant.
Additionally, in conjunction with the increased surety business written in
fiscal 2008, proceeds amounting to $803,000 from the sale of Series A preferred
stock, a requirement for issuing partially collateralized bonds, were
contributed to the surplus and capital of FSC. FSC's investment holdings in
fiscal 2008 averaged $4.553 million as compared with $3.837 for fiscal 2007 with
investment yields remaining relatively unchanged at just below 5.00%. Net
realized gains from investments resulted primarily from higher rate investment
bonds with call features being called and redeemed prior to maturity.
EXPENSES
--------
Incurred policy losses represent the provision for loss and loss adjustment
expense for "incurred but not reported" (IBNR) losses attributable to surety
bonds issued by FSC since its acquisition in December 2005. Incurred policy
losses for fiscal 2008 have been recorded as $135,867 or 30.0% of earned premium
as compared to $98,873 or 31.5% of earned premium for fiscal 2007. IBNR loss
estimates have been based on industry averages adjusted for factors that are
unique to the FSC's underwriting approach. FSC has experienced no claims for
losses as of May 31, 2008.
15
Insurance policy acquisition costs represent charges to operations for
underwriting, commissions, and premium tax attributable to surety polices issued
by FSC and are recognized ratably over the period in which premiums are earned.
In fiscal 2008 such costs amounted to $126,386 or 27.9% of earned premium as
compared with $108,065 or 34.1% in fiscal 2007.
General and administrative expenses for fiscal 2008 were $2,037,178 as compared
with $1,641,237 for fiscal 2007, representing an increase of $395,941 and are
comprised of the following:
<TABLE>
<CAPTION>
Year Ended May 31,
2008 2007 Difference
---------------- ----------------- ----------------
<S> <C> <C> <C>
Salaries and related costs $ 727,219 $ 790,725 $ (63,506)
General office expense 111,739 112,991 (1,252)
Legal and other professional fees 804,512 305,908 498,604
Audit, accounting and related services 118,595 134,047 (15,452)
Travel, meals and entertainment 73,668 83,723 (10,055)
Other general and administrative 201,445 213,843 (12,398)
---------------- ----------------- ----------------
Total general and administrative $ 2,037,178 $ 1,641,237 $ 395,941
================ ================= ================
</TABLE>
Salaries and related costs, net of deferred internal policy acquisition costs,
decreased approximately $63,500 and are comprised of the following:
<TABLE>
<CAPTION>
Year Ended May 31,
2008 2007 Difference
---------------- ----------------- -----------------
<S> <C> <C> <C>
Salaries and wages $ 567,522 $ 532,131 $ 35,391
Commissions 37,147 - 37,147
Payroll taxes 47,107 43,100 4,007
Stock option expense 98,972 206,681 (107,709)
Fringe benefits 61,764 56,075 5,689
Key-man life insurance 42,863 24,033 18,830
Deferred policy acquisition costs (128,156) (71,295) (56,861)
------------------ ------------------ ------------------
Total salaries and related costs $ 727,219 $ 790,725 $ (63,506)
================== ================== ==================
</TABLE>
Increases in salaries and wages relate to increased sales staff, salary
increases and year-end bonuses paid to non-executive employees. The increase in
commissions and deferred policy acquisition costs is attributable to the
increase in insurance business written in fiscal 2008 as compared to fiscal
2007. The decrease in stock option expense is attributable to non-uniform
vesting schedules under which options vest for certain key employees. Group
health benefits increased approximately $8,300 or 16.46% from the previous year,
but were offset by a decrease in the Company's group life insurance cost of
approximately $2,600. The increase in key-man life insurance is attributable to
the increased debt the Company has incurred.
In fiscal 2008, legal and professional fees of approximately $804,500 included
approximately $748,000 relating to the Company's on-going efforts to raise
additional capital for the expansion of the surety business into other states.
In fiscal 2007, legal and professional fees of approximately $306,000 included
approximately $197,000 relating to the Company's on-going efforts to raise
16
additional capital for the expansion of the surety business into other states.
Other legal and professional fees incurred in the respective years were for
other corporate matters.
Other less significant decreases were experienced in audit, travel and other
general administrative expenses categories in fiscal 2008 as compared to fiscal
2007.
Jacobs & Co. is the investment advisor to the J&C Fund. While the Fund is
responsible for its own operating expenses, Jacobs & Co., as the advisor, has
agreed to limit the Fund's aggregate annual operating expenses to 2.00% of the
average net assets. Under this expense limitation agreement, Jacobs & Co.
absorbed $157,269 of the Fund's operating expenses in fiscal 2008 as compared to
$181,612 in fiscal 2007. As the Fund grows in size (of assets under management),
expenses (in excess of the 2% level) absorbed by Jacobs & Co. will decrease
until the Fund reaches sufficient size to support its on-going operating costs.
In contrast, as the Fund grows in size, revenues from investment advisory fees
will increase. Additionally, should the Fund's operating expense ratio fall
below the 2.00% level, the costs absorbed by the Company are now reimbursable to
it for a period of up to three years. In fiscal 2008, the Fund's investment
advisory and distribution fees amounted to $39,535 as compared to $58,055 in
fiscal 2007. The Fund's average assets under management declined from
approximately $4.68 million for fiscal 2007 to approximately $3.25 million for
fiscal 2008. As of May 31, 2008, assets under management were approximately $2.5
million.
The Fund was initially established by Jacobs to provide the ability to manage
funds for smaller accounts in a more efficient and diversified manner than could
be achieved on an individual account basis. Additionally, the Fund provided an
investment vehicle that would fit within the Company's broader business plan of
issuing smaller bonds under its collateralized surety programs. While the Fund's
lackluster performance has contributed to its gradual decline in size, and the
maintenance of the Fund continues to be a significant cost to the Company, it
remains a key component in the Company's broader business plan. Moreover, if
successful in these broader efforts, the opportunity exists to significantly
increase the assets under management within the Fund. Should the Company be
successful in increasing the size of the Fund to such a level that the Fund's
operating expense ratio falls below the 2.00% level, the costs absorbed by
Jacobs & Co. are currently reimbursable to it for a period of up to three years.
Management continually evaluates the cost/benefit of maintaining the Fund.
GAIN ON EXTINGUISHMENT OF DEBT
------------------------------
The Company had been delinquent in paying certain of its payroll tax obligations
for periods ending on or before December 31, 2005. In fiscal 2008, the Company
entered into negotiations for the repayment and settlement of this obligation
with the Internal Revenue Service. In conjunction with such negotiations, the
Company made payments of approximately $402,000 towards the tax and interest
portion of this obligation and requested abatement of all penalties relating to
this matter. In February 2008, the Company received notification from the
Internal Revenue Service granting its request for abatement of penalty with
respect to this matter. Accordingly, the Company recognized a gain of $115,470
upon final settlement of this matter.
In December 2006, the Company repaid an obligation to a creditor relating to
professional fees incurred in the Company's 2002 fiscal year in connection with
litigation resulting from a failed business combination transaction. Under the
terms of an agreement reached in October 2006, the creditor agreed to waive
payment of any accrued interest on the obligation provided the obligation was
17
paid by a certain agreed-upon date. At the time of repayment, accrued interest
on this obligation totaled $42,445, and accordingly, upon satisfaction of the
debt in accordance with such agreement, a gain on the extinguishment of debt was
recognized.
INTEREST EXPENSE AND INTEREST INCOME
------------------------------------
Interest expense for fiscal 2008 was $479,295 as compared with $153,020 in
fiscal 2007. The increase in interest expense is primarily attributable to the
additional borrowings under the bridge-financing arrangement undertaken by the
Company beginning in September 2007. Components of interest expense are
comprised of the following:
<TABLE>
<CAPTION>
Year Ended May 31,
2008 2007 Difference
------------------ ------------------ ------------------
<S> <C> <C> <C>
Interest expense on bridge financing $ 170,931 $ 110 $ 170,821
Expense of common shares issued or to be issued in
connection with bridge financing arrangements 238,943 - 238,943
Interest expense on demand and term notes 47,920 46,400 520
Interest expense accrued on debt obligations
subsequently settled and recorded as gain on debt
extinguishment 13,075 92,886 (79,811)
Other finance charges 8,426 13,624 (4,198)
------------------ ------------------ -------------------
Total interest expense $ 479,295 $ 153,020 $ 326,275
================== ================== ===================
</TABLE>
Interest income for fiscal 2008 was $10,137 as compared with $1,176 for fiscal
2007. Interest income for fiscal 2008 is primarily related to the investment of
the unexpended proceeds from the bridge-financing arrangement in short-term
investment accounts. Interest income for fiscal 2007 relates to interest earned
on amounts due from a related party.
PREFERRED STOCK ACCRETION AND DIVIDENDS
---------------------------------------
Accretion of mandatorily redeemable convertible preferred stock is comprised of
accretion of discount, accrued but unpaid dividends on preferred stock and
amounts by which the redemption price exceeded the carrying value of redeemed
shares of Series B preferred stock as follows:
Year Ended May 31,
2008 2007
----------------- ----------------
Accretion of discount $ 529,273 $ 494,651
Accrued dividends 942,044 827,797
Excess redemption price 10,717
-
----------------- ----------------
$1,471,317 $1,333,165
================= ================
18
OFF BALANCE SHEET ARRANGEMENTS
------------------------------
The Company does not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on the Company's financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
material to investors.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As the Registrant qualifies as a small reporting company as defined by
ss.229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the
information required by this item.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
The following financial statements are included herein in response to Item 8:
Page
--------------------
<S> <C>
Table of Contents F-1
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders'
Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
</TABLE>
19
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
In connection with the audits for the years ended May 31, 2008 and May 31, 2007,
there have been no disagreements with independent accountants with respect to
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure.
Item 9A(T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
In connection with the preparation of this Annual Report on Form 10-K, an
evaluation was carried out by JFG's management, with the participation of JFG's
Chief Executive Officer and Chief Financial Officer, of the effectiveness of
JFG's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of May
31, 2008. Disclosure controls and procedures are designed to ensure that
information required to be disclosed in reports filed or submitted under the
Exchange Act is recorded, processed, summarized and reported within the time
frames specified in SEC rules and forms and that such information is accumulated
and communicated to management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding required disclosures.
During the evaluation of disclosure controls and procedures as of May 31, 2008,
control deficiencies were identified that constitute a material weakness in
internal control over financial reporting. Such control deficiencies relate to
inadequate segregation of duties, lack of effective board of directors
oversight, use of internally developed non-integrated accounting systems, lack
of internal review of account reconciliations, and lack of internal review of
general journal entries, elimination entries and the financial statement
consolidation process. As a result, JFG's Chief Executive Officer and Chief
Financial Officer concluded that as of May 31, 2008, JFG's disclosure controls
and procedures were ineffective.
Upon identification of the material weaknesses and under the direction of the
Chief Executive Officer and Chief Financial Officer, JFG developed a plan to
remediate the material weaknesses within the constraints of the Company's
limited financial resources and the size of its accounting staff.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness
previously identified. Additionally, management identified steps to be
implemented at both management and the board of directors' level to increase the
effectiveness of review as it relates to the financial reporting process. Such
changes will be implemented during the first fiscal quarter of the Company's
2008-2009 fiscal year. Other changes will be considered as additional financial
resources and accounting staff become available.
Notwithstanding the above, JFG believes the consolidated financial statements in
this Annual Report on Form 10-K fairly present, in all material respects, JFG's
financial condition as of May 31, 2008 and 2007, and the results of its
operations and cash flows for the years ended May 31, 2008 and 2007 in
conformity with U.S. generally accepted accounting principals (GAAP).
20
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of JFG is responsible for establishing and maintaining adequate
internal control over financial reporting. JFG's internal control over financial
reporting is a process under the supervision of JFG's Chief Executive Officer
and Chief Financial Officer, designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation of JFG's financial
statements for external purposes in accordance with GAAP.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to risk that controls may become
inadequate because of change in conditions, or the degree of compliance with the
policies and procedures may deteriorate.
JFG management conducted an assessment of the effectiveness of the Company's
internal control over financial reporting as of May 31, 2008. In making this
assessment, management used the criteria set forth by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control -
Integrated Framework. Based on this assessment, management concluded that the
Company's internal control over financial reporting was not effective as of May
31, 2008. A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of our annual or interim financial statements would not be
prevented or detected.
JFG management identified control deficiencies that, in the aggregate,
constitute a material weakness in internal control over financial reporting as
of May 31, 2008. Such control deficiencies relate to inadequate segregation of
duties, lack of effective board of directors oversight, use of internally
developed non-integrated accounting systems, lack of internal review of account
reconciliations, and lack of internal review of general journal entries,
elimination entries and the financial statement consolidation process.
Effective July 1, 2008, management implemented changes in the processing of
transactions to remediate the inadequate segregation of duties weakness.
Additionally, management identified steps to be implemented at both management
and the board of directors' level to increase the effectiveness of review as it
relates to the financial reporting process. Such changes will be implemented
during the first fiscal quarter of the Company's 2008-2009 fiscal year. Other
changes are to be considered as additional financial resources and accounting
staff become available. Management believes that the successful implementation
of these changes will strengthen overall controls over financial reporting, but
may not, at this time, be sufficient to effectively mitigate this material
weakness.
This annual report does not include an attestation report of the company's
registered public accounting firm regarding internal control over financial
reporting. Management's report was not subject to attestation by the company's
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit the company to provide only management's
report in this annual report.
Item 9B. OTHER INFORMATION
None
21
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERANCE
The directors and executive officers of the Company, their ages and positions
are as follows:
NAME AGE POSITION
--------------------- --- -----------------------
John M. Jacobs 54 President and CEO
Director
Frederick E. Ferguson 74 Director
C. David Thomas 55 Director
Robert J. Kenney 61 Vice President
Robert L. Neal 52 Chief Financial Officer
JOHN M. JACOBS
Mr. Jacobs is the founder of Jacobs & Co., an independent SEC registered
investment advisor, a Certified Public Accountant, and is licensed as a property
and casualty insurance agent in fifteen (15) states. Mr. Jacobs has served as a
Director and President of both Jacobs & Co. and FS Investments, Inc. since their
inception. Prior to establishing Jacobs & Co., in 1988, Mr. Jacobs was a
practicing public accountant for over thirteen years, during which he was a
managing partner of his accounting firm and a business and personal advisor to
his clients. Mr. Jacobs has served as a director and President of JFG since May
2001.
FREDERICK E. FERGUSON
Mr. Ferguson is retired coal operator who has a diverse experience with respect
to business and the coal industry. Mr. Ferguson spent the first half of his
career as a state and federal mine inspector. During the later half of his
career, Mr. Ferguson owned his own coal company and was involved in all facets
of mining production. He has served as a Director of FS Investments, Inc. since
its inception in December 1997, and has served as a director of JFG since July
2002.
C. DAVID THOMAS
Mr. Thomas is a licensed resident insurance agent in West Virginia and holds
non-resident agent licenses in several other states. Mr. Thomas began his surety
career in 1976 with United States Fidelity and Guaranty Company and served as
the surety underwriter in the Charleston, WV branch office until 1979. At that
time he joined George Friedlander & Company, a regional insurance agency based
in Charleston, WV, where he presently serves as Vice President and Manager of
the Surety Department. Mr. Thomas is a shareholder and Director of George
Friedlander & Company. He has served as a Director of FS Investments, Inc. since
its inception in December 1997, and has served as a director of JFG since July
2002.
22
ROBERT J. KENNEY
Mr. Kenney has been Vice President of the Company since 2003. Mr. Kenney joined
FSI and Jacobs &Co. in 2000, and is President of First Surety Corporation and
Vice President and Assistant Portfolio Manager of Jacobs & Co. Previously, Mr.
Kenney served as Senior Vice President of Triangle Surety Agency, Inc. In
addition, he is a licensed resident insurance agent in West Virginia and also
holds Series 63 and 65 securities licenses. Prior to joining Triangle Surety and
Jacobs & Co., Mr. Kenney had over 20 years experience in the oil and gas
industry with Columbia Energy Group. With Columbia, Mr. Kenney held various
positions in Treasury, Human Resources, and Law Departments and served as both
Manager of Risk Management and Special Projects Manager.
ROBERT L. NEAL
Mr. Neal re-joined JFG in January 2006 as Chief Financial Officer after
previously serving in a similar capacity from June 2000 to May 2002. Prior to
his re-joining JFG Mr. Neal served as President and CEO of West Virginia Capital
Corporation, a statewide community development corporation from June 2002 to
December 2005. Prior to that, Mr. Neal had over 20 years of management
experience in banking and public accounting. Mr. Neal is a Certified Public
Accountant.
There are no family relationships among any of the Company's directors and
executive officers.
During the past five years, there have been no filings of petitions under
federal bankruptcy laws, or any state insolvency laws, by or against any
business of which any director or executive officer of the Company was a general
partner or executive officer at the time or within two years before the time of
such filing.
During the past five years, no director or executive officer of the Company has
been convicted in a criminal proceeding or been subject to a pending criminal
proceeding.
During the past five years, no director or executive officer of the Company has
been the subject of any order, judgement, or decree, not subsequently reversed,
suspended or vacated by a court of competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities.
During the past five years, no director or executive officer of the Company has
been found by a court of competent jurisdiction (in a civil action), the
Commission or the Commodity Futures Trading Commission to have violated a
federal or state securities or commodities law.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
During the most recent fiscal year, the Company is not aware of any director,
officer or beneficial owner of more than 10 percent of the Company's common
stock at any time during the fiscal year that failed to file on a timely basis
reports required by Section 16(a) of the Exchange Act.
23
CODE OF ETHICS
--------------
The Company adopted a Code of Business Conduct and Ethics ("Code") that applies
to the Employees, Officers and Directors of Jacobs Financial Group, Inc.,
Triangle Surety Agency, Inc. and First Surety Corporation on November 13, 2007.
Further, the Code contains additional guidelines and standards for the Company's
principal executive officer and senior financial officer. A copy of the Code of
Business Conduct and Ethics can be obtained, without charge, upon written
request as follows:
Jacobs Financial Group, Inc.
Attn: Compliance Director
300 Summers Street, Suite 970
Charleston, WV 25301
Jacobs & Co., as an investment advisor, has its own compliance policy that was
revised and updated in November 2004 and is specifically designed to assure
compliance by Jacobs & Co. and its employees with the Investment Advisors Act of
1940 and the rules promulgated thereunder.
AUDIT (COMMITTEE) FINANCIAL EXPERT
----------------------------------
The Board has determined that John M. Jacobs is the Audit (Committee) Financial
Expert as such term is defined in Item 407(d)(5)(ii) of Regulation SK. Mr.
Jacobs is not independent as that term is used in Item 7(d)(3)(iv) of Schedule
14A under the Securities Exchange Act.
Item 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
--------------------------
The following table sets forth the compensation paid by the Company during the
fiscal years ended May 31, 2008 and 2007 to the Principal Executive Officer and
the two most highly compensated executive officers of the Company (the "Named
Executive Officers").
<TABLE>
<CAPTION>
------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
ALL
NAMES AND STOCK OPTION OTHER
PRINCIPAL SALARY BONUS AWARDS AWARDS COMPENSATION TOTAL
POSITION YEAR ($) ($) ($) ($) (1) ($) (2) ($)
------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
John M. 2008 $150,000 - - $ 49,164 $ 25,913 $225,077
Jacobs, CEO 2007 $150,000 $109,191 $ 16,647 $275,838
------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
Robert J. 2008 $ 75,000 - - $ 15,840 - $ 90,840
Kenney, VP 2007 $ 75,000 $ 34,849 $109,849
------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
Robert L. 2008 $ 90,000 - - $ 10,296 - $100,296
Neal, CFO 2007 $ 90,000 $ 19,800 $109,800
------------- ----------- -------------- -------- ---------- -------------- ----------------- -------------
</TABLE>
24
(1) On May 25, 2006, the compensation committee of the board of directors
awarded 12,500,000, 5,000,000 and 2,000,000 of incentive stock options to
acquire common shares at an exercise price of seven cents ($.07) per share
to Mr. Jacobs, Mr. Kenney and Mr. Neal, respectively, which vest as set
forth in the table below. The term of the options is five years and expires
in May 2011.
-------------------- -----------------------------------------------------------
Vesting date Incentive Stock Option Awards
-------------------- -----------------------------------------------------------
JOHN M. JACOBS ROBERT J. KENNEY ROBERT L. NEAL
-------------- ---------------- --------------
-------------------- -------------------- ---------------------- ---------------
May 25, 2006 2,500,000 2,000,000 -
-------------------- -------------------- ---------------------- ---------------
January 1, 2007 2,500,000
-------------------- -------------------- ---------------------- ---------------
May 25, 2007 1,000,000 500,000
-------------------- -------------------- ---------------------- ---------------
January 1, 2008 2,500,000
-------------------- -------------------- ---------------------- ---------------
May 25, 2008 1,000,000 500,000
-------------------- -------------------- ---------------------- ---------------
January 1, 2009 2,500,000
-------------------- -------------------- ---------------------- ---------------
May 25, 2009 1,000,000 500,000
-------------------- -------------------- ---------------------- ---------------
January 1, 2010 2,500,000
-------------------- -------------------- ---------------------- ---------------
May 25, 2010 500,000
-------------------- -------------------- ---------------------- ---------------
The amounts shown in this column represent the dollar amount recognized for
financial reporting purposes during the fiscal year for the fair value of stock
options received by the named individuals, excluding the effects of forfeitures
relating to service-based vesting conditions. The assumptions used to compute
the fair value are disclosed in "Note L, Stock-Based Compensation", to the
audited financial statements included herein under Part II Item 8.
(2) Other compensation includes insurance premiums paid by the Registrant on
behalf of the named executive officer under verbal agreement with the
Executive Officer.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
The following table sets forth for each of our Named Executive Officers certain
information regarding unexercised options and stock awards as of May 31, 2008.
<TABLE>
<CAPTION>
---------------- -----------------------------------------------------------------------------------
OPTION AWARDS
---------------- ---------------- ------------------ ---------------- -------------- ---------------
EQUITY
NUMBER OF INCENTIVE PLAN
NUMBER OF SECURITIES AWARDS; NUMBER
SECURITIES UNDERLYING OF SECURITIES
UNDERLYING UNEXERCISED UNDERLYING
UNEXERCISED OPTIONS (#) UNEXERCISED OPTION
OPTIONS (#) UNEXERCISABLE UNEARNED EXERCISE OPTION
NAME EXERCISABLE (1) OPTIONS (#) PRICE ($) EXPIRATION
DATE
---------------- ---------------- ------------------ ---------------- -------------- ---------------
<S> <C> <C> <C> <C> <C>
John M. 7,500,000 5,000,000 - $.07 05/25/2011
Jacobs, CEO
---------------- ---------------- ------------------ ---------------- -------------- ---------------
Robert J. 4,000,000 1,000,000 - $.07 05/25/2011
Kenney, VP
---------------- ---------------- ------------------ ---------------- -------------- ---------------
Robert L. 1,000,000 1,000,000 - $.07 05/25/2011
Neal, CFO
---------------- ---------------- ------------------ ---------------- -------------- ---------------
</TABLE>
25
(1) Non-vested options of Mr. Jacobs will vest evenly on January 1, 2009 and
2010, respectively. Non-vested options of Mr. Kenney will vest on May 25,
2009. Non-vested options for Mr. Neal will vest evenly on May 25, 2009 and
2010 respectively.
OTHER EXECUTIVE COMPENSATION PLANS
----------------------------------
The Company has no plans that provide for the payment of retirement benefits, or
benefits that will be paid primarily following retirement, including but not
limited to tax-qualified defined benefit plans, supplemental executive
retirement plans, tax-qualified defined contribution plans and nonqualified
defined contribution plans.
The Company has no contract, agreement, plan or arrangement, whether written or
unwritten, that provides for payment(s) to a named executive officer at,
following, or in connection with the resignation, retirement or other
termination of a named executive officer, or a change in control of the Company
or a change in the named executive officer's responsibilities following a change
in control.
DIRECTOR COMPENSATION
---------------------
The following table sets forth compensation received by our directors for the
fiscal year ended May 31, 2008.
--------------------------- ---------------------------------------- -----------
NAME FEES EARNED OR PAID IN CASH ($) (1) TOTAL ($)
--------------------------- ---------------------------------------- -----------
Frederick E. Ferguson $150 $150
--------------------------- ---------------------------------------- -----------
C. David Thomas $150 $150
--------------------------- ---------------------------------------- -----------
(1) Non-employee board members of JFG's wholly-owned subsidiary First
Surety Corporation, which include JFG board members, are compensated at
the rate of $150 per meeting.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following tables set forth the beneficial ownership of common stock of the
Company as of August 22, 2008 by (i) each person known by the Company to own
more than 5% of the Company's common stock, (ii) each of the directors, (iii)
the Named Executive Officers and (iv) all directors and executive officers as a
group. Unless otherwise noted, such persons have sole voting and investment
power with respect to such shares.
26
<TABLE>
<CAPTION>
---------------------------------- ------------------------------- ------------------------------- -------------------------------
Name and Address of Amount and Nature of Percent of
Title of Class Beneficial Owner Beneficial Ownership (1) Class (2)
---------------------------------- ------------------------------- ------------------------------- -------------------------------
MORE THAN 5.00% BENEFICIAL OWNERSHIP
<S> <C> <C> <C>
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 26,548,127 (3) 14.97%
Charles L. Stout
Route 1, Box 41J
Common Bridgeport, WV 26330 13,175,000 (4) 7.79%
Fay S. Alexander
6318 Timarron Cove Lane
Common Burke, VA 22015-4073 13,256,041 (5) 7.74%
William D. Jones
513 Georgia Avenue
Common Chattanooga, TN 37403 10,827,694 (6) 6.34%
Sue C. Hunt
1508 Viewmont Drive
Common Charleston, WV 25302 8,611,589 (7) 5.05%
DIRECTORS AND NAMED EXECUTIVE OFFICERS
John M. Jacobs
300 Summers St. Suite 970
Common Charleston, WV 285301 26,548,127 (3) 14.97%
Frederick E. Ferguson
Route 3, Box 408
Common Fayetteville, WV 25840 1,600,000 (8) *
C. David Thomas
P. O., Box 5157
Common Charleston, WV 25361 992,295 *
Robert J. Kenney
809 Sherwood Drive
Common Charleston, WV 25314 4,920,000 (9) 2.84%
Robert L. Neal
101 Sunset Drive
Common Charleston, WV 25301 1,000,000 (10) *
ALL DIRECTORS AND EXECUTIVE
Common OFFICERS AS A GROUP 35,060,422 19.15%
</TABLE>
* Represents beneficial ownership of less than one percent of the Company's
common stock.
27
(1) Beneficial ownership is determined in accordance with the rules of the
Securities Exchange Commission and generally includes voting or investment
power with respect to securities. Shares of common stock issuable upon the
exercise of options or warrants currently exercisable within 60 days of
August 22, 2008 are deemed outstanding for computing the percentage
ownership of the person holding such options or warrants but are not deemed
outstanding for computing the percentage ownership of any other person.
(2) Based on 169,206,823 shares of common stock issued and outstanding as of
August 22, 2008.
(3) Includes 12,233,044 shares of common stock held in the name of FS Limited
Partnership ("FSLP") of which Mr. Jacobs is the sole general partner. Mr.
Jacobs has the power to vote and to direct the voting of and the power to
dispose and direct the disposition of the shares beneficially owned by
FSLP. Includes 785,000 shares of common stock held in the name of JF
Limited Partnership ("JFLP") of which Mr. Jacobs is the sole general
partner. Mr. Jacobs has the power to vote and to direct the voting of and
the power to dispose and direct the disposition of the shares beneficially
owned by JFLP. Includes 5,363,416 shares held in joint tenancy with spouse,
Kathleen M. Jacobs. Includes 7,500,000 in vested options to purchase
Company stock exercisable within 60 days of August 22, 2008. Includes the
right to convert Series B Preferred Stock holdings to 666,667 shares of
common stock exercisable within 60 days of August 22, 2008. John M. Jacobs
is the CEO and also a member of the board of directors for the Registrant.
(4) Includes 25,000 shares of common stock held in the name of Applied
Mechanics Corporation of which Charles L. Stout is President and a
director, 12,150,000 shares held in joint tenancy with spouse, Marilyn J.
Stout, and 1,000,000 shares beneficially owned by members of the immediate
family.
(5) Includes 9,900,000 shares of common stock held in the name of Graphite
Investment, LLC ("Graphite") and 1,000,000 shares held in the name of
Southall Management Corporation ("Southall") of which Fay S. Alexander is
President (both entities). Includes the right to convert Series B Preferred
Stock holdings of Graphite and Southall to 2,141,341 shares of common stock
exercisable within 60 days of August 22, 2008. Includes 214,700 shares held
in joint tenancy with spouse, Dan C. Alexander.
(6) Includes 9,060,000 shares of common stock held in joint tenancy with
spouse, Cynthia B. Jones. Includes the right to convert Series B Preferred
Stock holdings to 282,116 shares of common stock (182,116 in joint tenancy
with spouse) exercisable within 60 days of August 22, 2008. Includes the
right to purchase 1,410,578 shares of common stock (910,578 in joint
tenancy with spouse) pursuant to issued and outstanding stock warrants at
an exercise price of one-tenth of one cent per share ("stock warrants")
exercisable within 60 days of August 22, 2008.
(7) Includes 1,209,515 shares of common stock held in the Individual Retirement
Account ("IRA") of spouse, Douglas E. Hunt. Includes the right to convert
Series B Preferred Stock holdings to 200,000 shares of common stock and the
right to purchase 1,000,000 shares of common stock pursuant to issued and
outstanding stock warrants exercisable within 60 days of August 22, 2008
and held in the IRA of Douglas E. Hunt. Includes the right to convert
Series B Preferred Stock holdings to 33,679 shares of common stock and the
28
right to purchase 168,395 shares of common stock pursuant to issued and
outstanding stock warrants exercisable within 60 days of August 22, 2008
and held jointly with spouse.
(8) Includes 750,000 shares of common stock held in joint tenancy with spouse,
Sandra B. Ferguson. Includes 130,000 shares held in the name of The Party
Store, Inc. ("Party Store") of which Fred E. Ferguson is President and a
director. Includes the right to convert Series B Preferred Stock holdings
held in the name Party Store to 120,000 shares of common stock exercisable
within 60 days of August 22, 2008. Includes the right to purchase 600,000
shares of common stock pursuant to issued and outstanding stock warrants
held in the name of Party Store exercisable within 60 days of August 22,
2008.
(9) Includes 75,000 shares of common stock held in joint tenancy with spouse,
Lee Anne Kenney. Includes 335,000 shares of common stock held in the
Individual Retirement Account ("IRA") of, Robert J. Kenney. Includes
510,000 shares of common stock held in the Individual Retirement Account
("IRA") of spouse, Lee Anne Kenney. Includes 4,000,000 in vested options to
purchase Company stock exercisable within 60 days of August 22, 2008.
(10) Includes 1,000,000 in vested options to purchase Company stock exercisable
within 60 days of August 22, 2008.
In accordance with the terms of the bridge-financing arrangement as set forth in
Note H of the Audited Financial Statements contained in Item 8. of Part II
herein, in the event that a qualified financing (as defined in said Note H) is
not completed and such bridge-financing is extended to September 2010 for
repayment, one of the participants providing part of the bridge-financing would
acquire common shares of the Registrant through such arrangement equal to 10.50%
of the common shares then outstanding. For each six-month period thereafter,
such holdings would be increased by 1.40% and if extended to maturity (September
2013), such holdings would amount to 18.90%.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
For the past several years the Company's operating expenses were partially
funded by advances from its largest shareholder and chief executive officer,
John M. Jacobs. The source of funding for these advances originated with
obligations incurred by Mr. Jacobs with third parties (such obligations together
with the loans by Mr. Jacobs to the Company, "back-to-back loans") with interest
rates ranging from 6.75% to 12%.
To assure that repayments of the various borrowings by the Company that were
either guaranteed by Mr. Jacobs or loaned to the Company by Mr. Jacobs via such
back-to-back loan arrangements did not result in a deemed loan to Mr. Jacobs,
Mr. Jacobs entered into an Assumption Agreement with the Company, pursuant to
which Mr. Jacobs assumes, and agrees to hold the Company harmless from,
principal of specified indebtedness of the Company as and when necessary to
fully offset what might otherwise be deemed an advance of funds arising out of
the Company's financing activities.
During the year ended May 31, 2006, the Company made net repayments of
$1,170,546 on the back-to-back loans which was $508,036 more than the original
29
loans and interest charges. In accordance with the Assumption Agreement, the
Company assigned to Mr. Jacobs and Mr. Jacobs assumed responsibility for payment
of certain debt totaling $101,326 and accounts payable totaling $365,000 during
the year ended May 31, 2006. The debt obligation was re-issued in the name of
Mr. Jacobs; and therefore the debt amount was relieved and offset against the
receivable from Mr. Jacobs. Although the Company assigned accounts payable
totaling $365,000 to Mr. Jacobs through the Assumption Agreement, for financial
reporting purposes under generally accepted accounting principles, the accounts
payable amount could not be derecognized until either paid or released by the
creditor. On September 13, 2006, the Company did receive a release from the
obligee of the $365,000 accounts payable that was assumed by Mr. Jacobs pursuant
to the Assumption Agreement. Accordingly, the assumption of the accounts payable
was offset against the balance due from Mr. Jacobs as of May 31, 2006 of
$361,009. The largest amount due from Mr. Jacobs in fiscal 2007 prior to
receiving the above mentioned release amounted to $425,423. Interest charged to
Mr. Jacobs in fiscal 2007 amounted to $12,222.
During fiscal 2007, advances to the Company from Mr. Jacobs amounted to $285,392
and repayments to Mr. Jacobs amounted to $273,620. As of May 31, 2007, the
balance due Mr. Jacobs was $15,763. The largest aggregate amount outstanding to
Mr. Jacobs in fiscal 2007 was $80,541. Interest on such obligations to Mr.
Jacobs in fiscal 2007 amounted to $6,146 and was netted against interest due
from Mr. Jacobs as stated above.
During fiscal 2008, advances to the Company from Mr. Jacobs amounted to $132,200
and repayments to Mr. Jacobs amounted to $146,963. As of May 31, 2008, the
balance due Mr. Jacobs was $1,000. The largest aggregate amount outstanding to
Mr. Jacobs in fiscal 2008 was $127,200. Interest paid on such obligations to Mr.
Jacobs in fiscal 2008 amounted to $1,387.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs
was 12% for both the 2007 and 2008 fiscal years.
As of August 22, 2008, no obligations were owed to Mr. Jacobs.
DIRECTOR'S INDEPENDENCE
-----------------------
The board of directors ("Board") is comprised of three members, John M. Jacobs,
Frederick E. Ferguson and C. David Thomas. Only Mr. John M. Jacobs, who serves
as Chief Executive Officer for the Company, is not independent within the
meaning of The Nasdaq Stock Market, Inc. listing standards.
There were no transactions, relationships or arrangements that were considered
by the Board of Directors in determining that Mr. Ferguson or Mr. Thomas were
independent.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
AUDIT FEES
----------
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-QSB, and services provided by the accountant in connection
with statutory and regulatory filings for the year ended May 31, 2008 amounted
to $70,173. Management estimates that additional amounts to be billed are
approximately $18,000.
30
Billings for principal accounting fees and services related to the annual audit
of financial statements, review of financial statements included in the
Company's Forms 10-QSB, and services provided by the accountant in connection
with statutory and regulatory filings for the year ended May 31, 2007 amounted
to $82,886.
AUDIT-RELATED SERVICES
----------------------
There were no billings for assurance and related services by the principal
accountant that are reasonably related to the performance of the annual audit or
review of financial statements for the years ended May 31, 2008 and 2007.
TAX FEES
--------
During fiscal 2008, billings for tax preparation services were $12,584. During
fiscal 2007, billings for tax preparation services were $14,250
ALL OTHER FEES
--------------
Billings for other services related to potential financing transactions in
amounted to $11,708 and $5,675 in fiscal 2008 and 2007 respectively.
Billings for professional services related to the audit of the acquisition
target, RSH Holdings, Inc. amounted to $63,500.
ADMINISTRATION OF AUDIT AND NON-AUDIT ENGAGEMENTS
-------------------------------------------------
The Company does not have a standing audit committee. The full Board of
Directors is performing the functions of the audit committee. The Board of
Director's policy is to pre-approve all audit and permissible non-audit services
provided by the independent auditors. These services may include audit services,
audit-related services, tax services and other services. Pre-approval is
generally provided for up to one year and any pre-approval is detailed as to the
particular service or category of services and is generally subject to a
specific budget. The independent auditors and management are required to
periodically report to the Board of Directors regarding the extent of services
provided by the independent auditors in accordance with this pre-approval, and
the fees for the services performed to date. The Board of Directors may also
pre-approve particular services on a case-by-case basis. The Board of Directors
pre-approved each audit and non-audit service rendered to the Company by its
independent Auditors as set forth above, with the exception of the billings for
other services related to potential financing transactions amounting to $11,708
in fiscal 2008 which were approved by the Board of Directors prior to the
completion of the audit for fiscal 2008 as provided by Rule 2-01(c)(7)(i)(C)(3)
of Regulation S-X.
31
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
(a)(1) The following financial statements are included in response to Item 8
herein:
Page
--------------------
<S> <C>
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders
Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
Page
--------------------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
</TABLE>
32
JACOBS FINANCIAL GROUP, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
--------------------
<S> <C>
Report of Independent Registered Public Accounting Firm F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets F-3
Consolidated Statements of Operations F-4
Consolidated Statements of Comprehensive Income (Loss) F-5
Consolidated Statements of Cash Flows F-6
Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders
Equity (Deficit) F-8
Notes to Consolidated Financial Statements F-10
Page
--------------------
SCHEDULES
Schedule I - Summary of Investments - Other than Investments in Related Parties F-48
Schedule II - Condensed Financial Information of Registrant F-49
Schedule III - Supplementary Insurance Information F-51
Schedule VI - Supplemental Information F-52
</TABLE>
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors
Jacobs Financial Group, Inc.
Charleston, West Virginia
We have audited the accompanying consolidated balance sheets of Jacobs Financial
Group, Inc. and subsidiaries (the "Company") as of May 31, 2008 and 2007, and
the related consolidated statements of operations, comprehensive income (loss),
cash flows, and mandatorily redeemable preferred stock and stockholders' equity
(deficit) for each of the years in the two-year period ended May 31, 2008. Our
audits also included the financial statement schedules listed in the Index as
Item 15. These consolidated financial statements and financial statement
schedules are the responsibility of the Company's management. Our responsibility
is to express an opinion on these consolidated financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of May 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the years in the two-year period ended May 31, 2008 in
conformity with accounting principles generally accepted in the United States of
America. Also, in our opinion, such financial statement schedules, when
considered in relation to the basic consolidated financial statement taken as a
whole, present fairly, in all material respects, the information set forth
therein.
The accompanying consolidated financial statements have been prepared assuming
that the company will continue as a going concern. As discussed in Note A to the
financial statements, the company's significant net working capital deficit and
operating losses raise substantial doubt about its ability to continue as a
going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
/s/Malin, Bergquist & Company
-----------------------------
Pittsburgh, PA
September 8, 2008
F-2
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, 2008 MAY 31, 2007
------------------- ------------------
ASSETS
INVESTMENTS AND CASH:
<S> <C> <C>
Bonds available for sale, at market value $ 105,866 $ -
(amortized cost - 05/31/08 $98,774)
Bonds held to maturity, at amortized costs - 2,316,875
(market value - 05/31/07 $2,308,003)
Mortgage-back securities held to maturity, at amortized costs 3,826,688 1,369,411
(market value - 05/31/08 $3,800,909; 05/31/07 $1,367,365)
Short-term investments, at cost (approximates market value) 1,176,056 335,729
Cash 48,640 25,298
------------------- -----------------
TOTAL INVESTMENTS AND CASH 5,157,250 4,047,313
Investment income due and accrued 19,892 35,294
Premiums and other accounts receivable 47,353 38,668
Deferred policy acquisition costs 75,940 52,365
Furniture and equipment, net of accumulated depreciation of
$120,931 and $113,919, respectively 29,168 23,628
Other assets 298,163 22,801
Intangible assets 150,000 150,000
------------------- ------------------
TOTAL ASSETS $ 5,777,766 $ 4,370,069
=================== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Reserve for losses and loss expenses $ 246,651 $ 110,784
Reserve for unearned premiums 277,208 144,188
Advance premiums - 127,034
Accrued expenses and professional fees 412,039 547,965
Accounts payable 315,577 345,895
Notes payable 2,968,016 410,136
Accrued interest payable 71,483 16,095
Other liabilities 16,402 511,751
------------------- ------------------
TOTAL LIABILITIES 4,307,376 2,213,848
SERIES A PREFERRED STOCK, $.0001 par value per share;
1 million shares authorized; 2,230 and 1,427 shares issued
and outstanding at May 31, 2008 and 2007, respectively; stated
liquidation value of $1,000 per share 2,308,933 1,420,913
SERIES B PREFERRED STOCK, $.0001 par value per share;
9,941.341 shares authorized; 9,621.940 and 9,596,940 shares
issued and outstanding at May 31, 2008 and 2007, respectively;
stated liquidation value of $1,000 per share 9,936,866 8,526,059
------------------- ------------------
TOTAL MANDATORILY REDEEMABLE PREFERRED STOCK 12,245,799 9,946,972
COMMITMENTS AND CONTINGENCIES (SEE NOTES)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $.0001 par value per share; 490 million shares
authorized; 166,091,242 and 156,997,836 shares issued and
outstanding at May 31, 2008 and 2007, respectively 16,609 15,700
Additional paid in capital 2,423,537 2,082,647
Accumulated deficit (13,222,038) (9,889,098)
Accumulated other comprehensive income (loss) 6,483 -
------------------- ------------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT) (10,775,409) (7,790,751)
------------------- ------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 5,777,766 $ 4,370,069
=================== ==================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31,
-------------------------------------
2008 2007
------------------- -----------------
REVENUES:
<S> <C> <C>
Investment advisory services $ 262,806 $ 270,133
Insurance premiums and commissions 465,286 358,055
Net investment income 225,461 189,956
Net realized investment gains (losses) 3,589 -
Other income - 5,195
------------------- -----------------
TOTAL REVENUES 957,142 823,339
EXPENSES:
Incurred policy losses 135,867 98,873
Insurance policy acquisition costs 126,386 108,065
General and administrative 2,037,178 1,641,237
Mutual fund costs 157,269 181,612
Depreciation 8,379 12,419
------------------- -----------------
TOTAL EXPENSES 2,465,079 2,042,206
------------------- -----------------
NET INCOME (LOSS) FROM OPERATIONS (1,507,937) (1,218,867)
Gain on debt extinguishment 115,470 42,445
Interest expense (479,295) (153,020)
Interest income 10,137 1,176
------------------- -----------------
NET INCOME (LOSS) (1,861,625) (1,328,266)
Accretion of Mandatorily Redeemable Convertible
Preferred Stock, including accrued dividends (1,471,317) (1,333,165)
------------------- -----------------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (3,332,942) $ (2,661,431)
=================== =================
BASIC AND DILUTIVE NET INCOME (LOSS) PER SHARE:
NET INCOME (LOSS) PER SHARE $ (0.02) $ (0.02)
=================== =================
WEIGHTED-AVERAGE SHARES OUTSTANDING 159,130,160 156,281,466
=================== =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
<TABLE>
<CAPTION>
YEAR ENDED
MAY 31
---------------------------------------
2008 2007
------------------ -------------------
COMPREHENSIVE INCOME (LOSS):
<S> <C> <C>
Net income (loss) attributable to common stockholders $ (3,332,942) $ (2,661,431)
OTHER COMPREHENSIVE INCOME (LOSS):
Net unrealized gain (loss) of available-for-sale investments
arising during period 7,318 -
Reclassification adjustment for realized (gain) loss included
in net income (835) -
------------------ -------------------
Net unrealized gain (loss) attributable to available-for-sale
investments recognized 6,483her comprehensive income 6,483 -
COMPREHENSIVE INCOME (LOSS) ATTRIBITUABLE TO COMMON STOCKHOLDERS $ (3,326,459) $ (2,661,431)
================== ===================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
--------------------------------------
2008 2007
-------------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Income (Loss) $ (1,861,625) $ (1,328,266)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating activities:
Unearned and advance premium 5,986 77,606
Stock option expense 98,972 206,682
Stock issued in connection with financing arrangements 242,003 -
Provision for loss reserves 135,867 98,873
Amortization of premium 23,496 29,745
Depreciation 8,379 12,419
Write-off of bad debts 985 -
Loss on disposal of furniture and equipment 684 -
Realized (gains) losses on sale of securities (3,589) -
Premium and other receivables (9,670) 9,106
Accretion of Discount (11,565) (5,024)
Investment income due and accrued 15,858 652
Deferred policy acquisition costs (23,575) 18,034
(Gain) on extinguishment of debt (115,470) (42,445)
Change in operating assets and liabilities:
Other assets (125,531) 11,062
Accounts payable and cash overdraft (30,318) (60,711)
Accrued expenses and other liabilities (460,417) 413,507
-------------------- -----------------
NET CASH FLOWS FROM (USED IN) OPERATING ACTIVITIES (2,109,530) (558,760)
CASH FLOWS FROM INVESTING ACTIVITIES
Advances to related party - (76,173)
Repayments from related party - 127,227
Short-term loan (50,000) -
Repayment of short-term loan 50,000 -
(Increase) decrease of short-term investments (835,305) 861,002
Repayment of mortgage-backed securities 476,400 431,064
Sale of securities held-to-maturity 169,330 -
Redemption of bonds upon call or maturity 2,155,000 500,000
Costs of bonds acquired (97,582) (1,793,901)
Costs of mortgage-backed securities acquired (2,956,145) (473,036)
Purchase of equity securities (25,438) -
Escow deposits for pending acquisitions (125,000)
Purchase of furniture and equipment (14,603) (6,007)
-------------------- -----------------
NET CASH FLOWS FROM (USED IN) INVESTING ACTIVITIES (1,253,343) (429,824)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from related party debt 132,200 158,166
Repayment of related party debt (146,963) (197,448)
Proceeds from issuance of Series A preferred stock and warrants 803,000 318,000
Proceeds from issuance of Series B preferred stock and warrants 25,000 542,258
Redemption of Series B preferred stock - (62,477)
Proceeds from issuance of common stock - 17,742
Proceeds from exercise of common stock warrants 335 1,500
Proceeds from borrowings 2,842,000 375,000
Repayment of borrowings (269,357) (138,859)
-------------------- -----------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 3,386,215 1,013,882
NET INCREASE (DECREASE) IN CASH 23,342 25,298
CASH AT BEGINNING OF PERIOD 25,298 -
-------------------- -----------------
CASH AT END OF PERIOD $ 48,640 $ 25,298
===================- =================
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
JACOBS FINANCIAL GROUP, INC,
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED MAY 31
--------------------------------------
2008 2007
-------------------- -----------------
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES
Interest paid $ 171,889 $ 49,388
Income taxes paid - -
Non-cash investing and financing transactions:
Assumption of accounts payable by related party - 365,000
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<TABLE>
<CAPTION>
JACOBS FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENT OF MANDATORILY REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEAR ENDED MAY 31, 2007
-----------------------------------------------------------------
STOCKHOLDERS' EQUITY (DEFICIT)
SERIES B
SERIES A MANDATORILY REDEEMABLE ---------------------------------------]]> |