The Company’s outstanding Series B Preferred stock matured on December 30, 2010, meaning that the holders of the Series B Stock became entitled to request that the Company redeem their Series B Shares. As of May 31, 2017, the Company has received requests for redemption of 2,219
shares of Series B Preferred. The aggregate redemption amount to which the holders are entitled as of June 30, 2017, is $5,519,942.
During the year ended May 31, 2012, two holders of Series A Preferred stock released all of their outstanding bonds held with FSC. The carrying value of these shares of Series A Preferred Shareholders are listed in the liability section of the balance sheet, and therefore the dividends associated with these shares of Series A Preferred stock after February 29, 2012 is a deduction from net income. The carrying value of the Series B Preferred Shares that did not convert are listed in the liabilities section of the balance sheet, and therefore the accretion and dividends associated with the Series B Preferred stock after November 30, 2009 are deductions from net income. Series C Preferred stock has no accretion. The recorded values of the Series A preferred stock was increased to their stated liquidation values using the interest method over a period of five years and such amounts were categorized as accretion of mandatorily redeemable preferred stock in the consolidated statement of operations. This accretion was concluded in December 2010.
Accordingly, the payment of ordinary dividends is no longer restricted. However, cash, marketable investments, and other receivables held by FSC are restricted from the Company’s use to fund operations or meet cash needs outside of the insurance company’s domain. As of May 31, 2017, such assets amounted to approximately $38.38 million.
Under the West Virginia insurance code, ordinary dividends to stockholders are allowed to be paid only from that part of FSC’s available surplus funds which is comprised of realized net profits from the business and whereby all such dividends or distributions made within the preceding twelve months do not exceed 1) the lesser of 10% of FSC’s surplus as regards to policyholders as of December 31st of the preceding year-end or 2) net income from FSC’s operations from the previous two calendar years, not including capital gains. Any payment of extraordinary dividends requires prior approval from the WV state insurance commissioner.
Management believes the Company has the ability to hold all fixed income securities to maturity. However, the Company determined it may dispose of securities prior to their scheduled maturity due to changes in interest rates, prepayments, tax and credit considerations, liquidity or regulatory capital requirements, or other similar factors. As a result, the Company classifies all of its fixed income securities (bonds) and equity securities as available-for-sale. These securities are reported at fair value, with unrealized gains and losses, net of deferred income taxes, reported in stockholders’ equity as a separate component of accumulated other comprehensive income.
For the years ended May 31, 2017 and 2016, the Company incurred loss adjustment expenses of $7,597 and $26,590, respectively, related to costs of engaging experts, attorney fees, and consultants for potential claims. These costs were charged against established case reserves or bulk reserves
During 2017 and 2016, the Company sold in a private offering investment units (Units) that consisted of a total of 30.00% of the outstanding shares of FSC and 3,000,000 common shares of the Company. The Registrant’s Board of Directors has authorized the sale of Units, which, if completed, would include up to forty-nine percent (49%) of the outstanding stock of FSC. These sales, as well as the increase in cash flows in 2017 (and 2018) allowed the Company to secure the services of independent auditors and all filings that are past due are to be expedited and filed during 2018.
Legal and professional fees decreased in 2017 compared to the prior year due to the Company’s above normal efforts and related expenses in 2016 to expand the Company’s business, restructure debt of the Company via refinancing and sale of subsidiary stock, and penetrate new markets. Audit, accounting and related services increased in 2017 due to a change in accounting and audit service provider in 2015 for the Company which resulted in the delay of audit related expenses for all of 2016.
The Company accounts for its surety bond issuances as short duration contracts. Surety premiums are recorded as receivables when due and are earned pro rata over the term of the policies of generally one year, subject to annual renewal. The reserve for unearned premiums represents the deferred revenue portion of premiums written relating to the unexpired terms of coverage. The reserve for unearned premium is determined using the monthly pro rata method. Advance premiums represent renewal premiums paid in advance of the effective renewal date.
As of May 31, 2017, the Company held one hundred two fixed maturity bonds with gross unrealized losses of $215,420, six of which have been in a continuous loss position for more than 12 months.
In February 2017, the Company paid a claim on a called bond in the amount of $752,400, of which $722,780 was paid using collateral of the principal. The remaining $29,620 was established as a salvage reserve to be repaid with periodic payments from the bond principal. As of May 31, 2017, the Company has received $3,000 in recovered salvage on this claim.
On December 30, 2005, through a private placement, the Company issued 350 shares of 4% Non-Voting Series A Preferred Stock (Series A Preferred Stock), along with 1,050,000 warrants for common shares of Company stock as additional consideration, for a cash investment in the amount of $350,000, in connection with the Company's acquisition of FSC. Holders of Series A Preferred Stock are entitled to participate in FSC's partially collateralized bonding programs, subject to continuing satisfaction of underwriting criteria, based upon the bonding capacity of FSC attributable to capital reserves of FSC established with the subscription proceeds (i.e., bonding capacity equal to ten times subscription proceeds) and for so long as the subscriber holds the Series A shares. Holders of the Series A Preferred Stock are entitled to receive, when and as declared by the board of directors, cumulative preferential cash dividends at a rate of four percent of the $1,000 liquidation preference per annum (equivalent to a fixed annual rate of $40 per share). The Series A Preferred Stock ranks senior to the Company's common stock and pari passu with the Company's Series B Preferred and Series C Preferred Stock with respect to dividend rights and rights upon liquidation, dissolution or winding up of the Company. The holder may redeem the Series A Preferred Stock on or after the seventh anniversary of the Issue Date, if the holder provides a written statement to the Company that it will no longer require surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, if no such surety bonds are then outstanding, the Company, at the option of the holder, will redeem all or any portion of the Series A Preferred Stock of such holder at a price per share equal to the Series A Preferred Stock Issue Price plus all accrued and unpaid dividends with respect to the shares of the Series A Preferred Stock of such holder to be redeemed. The conditional redemption shall not be available to any holder of Series A Preferred Stock for so long as surety bonds of the Company's insurance subsidiary issued on a partially collateralized basis remain outstanding for the benefit of such holder, and upon redemption, such holder shall no longer be eligible to participate in the partially collateralized bonding programs of the insurance subsidiary. The Company is authorized to issue up to 1,000,000 shares of the Series A Preferred Stock. As of May 31, 2017, the Company has issued 2,675 shares of Series A Preferred Stock in exchange for cash investments in the amount of $2,675,000, of which no shares were issued in fiscal 2017 or 2016.
(a) Dividend Accrual and Payment. The holders of the Series C Stock shall be entitled to receive, in preference to the holders of Junior Securities, dividends (“Dividends”) on each outstanding share of Series C Stock at the rate of 8% per annum of the sum of (i) the Series C Face Amount plus (ii) an amount equal to any accrued, but unpaid, dividends on such Series C Stock, including for this purpose the exchanged Series B Amount outstanding with respect to such Series C Stock. For purposes hereof, the “Series B Amount” means an amount equal to the dividend that would have accrued on such Series C Stock held by such holder from and after the Series B Original Issue Date applicable to such share of Series C Stock, through the Original Issue Date as if such Series C Stock had been issued on such Series B Original Issue Date, less all amounts thereof distributed by the Corporation with respect to such Series C Stock. Dividends shall be payable quarterly in arrears on each January 1, April 1, July 1 and October 1 following the Original Issue Date, or, if any such date is a Saturday, Sunday or legal holiday, then on the next day which is not a Saturday, Sunday or legal holiday (each a “Dividend Payment Date”), as declared by the Board and, if not paid on the Dividend Payment Date, shall accrue. Amounts available for payment of Dividends (including for this purpose the Series B Amount) shall be allocated and paid with respect to the shares of Series C Preferred and any other Equal Ranking Preferred, first, among the shares of Equal Ranking Preferred pro rata in accordance with the amounts of dividends accruing with respect to such shares at the current Dividend Payment Date, and, then, any additional amounts available for distribution in accordance with the accrued, but unpaid, dividends (and the Series B Amount then outstanding) at each prior Dividend Payment Date, in reverse chronological order, with respect to all shares of the Equal Ranking Preferred then outstanding in accordance with amounts accrued, but unpaid. For purposes hereof, the term “Series B Original Issue Date” shall mean, with respect to any share of Series C Stock issued by the Corporation in exchange for a share of Series B Stock, the date on which the Corporation originally issued such share of Series B Stock.
Accounting Standards Codification Topic 480-10-S99-4, Liabilities, equity instruments with redemption features that are not solely within the control of the issuer are required to be classified on the balance sheet outside of permanent equity (often referred to as “temporary equity”).
During the year ended May 31, 2015, the Company borrowed money from an individual that is a board member. Total amounts owed to this individual at May 31, 2017 consisted of $75,000 in demand notes and $5,000 in accrued interest.
The Company elected to continue to defer payment of quarterly dividends on its Series A Preferred Stock, Series B Preferred Stock, and Series C Preferred Stock with such accumulated accrued and unpaid dividends amounting to $1,472,931, $4,603,909 and $11,059,170 as of May 31, 2018.