The increase in revenues is largely attributable to the continued growth of the surety business of FSC as well as the receipt of a cumulative No Claims Bonus from its reinsurers for the years ended June 30, 2010 and June 30, 2011. For the twelve month period ended May 31, 2011 net investment income was less than expected due to the receipt of large principal payments on mortgage backed securities, which required larger amortization of premium in that period. The increase in expenses is attributable to increased general and administrative expenses, increased salaries and related costs, increased accounting and legal fees and penalties in relation to unpaid federal payroll taxes.
Interest expense remained relatively consistent, from approximately $908,000 in fiscal 2011 to approximately $905,000 in fiscal 2012.
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.
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 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. 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 choosing to exercise conversion privileges prior to the stated redemption date
At this time, management has chosen to defer payment of dividends to the holders of the Series A, B and C Preferred Shares until the Company has sufficient cash flow from operations to service the obligation.
Beginning in fiscal 2008 and completed during the first quarter of fiscal 2009, the Company obtained two rounds of bridge financing totaling an aggregate of $3,500,000. The purpose of the financing was to pay expenses of operations and to pay fees and expenses incurred or expected to be incurred in connection with a larger permanent financing and, in addition, to increase the capital surplus of FSC to make possible the reactivation of FSC's surety license in the state of Ohio. The terms of the bridge-financing arrangement provide for payment in full upon consummation by the Company of a qualified equity offering providing net proceeds of at least $15 million on or before September 10, 2013; and because such a qualified equity offering was not consummated by September 10, 2008, accrued interest-to-date was payable, and quarterly installments of principal and interest became payable over five years commencing in December 2008. The interest rates on such notes were fixed at 10.00%. Payments due December 2008 and March 2009 were not made by the Company as scheduled, but a forbearance agreement was subsequently entered into with the bridge lenders on June 5, 2009, modifying payment terms to cure the default (including increasing the interest rate on the loans to 17%), issuing additional common stock to the loan holders, and pledging the stock of the Company's subsidiary, CMW, as security for repayment of the loans. The modification required the Company to pay interest of $224,515 on June 10, 2009 and increase the quarterly payments by $67,185 (to a total of $291,700) for eight consecutive quarters beginning September 10, 2009 to satisfy the arrearage. Although the Company has failed to make the payment that was due September 10, 2009 and the payments that were due in the ensuing quarters, management has remained in close contact with the bridge lenders, providing reports regarding its efforts to refinance or otherwise repay the bridge loans. To date, none of the bridge lenders has elected to pursue legal remedies.
Insurance premiums are recognized as revenue ratably over the term of the related policies in proportion to the insurance protection provided. Premium revenues are net of amounts ceded to reinsurers. Unearned premiums represent the
portion of premiums written, before ceded reinsurance which is shown as an asset, applicable to the unexpired terms of policies in force determined on a pro rata basis.
The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Ceded reinsurance is treated as the risk and liability of the assuming companies. The Company cedes insurance to other companies but these reinsurance contracts do not relieve the Company from its obligations to policyholders. Ceded premiums, at a rate of 35% of written premium, are recognized as revenue ratably over the term of the related policies. Ceded unearned premiums represent the portion of ceded premiums written applicable to the unexpired terms of policies in force determined on a pro rata basis.
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 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.
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, 2012.
The Company experienced income from operation and operating losses of approximately $16,000 and ($22,000) for the years ended May 31, 2012 and 2011, respectively. The Company's income (or loss) decreases (or increases) when accretion of mandatorily redeemable convertible preferred stock and accrued
participate in the recapitalization. Management believes the recapitalization will improve the Company's prospects for engaging in a larger financing, will assist FSC as it applies to enter other state markets, and will be an impetus to the growth of the Company's business.
Through the sharing of resources (primarily personnel) to minimize operating costs, the Company and its subsidiaries attempt to minimize operating expenses and preserve resources. Although FSC is now cash flow positive, the use of its assets and profits are restricted to its stand-alone operation by regulatory authority. While growth of the FSC business continues to provide additional revenue opportunities to the Company's other subsidiaries, Jacobs & Company and Triangle Surety, it is anticipated that working capital deficiencies will continue 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.
Revenue from the surety insurance segment, consisting of FSC and TSA, increased 24%, with $1,576,107 in fiscal 2012 as compared with $1,275,319 for the prior year. Revenues attributable to the insurance segment are as follows:
The increase in revenues reflected above is mainly attributable to the recorded receipt of $213,281 from the reinsurers of the Company's insurance subsidiary, FSC, representing a cumulative No Claims Bonus under the terms of its reinsurance agreement for the claim years ending June 30, 2010 and June 30, 2011. The Company has experienced no claims for losses as of May 31, 2012. Gross premium written in fiscal 2012 amounted to $1,343,661 as compared to $1,613,912 in fiscal 2011 and is reflective of the loss of a major customer, although the Company still experienced overall growth in bonds issued for new and existing clients, as well as increased bonds written on contracts that are earned up front as opposed to over the life of a bond. Commission income earned for the placement of bonds with outside insurers has remained relatively stagnant.
Travel, meals and entertainment expense increased during fiscal 2012 due to expanded efforts by management to obtain financing necessary to expand the Company's business and penetrate new markets.
Other general and administrative expense decreased approximately $8,000 for the year May 31, 2012 as compared to the corresponding 2011 period. The decline this year reflects termination of a corporate lease and decreased finance charges associated with overdue payables while the prior year's expense included expenses related to obtaining a U.S. Treasury Listing for FSC and non-recurring use of temporary personnel for information technology projects in the prior year. Other less significant increases and decreases were experienced in other general administrative categories in fiscal 2012 as compared to fiscal 2011.
During the years ended May 31, 2012 and May 31, 2011, the Company removed certain dormant accounts payable in the aggregate amounts of $150,604 and $54,358. For the year ended May 31, 2012, the amount was removed based on the vendor no longer requiring payment on a portion of the balance owed. For the year ended May 31, 2011, the amount was removed based upon advice of legal counsel that the accounts represented an obligation that is legally unenforceable. Such removals were recorded as gains on debt extinguishment.
Year Ended May 31, 2012 2011 -------------- ------------- Accretion of discount $ - $ 10,888 Accrued dividends - mandatorily redeemable preferred stock 113,726 122,468 Accrued dividends - equity preferred stock 847,833 781,062 -------------- ------------- $ 961,559 $ 914,418 ============== =============
FINANCIAL STATEMENTS Consolidated Balance Sheets Consolidated Statements of Operations Consolidated Statements of Comprehensive Income (Loss) Consolidated Statements of Cash Flows Consolidated Statements of Mandatorily Redeemable Preferred Stock and Stockholders Equity (Deficit) Notes to Consolidated Financial Statements
Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant Schedule III - Supplementary Insurance Information Schedule IV - Supplementary Insurance Information - Reinsurance Schedule VI - Supplemental Information