As the Registrant qualifies as a small reporting company as defined by §229.10(f)(1) of Regulation S-K, the Registrant is not required to provide the information required by this item.
The increase in expenses is mainly attributable to increased policy acquisition costs and provision for policy losses that are corollary to the previously mentioned increase in insurance premiums written for new and existing customers. However, general and administrative expenses decreased in 2017 due to reduced legal fees of approximately $200,000, as a result of a reduction in litigation and legal advice during 2016 relating to financing and settlement of debt.
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. Surety bonds currently being issued by FSC are primarily for coal mining and reclamation permits, which are long-term in nature and continually evolving 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 Company’s outstanding Series A Preferred stock matures on the seventh anniversary of the issuance date if the holder has no outstanding surety bonds with the Registrant. Thereafter holders of the Series A Stock are eligible to request that the Company redeem their Series A Shares. As of May 31, 2017, the Company has received requests for redemption of 1,026 shares of Series A Preferred. The aggregate amount to which the holders requesting redemption are entitled as of June 30, 2017, is $1,598,043.
The accrual of dividends on the equity preferred stock resulted in a charge to common stockholders’ equity and a credit to the equity of equity preferred stock of $1,256,829 in fiscal 2017 as compared to $1,164,143 in fiscal 2016.
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 funds to meet its redemption obligations with respect to the Series A and Series B Preferred Shares and has sufficient cash flow from operations to service its dividend obligations.
terms of the bridge-financing arrangement provided 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. A qualified equity offering was not consummated. On August 10, 2012, the Company entered into an agreement with the bridge lenders, pursuant to which the bridge lenders formally agreed to forbear from exercising their rights and remedies arising from the accumulated acknowledged events of default. As consideration for this forbearance, the Company entered into an Amended and Restated General Hypothecation and Pledge Agreement, granting to the bridge lenders a lien and security interest in all of the capital stock of First Surety Corporation. Under the August 2012 Pledge, the bridge lenders acknowledged that the effectiveness of certain of the rights and remedies provided by such agreement were subject to prior approval by the Office of the Commissioner of Insurance for the State of West Virginia.
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Registrant, borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after waiving interest of approximately $1.6 million, 50.7% ($1.775 million face amount) of the outstanding senior promissory notes comprising the $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company and improved its balance sheet through waiver of accrued interest.
Regulatory approval for the acquisition of FSC by JFG was provided by a Consent Order issued December 23, 2005 by the Commissioner of Insurance of the State of West Virginia and imposed several conditions for the operation of FSC, including the condition that no dividends or monies were to be paid to JFG without regulatory approval. This consent order was terminated on March 26, 2012 and dividends in the amounts of $173,000 and $198,000 were paid during the years ended
May 31, 2015 and May 31, 2014, respectively. For further information, see Notes C and O to the Consolidated Financial Statements.
The Company limits the maximum net loss that can arise from large risks by reinsuring (ceding) certain levels of such risk with reinsurers. Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd’s of London for its coal reclamation surety bonding programs. This agreement has provided additional bonding capacity to FSC and has enabled FSC to write more
Incident to its acquisition of FSC on December 31, 2005, 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 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 information derived from Company experience in addition to management’s estimate of expected future claims on those policies in force. Management’s estimate considers relevant
In August 2015, the Company paid a claim on a called bond in the amount of $550,000, of which $75,000 was paid using collateral of the principal. The remaining $475,000 has been established as a salvage receivable to be repaid by the principal with collateral comprised of the assignment of a closely held stock owned by the principal and assignment of a promissory note payable to the principal, with the total assigned values in excess of the salvage receivable. As of May 31, 2017, the Company had received $45,000 in recovered salvage on this claim.
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 has been established as a salvage receivable 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.
FSC is currently licensed to write coal permit and miscellaneous fixed-liability limit surety bonds in West Virginia and Ohio. Coal permit bonds are required by regulatory agencies to assure the reclamation of land that has been disturbed by mining operations, and accordingly is a highly regulated process by federal and state agencies. Such bonds are generally long-term in nature with mining operations and reclamation work being conducted in unison as the property is mined. No two principals or properties are alike due to varied company structures and unique geography and geology of each site.
In underwriting coal reclamation bonds, management obtains estimates of costs to reclaim the 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, or if sufficient collateral is not obtained, or if the collateral held has experienced significant deterioration in value and if FSC is not otherwise able to recover under its contractual rights to indemnification.
The Company experienced operating income (loss) from operations of approximately $508,000 and ($571,000) for the years ended May 31, 2017 and 2016, respectively. The Company’s income (or loss) decreases (or increases) when accretion of mandatorily redeemable convertible preferred stock and accrued dividends on mandatorily redeemable preferred stock, as well as income attributable to non-controlling interests, (i.e. 30% and 10% of FSC in 2017 and 2016, respectively), are taken into account, to losses of approximately ($1,358,000) and ($108,000) for the years ended May 31, 2017 and 2016. The Company has not been able to pay certain amounts due to professionals and others and continues to be unable to pay its preferred stock redemption and dividend obligations. Due to this inability to pay professional fees, the financial audits and subsequent required filings for the fiscal years ended May 31, 2014, 2015, 2016, and 2017 were not completed or filed in a timely manner. A substantial portion of the Company’s cash flow is generated by its insurance subsidiary, with such cash flow subject to insurance regulatory restrictions, including a limitation of FSC to pay dividends to its parent. While management expects revenue growth and cash flow to increase significantly as its business plan is fully implemented, it is anticipated that losses will continue and the Company will be cash constrained until FSC is able to develop a more substantial book of business.
Expansion of FSC’s business to other states is a key component to fully implementing the Company’s business plan. In fiscal 2009, the Company was able to increase the capital of FSC and reactivate FSC’s insurance license in Ohio and obtain authority to issue surety bonds in that state. However, management has found that entry into other states (as a surety) has been difficult without the benefit of more substantial capital due to FSC’s specialization in coal reclamation bonds, the cyclical nature of that industry and the financial condition of the Company. Management believes that if FSC’s capital and surplus were significantly more substantial and the financial condition of the Company was stabilized, entry into other states would be less challenging.
Accordingly, during November 2016 FSC received approval to issue up to $50 million non-voting, non-cumulative 3.5% Series A Preferred stock. A strategic partner purchased $8 million Preferred which was contributed to capital in January 2017, increasing the subsidiary’s capital and surplus from $5 million to $13 million. Enabled by the increase in capital and desiring to expand its geographic footprint, FSC is actively pursuing expansion to additional states. Management continues to pursue avenues that can provide additional capital to increase the capacity of its insurance subsidiary and to fund the Company’s continuing operations as the business is being fully developed.
The Company experienced income from operations of approximately $507,000 in 2017 as compared with loss from operations of ($572,000) in fiscal 2016. Including non-cash expenses, the net loss attributable to common stockholders was ($2,351,714) in fiscal 2017 as compared to ($1,346,660) in fiscal 2016. Net loss attributable to the Company after deducting participation attributable to non-controlling interests is taken into account is ($2,614,485) in fiscal 2017 as compared to ($1,273,529) in fiscal 2016.
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 mainly attributable to the rebounding from a 2016 severe drop in market value of an investment account held as a result of a contractual arrangement, where the Company receives any appreciation and earning in excess of the initial deposit of collateral by the principal on a surety bond as well as realized gain of 138,220 in 2017 compared to realized losses of (79,060) in 2016 on the sale of investments. Gross premium written in fiscal 2017 amounted to $2,948,921 as compared to $1,466,837 in fiscal 2016 and is reflective of an increase in the volume of bonds required for new and existing clients. Commission income earned for the placement of bonds with outside insurers decreased from $134,346 in 2016 to $15,195 in 2017. This decrease in commission revenue for 2017 is derived from one subsidiary’s 2016 facilitation of a contract with an outside company and a separate subsidiary to provide replacement bonding for premium income. The Company did not record a No Claims Bonus for the year ended May 31, 2016 due to the recording of a claim reserve payable under the terms of the reinsurance contract period covering October 1, 2014 through
FSC’s investment holdings in fiscal 2017 averaged $26.550 million as compared to $9.748 million for fiscal 2016, with investment yields decreasing from 3.05% to 1.68%. The ultimate effect of zero coupon bonds will be reflected over the life of the bond through accretion rather than yield. During the period, equity securities in the portfolio provided dividends and gains from the covered call strategy utilized on the equities.
General and administrative expenses for fiscal 2017 were $1,187,379 as compared with $1,442,606 for fiscal 2016, representing a decrease of $255,227 and are comprised of the following:
Salaries and related costs, net of deferred internal policy acquisition costs, decreased $23,354 and are comprised of the following:
2016. The Company anticipates that some of these accounts receivable will be paid by an obligor in the future based on verbal agreements with this obligor.
$483,593 associated with the Series B outstanding after November 30, 2009 are deductions from net income and not included in the table above. During the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. Therefore, these shares of Series A Preferred Shareholders are listed in the liability section of the consolidated balance sheet and the dividends after February 29, 2012 associated with these shares are a deduction from net income in the amounts of $67,847 and $65,374, for the years ended May 31, 2017 and 2016, and not included in the table above. Series C equity stock is not mandatorily redeemable and does not accrete.
The substantial increase of funds placed in IBNR (a reserve for potential claims) directly strengthened FSC, allowing it to execute larger and more strategic groups of bonds going forward.
FSC intends to branch into infra-structure bonds in the near future.
We have audited the accompanying consolidated balance sheets of Jacobs Financial Group, Inc. (the "Company") as of May 31, 2017 and 2016, and the related consolidated statements of operations, comprehensive income (loss), cash flows, and Series A redeemable preferred stock and stockholders' deficit for each of the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
The consolidated financial statements include the accounts of Jacobs Financial Group, Inc. and its majority owned subsidiaries, after the elimination of intercompany transactions.
First Surety Corporation, a subsidiary of the Jacobs Financial Group, Inc. has a non-controlling ownership interest. The Company’s board of directors has authorized the sale of Units (5% per Unit), which, if completed, would include forty-nine percent (49%) of the outstanding stock of FSC. As of May 31, 2017, the Company still had ownership of 70% of First Surety Corporation. For further discussion of these Units, see Note H.
Summarized balance sheet and income statement amounts for First Surety Corporation are as follows;
The Company considers all highly liquid instruments purchased with an original maturity of three months or less to be cash equivalents. The Company continually monitors its positions with, and the credit quality of, the financial institutions with which it invests.
Preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities. Significant areas requiring the use of management estimates are loss reserves, valuation of investments, and the valuation of deferred tax assets. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements.
Management has 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. 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.
These transactions expose the Company to potential market risk for which the Company receives a premium up front and the Company realizes the option premium received as income. The market risk relates to the requirement to deliver the underlying security to the purchaser of the call within a definite time at an agreed market price regardless of the then current market price of the security. As a result the Company takes the risk that it may be required to sell the security at the strike price, which could be a price less than the then market price. Should the security decline in market price over the holding period of the call option, the Company can lessen or mitigate the risk of loss with a closing transaction for the covered call and sale of the underlying security.
The majority of the Company’s fee revenue is generated by services provided to companies and individuals throughout the Eastern United States. Management evaluates the need for a reserve for the amount of related receivables that may be uncollectible, based on historical collection activity adjusted for current conditions. Premium and other receivables are charged-off when deemed uncollectible. Based on this evaluation management has established an allowance for estimated uncollectible accounts of $15,053 and $40,658 for fiscal 2017 and 2016, respectfully.
The Company evaluates long-lived assets for impairment annually, or whenever events or changes in circumstances indicate that the assets may not be recoverable. Impairment is measured by discounting estimated future cash flows expected to be generated, and comparing this amount to the carrying value of the asset. Cash flows are calculated utilizing forecasts and projections and estimated lives of the assets being analyzed. Should actual results differ from those forecasted and projected the Company may be subject to future impairment charges related to recovery of these long-lived assets. During the periods presented management determined impairment had not occurred.
Losses and loss adjustment expenses represent management’s best estimate of the ultimate net cost of all reported and unreported losses incurred. Reserves for unpaid losses and loss adjustment expenses are estimated using industry averages, however, will include individual case-basis valuations in the event claims are received. These estimates and methods of establishing reserves are continually reviewed and updated.
The fair value of stock options is estimated at the grant date using the Black Scholes Option Pricing Model. This model requires the input of a number of assumptions, including expected volatility and dividend yields, expected stock price, risk-free interest rates, and an expected life of the options. Although the assumptions used reflect management’s best estimate, they involve inherent uncertainties based on market conditions generally outside the control of the Company. As of and for the periods presented there were no stock options outstanding.
The Company follows a more-likely-than-not measurement methodology to reflect the financial statement impact of uncertain tax positions taken or expected to
be taken in a tax return. If taxing authorities were to disallow any tax positions taken by the Company, the additional income taxes, if any, would be imposed on the Company.
Basic earnings (loss) per share of common stock are computed using the weighted average number of shares outstanding during each period. Diluted earnings per share are computed on the basis of the average number of common shares outstanding plus the dilutive effect of convertible debt, stock options and warrants. In periods of net loss, there are no diluted earnings per share since the result would be anti-dilutive.
In August 2014, the FASB issued Accounting Standards Update No. 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40) (ASU 2014-15). ASU 2014-15 is intended to define management's responsibility to evaluate whether there is substantial doubt about an organization's ability to continue as a going concern and to provide related footnote disclosures. We adopted this guidance for our fiscal 2017 financial statements.
In March 2016, the FASB issued ASU 2016-05, “Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships”, which clarifies that a change in the counterparty to a derivative contract, in and of itself, does not require the designation of a hedging relationship. The new standard which can be adopted prospectively or on a modified retrospective basis, is effective for the Company’s fiscal 2019 annual and interim financial statements. The Company does not expect the adoption of the new accounting rules to have a material impact on the Company’s financial condition, results of operations and cash flows. Also in March 2016, the FASB issued ASU 2016-06, “Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments”, which clarify the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amendments in this update is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence. The new standard, which should be applied on a modified prospective basis is effective for the Company’s 2019 annual financial statements and interim periods thereafter.
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement-Reporting Comprehensive Income (Topic 220) Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to address a specific consequence of
the Tax Cuts and Jobs Act (TCJA) by allowing a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the TCJA’s reduction of the U.S. federal corporate income tax rate. The ASU is effective for all entities for the Company’s fiscal 2020 financial statements, with early adoption permitted, and is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the TCJA is recognized.
Management has assessed the potential impact of recently issued, but not yet effective accounting standards and, except as noted, has determined that the provisions are either not applicable to the Company, or are not anticipated to have a material impact on the consolidated financial statements.
The Company held the following investments, by 	security type, that were classified as available-for-sale and carried at fair value at May 31, 2017:
There are no securities classified as held to maturity at May 31, 2017 or May 31, 2016.
At May 31, 2017, the Company’s insurance subsidiary had cash, securities and short-term investments held as collateral for their bonding program in the amount of $21,926,872.
In connection with regulatory approval of the Company’s acquisition of its insurance subsidiary, certain restrictions were imposed on the ability of the Company to withdraw funds from FSC without prior approval of the state Insurance Commissioner. Accordingly, investments and cash in the amount of $38,374,571 and $9,384,909 as of May 31, 2017 and 2016, respectively, are restricted to the use of FSC.
The following table summarizes the gross unrealized losses and fair value on investment securities aggregated by major investment category and length of time that individual securities have been in a continuous loss position at May 31, 2017 and May 31, 2016.
As the result of the acquisition of FSC on December 30, 2005, in exchange for the purchase price of $2,900,000, the Company received cash and investments held by FSC with a fair value of $2,750,000, with the difference of $150,000 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, or more frequently if circumstances indicate that a possible impairment has occurred, for recoverability and possible impairment loss. No impairment has been recorded in fiscal years ended May 31, 2017 and 2016.
Reserves for unpaid losses and loss adjustment expenses are estimated based primarily on management’s judgment as the Company has incurred limited losses since its inception and available industry data is also extremely limited. In the event of the Company receiving a claim it will use individual case basis estimates including all estimated future expenses to settle such claims. As of May 31, 2017, the Company’s insurance subsidiary, FSC, is only licensed to write surety in West Virginia and Ohio and has focused its primary efforts towards coal permit reclamation bonds while also providing other miscellaneous surety bonds, most of which are partially collateralized by investment accounts that are managed by Jacobs & Company. Reclamation of land that has been disturbed by mining operations is highly regulated by federal and state agencies and the required bonds are generally long-term in nature with mining operations and reclamation work conducted in unison as the property is being mined.
Additionally, no two principals or properties are alike due to varied company structures and unique geography and geology of each site. In underwriting such bonds, management develops, through consultation with professionals experienced in the specific field of work, estimates of costs to reclaim the properties subject of the permit(s) in accordance with those mining permit(s), in addition to other underwriting and financial risk considerations. FSC requires the principal to provide cash, or other acceptable collateral such as irrevocable letters of credit, in amounts determined through the underwriting process to reclaim the disturbed land and thus mitigate the exposure to significant loss.
Inspections of mining activity and reclamation work are performed on a regular basis with initial cost estimates being updated periodically. Should the principal default in the obligation to reclaim the property in accordance with the mining permit, FSC would then use the funds held in the collateral account to reclaim the property or would be required to forfeit the face amount of the bond to the agency to which the bond is issued.
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.
At May 31, 2017 and May 31, 2016, the reserve for losses and loss expenses consisted of:
All notes payables, with the exception of those secured by FSC stock are on demand terms and therefore current liabilities.
On July 9, 2014 the Company completed a $4,500,000 financing. In effect, FSI, a subsidiary of the Company, borrowed the funds at 8.00% interest with principal repayments on a ten year schedule. Proceeds of the borrowing were applied (i) to purchase from certain bridge lenders, after waiving interest of approximately $1.6 million, i.e. 50.7%, ($1.775 million face amount) of the outstanding senior $3.5 million financing dating from 2008, together with the associated collateral, (ii) to pay in full delinquent tax liabilities owed to the Internal Revenue Service and State of West Virginia, (iii) to pay an outstanding judgment, and (iv) to pay certain other current liabilities. FSI therefore became a member of the Bridge Loan and notified the Collateral Agent for the group of its purchase and majority holding. The transaction restored majority control of FSC to the Company.
The transaction was funded through sale in a private offering of investment units (Units) that consisted of 5.00% of the outstanding shares of FSC and 500,000 common shares of the Company. $1,600,000 was raised through a combination of cash, partial assignments of loans back to the Company that were debt of the Company and loans that are convertible into purchase of Units. The Registrant’s Board of Directors has authorized the sale of up to forty-nine percent (49%)of the outstanding stock of FSC.
As of May 31, 2017, the Company had accrued and withheld approximately $172,000 in Federal payroll taxes and approximately $32,000 in estimated penalties and interest, which are reflected in the financial statements as other liabilities and accrued expenses and professional fees payable.
As of May 31, 2017, the Company had accrued and withheld approximately $73,000 in West Virginia payroll withholdings and approximately $17,000 in interest and penalties, which are reflected in the accompanying financial statements as other liabilities and accrued expenses and professional fees payable.
As of May 31, 2016, the Company had accrued and withheld approximately $31,000 in Federal payroll taxes and approximately $31,000 in estimated penalties and interest, which are reflected in the financial statements as other liabilities and accrued expenses and professional fees payable.
are not sufficient funds legally available to accomplish the redemption or that the use of such funds to effect the redemption will result in an impairment of the operations of the Insurance Subsidiary, then (X) the Company shall notify the holders of shares that would otherwise have been redeemed of such fact and the consequences as provided in this paragraph, (Y) the Company will use those funds which are legally available therefor and which would not result in an impairment of the operations of the Insurance Subsidiary to redeem the maximum possible number of shares of Series A Stock for which Redemption Notices have been received ratably among the holders of such shares to be redeemed based upon their holdings of such shares, and (Z) thereafter, until such shares are redeemed in full, the dividends accruing and payable on such shares of Series A Stock to be redeemed shall be increased by 2% of the Series A Face Amount, with the amount of such increase (i.e., 2% of the Series A Face Amount) to be satisfied by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series A Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series A Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series A Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series A Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series A Stock elected to be redeemed shall have been paid in full, such share of Series A Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
by distributions on each Dividend Payment Date of shares of Common Stock having a value (determined by reference to the average closing price of such Common Stock over the preceding 20 trading days) equal to the amount of such increase. The shares of Series B Stock not redeemed shall remain outstanding and entitled to all the rights and preferences provided herein. At any time thereafter when additional funds of the Company are legally available for the redemption of shares of Series B Stock and such redemption will not result in an impairment of operations of the Insurance Subsidiary, such funds will immediately be used to redeem the balance of the shares of Series B Stock to be redeemed. No dividends or other distributions shall be declared or paid on, nor shall the Company redeem, purchase or acquire any shares of, the Common Stock or any other class or series of Junior Securities or Equal Ranking Preferred of the Company unless the Redemption Price per share of all shares for which Redemption Notices have been given shall have been paid in full, provided that the redemption price of any Equal Ranking Preferred subject to redemption shall be paid on a pari passu basis with the Redemption Price of the Series B Stock subject to redemption in accordance herewith. Until the Redemption Price for each share of Series B Stock elected to be redeemed shall have been paid in full, such share of Series B Stock shall remain outstanding for all purposes and entitle the holder thereof to all the rights and privileges provided herein, and Dividends shall continue to accrue and, if unpaid prior to the date such shares are redeemed, shall be included as part of the Redemption Price.
The Company experienced a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $1,357,656 in fiscal 2017 as compared with a loss after accretion of mandatorily redeemable convertible preferred stock, and accrued dividends on mandatorily redeemable preferred stock of $108,386 in fiscal 2016.
2. Authorized Number. The number of shares constituting the Series C Stock is 10,000.
exchanged Series B Stock, with the related cost associated with the Common issuance offsetting the Series C carrying value by $265,120. The shares were valued at approximately $.01948 per share based on the average quoted closing price of the Company's stock for the 20-day period proceeding the date of the transaction. Series C stock may be redeemed by the Company but does not have a fixed maturity date and, thus, is classified as permanent equity. For the year ending May 31, 2016, 2,817 shares of Series B Stock had not been exchanged.
Share. The Series C Shares may be redeemed by the Corporation, at its option, when it is in a financial position to do so.
Holders of over 70% of the outstanding Series B Preferred Shares elected to participate in the recapitalization. The shares of Series B Preferred Shareholders that chose not to convert are listed in the Liabilities section of the Balance Sheet, and therefore the accretion and dividends associated with the Series B stock after November 30, 2009 are deductions from net income. Dividends on Series B mandatorily redeemable preferred stock deducted from net income amounted to $522,099 for the year ended May 31, 2017. The remaining Series B shares not converted were accreted from carrying value to the face amount for the 5 year period from the date of issuance. Series C stock has no accretion. There were no shares of Series B Stock surrendered or exchanged in the year ended May 31, 2016.
During the year ended May 31, 2012, two holders of Series A stock released all of their outstanding bonds held with FSC. These shares of Series A Preferred Shareholders are listed in the liability section of the Balance Sheet as of May 31, 2017, in the amount of $1,738,792, which consists of the fully accreted $1,126,000 face value of stock and $612,792 in dividends payable. The dividends associated with these shares of Series A stock for the year ended May 31, 2017, is a deduction from net income in the amount of $67,847. There was no current accretion on these shares of Series A stock.
As of May 31, 2017 the Company has chosen to defer payment of dividends on Series A Preferred Stock with such accrued and unpaid dividends amounting to $1,311,080 through May 31, 2017. These dividends are included in the amounts reported on the face of the balance sheet for each classification of Series A stock.
U.S. GAAP requires that an entity classify as liabilities certain financial instruments with characteristics of both liabilities and equity. The Company's Series A and B Preferred stock each have mandatory redemption features that subject the Company to the analysis of equity versus liability. Both Series A and B have features that embody a conditional obligation to redeem the instrument upon events not certain to occur and accordingly, are not classified as liabilities until such events are certain to occur. With respect to the Series A Preferred Stock, such condition is contingent upon the holder having no further need for surety bonds issued by the Company's insurance subsidiary (FSC) under its partially collateralized bonding programs and, having no such surety bonds then outstanding. With respect to the Series B Preferred Stock, if the stock provides an option to the holder to convert to common shares at a rate equivalent to fair value, then the financial instruments are not mandatorily redeemable during the period in which the holder can convert the shares into common shares. Accordingly, the Company has determined that only the Series A preferred stocks held by principals with outstanding surety bonds should not be classified as liabilities. However, in accordance with FASB’s
There were no options exercised in fiscal 2017 or 2016. There is no unrecognized compensation expense related to non-vested awards at May 31, 2017 or May 31, 2016 as all awards are fully vested.
Deferred tax assets and liabilities are recorded for the effects of temporary differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements. Such differences include the income recognition of a portion of the unearned premium reserve, loss reserve deductibility, certain accrued expenses that are not paid within specified time frames by the Internal Revenue Service, and the deductibility of deferred policy acquisition costs paid. As of May 31, 2017, the Company had estimated operating loss carry forwards of approximately $14.2 million. These carry forwards began expiring in 2015 and, as a result of the ownership change resulting from the 2001 acquisitions of FSI and Jacobs, the utilization of approximately $6.4 million of the operating loss carry forwards are substantially limited.
In fiscal 2016, the Company issued 11,956,049 shares of the Company’s common stock in connection with the additional 2% stock dividend associated with Series A and B Preferred shares that were requested to be redeemed upon maturity (see Note J). The shares were valued at approximately $.003208 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $38,352.
The shares were valued at approximately $.002566 per share based on the average quoted closing price of the Company's stock for the 20-day period preceding the date of the transaction and totaled $6,415.
Statutory capital and surplus as of May 31, 2017 and 2016, and net income for the Company’s insurance subsidiary for the calendar year ended December 31, 2016 and 2015 and five-month periods ended May 31, 2017 and 2016 are as follows:
The Company leases certain office equipment with combined monthly payments of approximately $425 that have varying remaining terms of less than five years. The Company leases office, parking and storage space under month-to-month lease arrangements that approximate $2,978 each month.
Rental expense for these lease commitments totaled approximately $43,321 and $45,086 during fiscal years 2017 and 2016.
Minimum future lease payments under non-cancelable operating leases having remaining terms in excess of one year as of May 31, 2017 are:
The carrying amounts and fair values of the Company’s financial instruments at May 31, 2017 and 2016 are as follows:
As of May 31, 2017 the Company’s investment securities of approximately $38,000,000 are comprised solely of mortgage-backed securities, fixed maturity municipal bonds, equity investments, and money-market mutual funds that invest principally in obligations issued by the U.S government, its agencies or instrumentalities. Such instruments are generally considered to be of the highest credit quality investment available.
Management has established an allowance for estimated uncollectible accounts of less than 3% of outstanding premiums and other receivables believing that most receivables are collectible.
The Company’s insurance subsidiary currently writes only the surety line of business, is licensed to write surety only in West Virginia and Ohio and has focused its primary efforts towards coal permit bonds. Such business, including investment advisory fees from managed collateral accounts, accounted for approximately 34% and 66% of the Company’s fiscal 2017 and 2016 revenues, respectively. Furthermore, the Company provides surety bonds to companies that share common ownership interests that constitute 18% and 36% of the Company’s fiscal 2017 and 2016 revenues, respectively, as follows:
The Company has two reportable segments, investment advisory services and surety insurance products and services. The following table presents revenue and other financial information by industry segment.
During fiscal 2017, advances to the Company from Mr. Jacobs amounted to $359,298 and repayments to Mr. Jacobs amounted to $783,755. As of May 31, 2017, the balance due from Mr. Jacobs $939,945. The largest aggregate amount outstanding from Mr. Jacobs in fiscal 2017 was $955,646.
As of May 31, 2018, $24,000 was owed to Mr. Jacobs by the Company.
The rate of interest on such amounts due from and obligations due to Mr. Jacobs was 6% and 12% respectively for both the 2017 and 2016 fiscal years.
May 31, 2017 and 2016, respectively). This individual also arranged to purchase a 15.00% interest in First Surety Corporation for $1,500,000 through a combination of cash and a Promissory Note for $1,250,000 secured by assignment of debt payable by the Company. This sale also resulted in the issuance of 1,500,000 shares of common stock of the Company. As of May 31, 2017, the amounts receivable from this individual amounted to $960,540, with interest income of $83,894 and $75,168 for the periods ending May 31, 2017 and 2016.
Effective April 1, 2009, FSC entered into a reinsurance agreement with various syndicates at Lloyd’s of London (“Reinsurer”) for its coal reclamation surety bonding programs. The agreement has been renewed annually with the Reinsurer, with the most recent renewal effective April 1, 2017. The reinsurance agreement is an excess of loss contract which protects the Company against losses up to certain limits over stipulated amounts and can be terminated by either party by written notice of at least 90 days prior to any July 1. The contract calls for a premium rate of 35% subject to a minimum premium of $490,000. Deposits to the reinsurers are made quarterly in arrears in equal amounts of $140,000. At May 31, 2017 and May 31, 2016, the Company had prepaid reinsurance premiums of $418,124 and $232,647.
The effects of reinsurance on premium written and earned for fiscal 2017 and 2016 are as follows;