During fiscal 2009, the Company has focused its primary efforts on the development and marketing of its surety business in West Virginia and Ohio, arranging for an increase in FSC's bonding capacity through a reinsurance relationship, raising additional capital to increase the capital base of FSC and facilitate entry into other state markets and other means of accelerating the progression of the Company's business plan.
The increase in revenues is largely attributable to new business acquired by FSC and increased investment holdings of FSC. The decrease in expenses is attributable to decreased general and administrative expense related to reduction in personnel and reduction in professional fees incurred in the Company's negotiating and entering into acquisition agreements with respect to RSH and Unione in fiscal 2008 and ongoing efforts to raise additional capital to expand its business.
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
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.
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.
The Company has experienced operating losses (after accretion of mandatorily redeemable convertible preferred stock, including accrued dividends) of approximately $3,058,000 and $3,333,000 for the fiscal years ended May 31, 2009 and 2008, respectively. The Company continues to face significant working capital deficiencies and cash flow concerns. This has resulted in the deferral of payments to professionals and others and an inability to pay its preferred stock dividend obligation. A substantial portion of the Company's cash flow is generated by its insurance subsidiary and is subject to certain withdrawal restrictions. 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 substantial book of business.
Effective April 1, 2009, FSC entered into a reinsurance agreement with Lloyd's of London for its coal reclamation surety bonding programs. This agreement has provided additional bonding capacity to FSC and has enabled FSC to write more bonds and of greater size for its coal reclamation bonding clients. Management expects this reinsurance arrangement to allow FSC to expand its market share and to result in increased cash flow for each of the Company's operating subsidiaries.
The Company experienced a loss (after accretion of mandatorily redeemable convertible preferred stock, including accrued dividends) of $3,057,687 in fiscal 2009 as compared with a loss of $3,332,942 (after accretion of mandatorily redeemable convertible preferred stock, including accrued dividends) in fiscal 2008.
Revenue from the investment management segment, net of advisory referral fees, was $233,298 in fiscal 2009 as compared with $262,806 in fiscal 2008, representing a decrease of $29,503. 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.
Additionally, during fiscal 2009, in conjunction with the increased surety business written, proceeds amounting to $259,000 from the sale of Series A preferred stock were contributed to the surplus and capital of FSC. $176,000 in proceeds have been collected but not yet contributed to the surplus and capital of FSC. FSC's investment holdings in fiscal 2009 averaged $5.986 million as compared with $4.553 million for fiscal 2008, with investment yields remaining relatively unchanged at just below 5.00%.
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 2009 have been recorded as $186,007 or 28.5% of earned premium as compared to $135,867 or 30.0% of earned premium for fiscal 2008. 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, 2009.
Salaries and related costs, net of deferred internal policy acquisition costs, decreased approximately $176,573 and are comprised of the following:
Decreases in salaries and wages relate to decreased staff and year-end bonuses paid to non-executive employees. The decrease in stock option expense is attributable to non-uniform vesting schedules under which options vest for certain key employees as well as the expiration of options for employees terminated in 2009. Group health benefits remained consistent with the previous year, but were offset by an increase in the Company's group life insurance cost of approximately $2,000. The increase in key-man life insurance is attributable to the increased debt the Company has incurred.
Interest income for fiscal 2009 was $4,819 as compared with $10,137 for fiscal 2008. Interest income for fiscal 2009 and 2008 is primarily related to the investment of the unexpended proceeds from the bridge-financing arrangement in short-term investment accounts