UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (no fee required)
For the transition period to
Commission File No. 000-24057
RUSHMORE FINANCIAL GROUP, INC.
(Name of small business issuer in its charter)
Texas 75-2375969
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
13355 Noel Road, Suite 650, Dallas, Texas 75240
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 450-6000
Securities registered pursuant to Section 12(b) of the Act: ___________________
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par
value $0.01
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 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
---- ----
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and none will be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. |X|
The registrant's revenues for its most recent fiscal year were: $6,008,000.
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 a
specified date within the past 60 days was/is $11,000,000.
At June 1, 1998, the registrant had outstanding 2,984,617 shares of par value
$0.01 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
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Page
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PART I
Item 1. Description of Business..................................................................................2
Item 2. Description of Property..................................................................................7
Item 3. Legal Proceedings........................................................................................7
Item 4. Submission of Matters to a Vote of Security Holders......................................................7
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.................................................8
Item 6. Management's Discussion and Analysis or Plan of Operation................................................9
Item 7. Financial Statements....................................................................................14
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....................15
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act.......................................................................15
Item 10. Executive Compensation..................................................................................17
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................................19
Item 12. Certain Relationships and Related Transactions..........................................................20
Item 13. Exhibits and Reports on Form 8-K........................................................................21
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PART I.
ITEM 1. Description of Business
Rushmore Financial Group, Inc. ("Rushmore", "Registrant" or the "Company")
Rushmore is a financial services holding company that provides a wide range of
investment and insurance services and products to its clients through a national
distribution network of approximately 125 securities representatives operating
in over 30 states and more than 1,300 insurance agents in 39 states. The Company
believes that it is well positioned to take advantage of demographic trends in
the industry and the increasing overlap of investment services with other
financial security products. The Company's activities in these two complementary
sectors of the financial services industry, investment services and insurance
services, allow Rushmore to provide a full range of financial services to its
clients and enhance the cross-selling opportunities of its select product lines.
The Company's investment services business consists of securities brokerage
services, mutual fund distribution, variable life insurance and annuities sales
and other financial services offered by Rushmore Securities Corporation
("Rushmore Securities"). In addition, Rushmore Investment Advisors, Inc.
("Rushmore Advisors") provides fee-based advisory services, using a proprietary
asset allocation program known as RushMAP.
The Company's insurance services business selects and markets a wide range
of life, disability, accident and health insurance and annuity products
distributed through more than 1300 independent or exclusive agents of its
affiliated agency, Rushmore Insurance Services, Inc. ("Rushmore Agency"). In
addition, Rushmore Life Insurance Company ("Rushmore Life") acquires and
coinsurers up to a 50% interest in the policies written through representatives
of Rushmore Agency that are issued by its primary life insurance companies that
have entered into modified coinsurance agreements with Rushmore Life.
Growth Strategy
The Company's growth strategy focuses on expanding its national
distribution network and continually seeking out and evaluating new products and
acquisition opportunities that are consistent with the Company's objective to
provide a full range of financial products and services. Over the past ten
years, the amount invested in retirement and other financial security products
and services has grown over 185%. According to the Federal Reserve Board of
Governors, in 1986 the total amount invested in retirement and other financial
security products by households and non-profit organizations was approximately
$7.16 trillion, as compared to over $20.45 trillion at year end 1995, an 11.1%
compounded annual growth rate. The Company's objective is to capture an
increasing share of the commission revenues and assets related to the investment
and insurance services industry. The key components of Rushmore's growth
strategy include:
o expanding its distribution network by recruiting and retaining high quality
and productive agents and representatives, including both exclusive "Career
Partners" insurance agents and registered securities representatives and
independent insurance agents;
o providing its sales force with a wide range of financial products and
services, including exclusive insurance and investment products;
o offering incentives to its agents and employee, including favorable
commission structures, stock option plans and award programs to attract and
retain a loyal base of highly motivated sales representatives;
o upgrading its management information system to allow its agents and
representatives to maintain an efficient and orderly flow of sales orders;
and
o seeking acquisitions of other insurance, securities or investment advisory
firms and other complementary financial services companies that have a
strategic fit and advance the overall mission and goals of the Company.
Insurance Services. The Company intends to expand its coinsurance
activities with existing and new carriers, and actively seeks to acquire other
full-line life insurance companies licensed in multiple states to begin selling
the products of such companies through the Company's agency force.
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Securities Brokerage. Rushmore Securities' strategy is to continue its
growth by means of recruiting quality representatives, opening new branch
offices, acquiring other broker-dealers and increasing its volume of business
referred from agents and representatives of Rushmore subsidiaries and their
customers.
Advisory Services. Rushmore Advisors' strategy is to increase its assets
under management by maximizing cross- selling opportunities to clients of
Rushmore Securities and Rushmore Agency and acquiring other investment advisory
firms. Rushmore Advisors will emphasize three profit centers in these efforts:
(i) the Rushmore Managed Asset Program ("RushMAP"), (ii) estate and financial
planning for high net worth individuals, corporations and pension funds, and
(iii) a partnership investment that is structured as a "fund of funds", or a
grouping of experienced money managers selected to meet specific return
objectives within a defined risk tolerance level.
Investment Services
Securities Brokerage--Rushmore Securities Corporation. Rushmore Securities
provides investment services to its clients through a network of approximately
125 registered representatives operating in over 30 states. Rushmore Securities
is a member of the NASD, the Municipal Securities Rulemaking Board ("MSRB") and
the Securities Investors Protection Corporation ("SIPC").
Rushmore Securities functions as a full commission retail broker for
clients to whom it makes trading recommendations, on a discretionary or
non-discretionary basis, and as a discount broker as to unsolicited orders from
its customers and from trades initiated by other Rushmore subsidiaries. It also
sells mutual funds and variable annuity products.
Rushmore Securities acts as a broker/dealer for a full line of securities
products, including stocks, bonds, mutual funds, variable annuities and
certificates of deposit. It is known as a "fully disclosed" originating broker,
meaning that it does not hold clients' funds, does not clear clients' trades on
securities markets, and is not a member of any stock exchange. Instead, it
forwards all clients' trades to one of the clearing firms with which it
maintains a contractual relationship to execute such trades on the appropriate
market. The Company currently has clearing agreements with Southwest Securities,
Inc. and First Southwest Company. This arrangement allows the Company to reduce
some of the risk associated with trading and the amount of net capital it is
required to maintain under applicable securities laws.
Most of Rushmore Securities' registered representatives are also licensed
as insurance agents with Rushmore Agency. All such persons are employees of
Rushmore Securities and are compensated on the basis of commissions on sales of
investment securities. Each representative executes an agreement with Rushmore
Securities to sell securities to their clients exclusively through Rushmore
Securities and comply with Rushmore Securities' rules and procedures and all
applicable federal and state laws. Rushmore Securities supervises the efforts of
these representatives through over 30 registered securities principals and
branch office managers, who earn commissions and overrides on sales of
representatives under their supervision.
Rushmore Securities is continually seeking to add new representatives,
especially those with prior brokerage experience and an established client base.
Rushmore Securities believes it competes effectively for registered
representatives based on its favorable commission structure, its ability to
provide its representatives access to all securities markets and research
reports from leading analysts, and the opportunity for representatives to earn
stock options in the Company. Through its affiliate, Rushmore Advisors, Rushmore
Securities also provides its representatives the flexibility to generate
commission-based or fee-based income. In addition, Rushmore Securities has
benefited from the increase in securities trading volume during recent years.
Combined, listed companies on the New York Stock Exchange and American Stock
Exchange and NASDAQ have increased from 6,414 in 1987 to 9,272 in 1997 with
market capitalization increasing from $2.67 trillion in 1987 to $10.68 trillion
in 1997, according to reports published by such exchanges. Combined average
daily share volume for the New York Stock Exchange and American Stock Exchange
and NASDAQ have increased from 341 million shares in 1987 to 1.1 billion shares
in 1997.
Investment Advisory Services--Rushmore Investment Advisors, Inc. The
Company formed Rushmore Advisors in January 1996, in order to provide fee-based
investment advisory and money management services to its clients.
Rushmore Advisors enters into investment advisory agreements with its
clients that outline the services to be provided and the compensation to be
paid. The agreements in force provide for annual compensation to Rushmore
Advisors from 0.5% to 2.5% of funds under management.
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The investment philosophy of Rushmore Advisors is to provide superior
returns without materially increasing the associated investment risk. In
equities, Rushmore Advisors seeks to achieve long-term capital appreciation by
limiting its selections to listed stocks trading at more than $12 per share,
with consistent records of earnings growth and strong balance sheets. With fixed
income securities, Rushmore Advisors seeks income and preservation of capital
through a diversified portfolio for each client considering its income needs and
risk tolerance.
Rushmore Advisors does not hold its clients' funds or securities. Rushmore
Advisors has discretionary authority to direct the investments in the majority
of the funds under its management. Virtually all trades effected by Rushmore
Advisors are executed through Rushmore Securities on a discounted basis.
Rushmore Advisors cooperates with Rushmore Securities in providing its
services to clients of both firms through the Rushmore Managed Asset Program
("RushMAP"). RushMAP is a proprietary system that provides strategic and
tactical asset management allocation of mutual funds and equities for accounts
of $100,000 or more.
Rushmore Advisors directs its marketing efforts to high net worth
individuals, corporations and pension plans having substantial funds to invest
and who can benefit from the efforts of a professional money manager. Rushmore
Advisors seeks to obtain clients having portfolios of at least $100,000 and
believes it can fill a niche being neglected by larger money managers.
Rushmore Advisors does not currently employ a separate sales force, but
relies on Rushmore Agency's and Rushmore Securities' network of agents and
brokers to market the RushMAP investment management products, permitting its
managers to interact directly with clients.
Insurance Services
Rushmore Insurance Services, Inc. The Company markets life, health and
disability insurance and annuities to individuals and small businesses through a
network of exclusive and independent agents. The Rushmore Agency group has
primarily marketed policies under national marketing agreements with Conseco
Life Insurance Company, Southwestern Life Insurance Company and Great Southern
Life Insurance Company, the companies with which it has entered into coinsurance
arrangements (the "Primary Insurers"). For the year ended December 31, 1997, the
gross revenues generated from insurance written with the Primary Insurers
accounted for the majority of Rushmore Agency's total revenues. Rushmore
Agency's agents also market policies issued by numerous other life insurance
companies, of which most are rated "A" or better by A.M. Best, that have
appointed Rushmore Agency and its agents to sell on their behalf (the "Other
Insurers"). The Company's agents are employed by or have contracts with Rushmore
Agency, which is owned by D. M. Moore, Jr., Chairman and Chief Executive Officer
of Rushmore, because the Texas Insurance Code does not permit life insurance
agencies to be owned by corporations. However, pursuant to an Overhead Services
Agreement all revenues and expenses of Rushmore Agency are passed through to the
Company as permitted by regulatory requirements. In addition, Mr. Moore has
granted the Company an irrevocable option for the Company to appoint any other
qualified person to acquire the capital stock of Rushmore Agency on its behalf,
thus insuring the Company's ability to continue receiving that income and
expense.
Insurance Products. The Company's insurance agents sell a wide range of
insurance and annuity products issued by the Primary Insurers and Other Insurers
consisting primarily of life and health insurance. These include life insurance
in the form of term life, universal life, fixed and variable annuities and
variable universal life (universal life products are flexible premium life
insurance policies under which the policyholder may adjust the death benefit
from time to time or vary the amount or timing of premium payments); health
insurance including cancer insurance, major medical, group health and group and
individual long-term disability insurance. Agents who sell variable life and
annuity products are also licensed as securities representatives with Rushmore
Securities.
Rushmore Agency has entered into an agreement with the American Financial
Freedom Association, a not-for-profit organization ("AFFA"), to administer AFFA
and serve as its exclusive marketing organization for insurance services and
investment services and other benefits to AFFA members. AFFA offers its members,
including Rushmore clients, the opportunity to participate in lower cost group
insurance and other benefits of AFFA, including discounted optical and dental
benefits, prescription drug cards and consumer discounts. Rushmore Agency has
also entered into a national marketing agreement with Legion Insurance Company
to market its individual and group health insurance plans to AFFA members
through Rushmore Agency's Career Partners Group.
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Sales and Marketing. As of June 1, 1998, the Company either employed or
contracted with more than 1,300 independent or exclusive agents in 39 states,
who have been appointed by Rushmore Agency, the Primary Insurers and Other
Insurers to sell policies of the Primary Insurers and Other Insurers as part of
Rushmore Agency's marketing organization.
In July 1997, the Company's Career Partners Group began developing
full-time, career-oriented agents to market the products and services of the
Insurers and Other Insurers on an exclusive basis. The Career Partners agents
market bundled and packaged products, primarily to individuals in the small
business and self-employed market in Texas. Rushmore Agency plans to expand the
Career Partners Group to other states.
Rushmore Agency continually seeks to recruit new agents to join its
marketing force. It recruits primarily existing licensed agents as well as
unlicensed persons with proven sales backgrounds whom it trains to become
licensed. The Company utilizes both advertising and referrals to locate
qualified persons. Rushmore Agency is able to compete for new agents on the
basis of the quality of the insurance products it offers, the opportunity for
increased income through higher payouts and a more diversified product
portfolio, sales training, and the opportunity to participate in the Company's
Stock Option Plans.
Rushmore Life Insurance Company. A key feature of the Company's strategy is
to capture, through coinsurance agreements, a portion of the premiums from sales
of insurance policies in addition to commissions. The Company acquired a 20%
interest in Rushmore Life in 1994, and in April 1997 completed a merger
transaction to acquire the balance of Rushmore Life in exchange for 534,187
shares of Rushmore Common Stock and $137,900 in cash. Rushmore Life is chartered
as a life reinsurance company in the State of Arizona and is not licensed in any
other state. Its business is therefore limited to coinsuring policies written by
Rushmore agents and issued by its Primary Insurers that have entered into
modified coinsurance agreements with Rushmore Life.
Rushmore Life's coinsurance arrangements typically consist of a modified
coinsurance agreement, under which Rushmore Life receives between 331/3% and 50%
of the premium income and associated insurance risk on policies written by
Rushmore Agency's agents. Because Rushmore Life's retention limit is $25,000 per
policy, the differential between such retention and the amount coinsured with
the Insurer is then reinsured back to the Insurer or another reinsurance
carrier. Rushmore Life earns a spread between the net coinsured premium income
and the lower reinsurance premium. In the case of the coinsurance arrangement
with the block of insurance written with Conseco, Rushmore Life is also party to
an administrative services agreement pursuant to which a subsidiary of Conseco
administers the block. Rushmore life will continue to pursue national marketing
and coinsurance agreements with other major life insurance companies.
The Industry
The brokerage and insurance industries are highly competitive with many
large, diversified, well-capitalized brokerage firms, financial institutions and
other organizations. The Company, in many instances, competes directly with such
organizations for market share of commission dollars, and qualified registered
representatives and insurance agents.
Insurance Services. The Company's agency operations are competitive in all
of its phases, and there are more than 2.5 million insurance agents in the
United States representing more than 1,100 life and health insurance companies.
The Company is able to compete effectively on the basis of the quality and
pricing of the insurance products offered by the Primary Insurers and Other
Insurers, and incentives to its agents to sell the Company's products through
the Company's commission structure, administrative and marketing support,
achievement and award programs, management opportunities and stock option plans.
Securities Brokerage. Rushmore Securities' competes among more than 5,400
NASD member firms employing more than 500,000 registered representatives.
Rushmore Securities believes it is able to compete effectively due to Rushmore
Securities' access to the same securities as larger firms and the experience and
qualification of its sales force. Rushmore Securities believes it competes
effectively for registered representatives based on its favorable commission
structure, its ability to provide its representatives access to all securities
markets and research and the opportunity to earn stock options in the Company.
Investment Advisory. Rushmore Advisors attracts funds for management
utilizing the broad network of brokers and agents of Rushmore Insurance and
Rushmore Securities. Rushmore Advisors also utilizes a network of CPA's and
other professionals who actively market fee-based advisory services. Rushmore
Advisors markets its services emphasizing its
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flexible fee structure and its investment track record. Rushmore Advisors has an
information system that provides direct and timely access to the world markets
and information systems, as well as, a proprietary investment management
reporting system that is in compliance with the performance reporting standards
of the Association of Investment Management and Research ("AIMR").
Employees
As of June 1, 1998, Rushmore had a total of 139 employees, including 117 in
its securities operations, 13 in its insurance services area, 4 in its advisory
business, and 5 in its executive offices. A total of 23 are located at the
Company's offices in Dallas. All but 9 employees are compensated all or in part
on the basis of commissions and other incentive-based compensation.
The Company is under contract with an additional 1,300 independent or
exclusive agents to market life insurance in 39 states.
Regulation
The Company's business is subject to a high degree of regulation. The
insurance and securities businesses are two of the most highly regulated
industries in the United States, and regulatory pressures can have a direct
effect on the Company's operations.
Insurance Regulation. Rushmore Life is subject to comprehensive state
insurance regulation by the Division of Insurance of the State of Arizona.
Additionally, Rushmore Life will be subject to regulation in any other states in
which it conducts business in the future. The powers of the Commissioner of
Insurance in Arizona and other states include the granting and revocation of
certificates of authority to transact insurance business, review of adequacy of
reserves and of guaranty funds and surplus required by statute, determination of
the form and content of required financial statements, approval of policy forms,
and review of Rushmore Life's business practices so as to ascertain that certain
standards are met. These supervisory agencies periodically examine the business
and accounts of insurers and require insurers to file detailed annual statutory
statements.
Rushmore Life can also be required under the solvency or guaranty laws of
the State of Arizona to pay assessments (up to prescribed limits) to fund
liabilities of insurance companies that become impaired or insolvent. These
assessments may be abated or deferred if they would endanger the ability of
Rushmore Life to fulfill its contractual obligations. The amount of any future
assessments under these laws cannot reasonably be estimated.
Arizona and substantially all other states regulate members of insurance
holding company systems. Under the insurance holding company statute in Arizona,
the insurance authorities in such state must approve in advance the direct or
indirect acquisition of 10% or more of the voting securities of an insurance
company chartered in Arizona. Such statutes also regulate certain transactions
among affiliates, including the payment of dividends or service fees by an
insurance company to its holding company parent. In states such as Arizona,
without the consent of the state's insurance authority, an insurance company may
not pay during any year dividends to its holding company parent in excess of the
lesser of net gains from operations, which generally represent net income, or
10% of the insurance company's surplus, which generally represents paid in
capital and retained earnings.
The Company has entered into an Administrative Services Agreement with
Rushmore Life, approved by the Arizona Department of Insurance, that allows the
Company to charge a share of its overhead and all direct costs to Rushmore Life.
In the event Rushmore Life should fail to comply with applicable insurance
laws and regulations, the Commissioner of Insurance of Arizona is empowered,
depending upon the circumstances and the particular provisions in question, to
impose fines and/or penalties against Rushmore Life, suspend or revoke Rushmore
Life's certificate of authority, to direct supervision of or appoint a
conservator for Rushmore Life's property and conduct of its business or to seek
such other relief as the circumstances and interest of Rushmore Life policy
holders and creditors may require.
Rushmore Agency is subject to regulation as an insurance agency by the
Texas Department of Insurance. Such regulations includes the requirement for all
agents to pass tests and background checks. Rushmore Agency is subject to
periodic examination and can be fined, censured or even liquidated if it is
found to be in violation of applicable standards.
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Securities Regulation. Rushmore Securities is subject to regulation by the
Securities and Exchange Commission, the NASD, the SIPC, the Texas State
Securities Board and the securities exchanges. The NASD and State Securities
Board regularly inspect Rushmore Securities' books and records to determine
compliance with laws applicable to securities dealers.
Investment Adviser Regulation. Depending on their size, investment advisers
are subject to regulation by the Securities and Exchange Commission or state
securities regulators. Such regulation covers testing and background checks on
officers and employees of the advisor, review and approval of business methods,
compensation structures and advisory agreements, and advertising.
Year 2000 Readiness
The Company is establishing a Year 2000 due diligence process to identify
and assess the critical on-site software and hardware inventory to achieve Year
2000 readiness. The Company is also establishing monitoring procedures to verify
that its service and product vendors, particularly the primary insurers and
clearing brokers, are taking appropriate action to achieve Year 2000 readiness.
Management believes that the Company's level of risk due to potential problems
with its internal systems is manageable. Any expenditures on operations are not
expected to have a material impact on the Company's financial condition.
Environmental Matters
None of the Company's activities result in any discharge of hazardous
materials or other environmental risks.
Item 2. Description of Properties
The Company leases 12,305 square feet in two offices at the Dallas Galleria
One Office Tower. Certain of the Company's registered representatives maintain
facilities comprising 5,190 square feet as branch offices of Rushmore
Securities. The Company believes these facilities are adequate to meet its
requirements for the foreseeable future, although it may open additional branch
offices.
Item 3. Legal Proceedings
The Company is engaged from time to time in routine litigation incidental
to its business. On May 23, 1997, Rushmore filed suit against the former chief
executive officer of the holding company of Rushmore Life in Rushmore Capital
Corporation and First Financial Life Insurance Company v. Donald E. Ebbert,
First Financial Marketing Services, Inc. and First Travel, Inc., Cause No.
907-4793-L in the 193rd District Court of Dallas County, Texas. The Company
alleges that after he resigned from the company and had all of his stock
ownership redeemed, Mr. Ebbert and his affiliates failed to turn over all money,
property and books and records of Rushmore Life in his possession. In addition,
the Company alleges that he overstated to the Company the value of a block of
insurance business coinsured to an Insurer, resulting in an overpayment of the
redemption price to him and entitling the Company to be relieved of any further
obligation under the redemption agreement. In January 1998, the defendants filed
a counterclaim against the Company and a third party complaint against the
Company's directors, alleging that the Company breached the redemption agreement
by failing to allow him to effect the sale of the block of insurance business,
and charged the Company with oppression of a minority shareholder, tortious
interference with contract and breach of fiduciary duty. The Company believes
that it has valid defenses to the counterclaim and third party complaint and
intends to pursue its primary claim vigorously. The Company is pursuing efforts
to settle the case.
Item 4. Submission of Matters to a Vote of Security Holder.
None.
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PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market Information
The Company's Common Stock is traded in the over-the-counter market on the
Nasdaq SmallCap Market under the Symbol "RFGI." According to First Southwest
Company, the following table shows the price range of the Company's Common Stock
since it began trading on April 28, 1998
BID ASK
High Low High Low
Second Quarter 1998 51/2 5 6 1/8 5 3/8
(April 28 - June 1)
Holders
As of April 28, 1998, there were approximately 650 beneficial holders of
the Company's Common Stock and 9 holders of the Company's Preferred Stock.
Dividends
The Company does not anticipate any stock or cash dividends in the
foreseeable future.
Recent Sales of Unregistered Securities
Registrant has sold and issued the shares of Common Stock described
below within the past three years that were not registered under the Act. No
underwriting discounts or commissions were paid with respect to such sales.
Number of Offering Exemption
Date Shares Price Claimed
- - - ---- --------- -------- ---------
November 1997 (2) 175,758 $ 1.92 (1)
May 1997(3) 534,187 1.92 (1)
April 1997(4) 28,426 0.32 (1)
January 1997(5) 17,593 1.50 (1)
Various(6) 11,759 1.76 (1)
April 1996 5,759 1.50 (1)
July 1996 46,026 1.50 (1)
December 1996 34,151 1.50 (1)
April 1995 61,966 1.04 (1)
June 1995 147,742 1.04 (1)
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(1) The Company relied on Sections 3 and 4(2) of the Securities Act of 1933 for
exemption from the registration requirements of such Act. Each investor was
furnished with information concerning the formation and operations of the
Registrant, and each had the opportunity to verify the information
supplied. Additionally, Registrant obtained a signed representation from
each of the foregoing persons in connection with the purchase of the Common
Stock of his or her intent to acquire such Common Stock for the purpose of
investment only, and not with a view toward the subsequent distribution
thereof; each of the certificates representing the Common Stock of the
Registrant has been stamped with a legend restricting transfer of the
securities represented thereby and the Registrant has issued stop transfer
instructions to the Transfer Agent for the Common Stock of the Company,
concerning all certificates representing the Common Stock issued in the
above-described transactions.
(2) Represents a Rule 504 offering to employees and agents commenced on May
1997 and closed in November 1997.
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(3) 3.04 shares of the Company's Common Stock were issued in exchange for each
share of First Financial Life Companies, Inc. in connection with the
acquisition of Rushmore Life. Those shares were valued at $1,025,639.
(4) Exercise of stock options at prices from $.20 to $1.50 per. (5) Issued to
fulfill 1996 stock subscriptions.
(6) Includes purchase of fixed assets, payment for services payment of
preferred stock dividends, and other miscellaneous issues not listed
elsewhere.
Item 6. Management's Discussion and Analysis or Plan of Operations
Selected Consolidated Financial Information
The following selected financial information should be read in
conjunction with the financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." The information for the years ended December 31, 1995, 1996 and
1997, are derived from the audited financial statements.
<TABLE>
Year Ended December 31,
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1997 1996 1995
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(dollars in thousands, except per share data)
Statement of Operations Data:
Revenue from investment services $ 2,373 $ 1,523 $ 857
Revenues from insurance services 3,611 347 152
Total revenues 6,008 1,885 1,020
Investment services expense 2,040 1,325 787
Insurance services expense 2,342 13 33
General and administrative expenses 1,012 663 431
Total expenses 5,695 2,001 1,251
Operating income (loss) 313 (116) (231)
Net loss (163) (171) (210)
Net income (loss) per share of Common
Stock after dividends on preferred
stock (0.10) (0.13) (0.18)
Operating margin
Investment services 14% 13% 8%
Insurance services 35% 96% 78%
Operating income (before G&A and stock based
compensation) 1,626 547 200
G&A expenses as % of Revenues 17% 35% 42%
As of December 31, 1997
Actual
(dollars in thousands)
Balance Sheet Data:
Cash and equivalents $ 1,218
Amounts on deposit with reinsurers 30,483
Total assets 35,868
Universal life contract liabilities 31,986
Total debt 87
Shareholders' equity 1,755
</TABLE>
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Results of Operations
Year Ended December 31, 1997 and Year Ended December 31, 1996
Revenues
The following table sets forth the components of the Company's revenues for the
periods indicated:
Year Ended December 31,
1997 1996
---------- --------
Insurance services $3,610,675 $ 346,968
Investment services 2,373,388 1,522,613
Other 24,432 15,911
---------- -----------
Total revenues $6,008,495 $1,885,492
========== ==========
Total revenues increased 219% from $1,885,492 for the year 1996 to
$6,008,495 during 1997. The increase included a $850,775 (56%) increase in
investment services revenues, resulting from additional representatives,
revenues generated from the business of Rushmore Advisors and favorable equity
markets during 1997; a $247,368 (71%) decrease in insurance services revenues
from agency operations due to the receipt, in 1996, of back commissions in the
amount of $156,000 as a result of a one-time settlement of litigation; and
$3,516,749 from the consolidated operations of Rushmore Life following its
acquisition in full in April 1997. The revenues of Rushmore Life included
$1,957,105 net premium income, representing Rushmore Life's quota share of
policy premiums received under coinsurance agreements and $1,553,970 net
investment income of Rushmore Life. Excluding the revenues of Rushmore Life, the
comparable revenues increased 32% from $1,885,492 to $2,491,746. Revenues from
insurance services from the operations of Rushmore Agency historically are not a
large amount, because the bulk of commissions from insurers on sales of
insurance proceeds are received directly from the insurers to the agents and do
not pass through Rushmore.
Expenses
Investment services expenses increased 54% from $1,325,279 to
$2,040,267 primarily due to commissions paid to representatives of $1,928,500
during 1997 compared with $1,241,476 for 1996. The increase corresponded to the
growth in revenues. Commissions paid as a percentage of commission revenue
increased from 83% in 1996 to 87% in 1997. That increase can be attributed to a
slightly higher proportion of internally generated commissions in 1996. Direct
overhead associated with investment services increased 33% from $83,803 to
$111,767, primarily due to the net premium on an errors and omissions insurance
policy implemented in 1997, offset by increased collections from representatives
for their share of such premiums.
Insurance services expense components changed substantially due to the
consolidation of Rushmore Life beginning in April 1997. In years prior to 1997,
insurance services expenses included only the loss (or income) of the Company's
minority ownership in Rushmore Life, accounted for on the equity method. The
first three months of 1997 included an equity in subsidiary loss of $19,264,
whereas the next nine months included the consolidated operations of Rushmore
Life, including expense categories of benefits, claims and losses, representing
claims against policies coinsured by Rushmore Life in the amount of $613,312,
amortization of deferred acquisition costs of $502,949, amortization of present
value of future profits of $392,581 and other insurance company expenses of
$813,823. Rushmore Life recorded a net loss of $75,842 for the first quarter of
1997 and net income of $429,059 during the last nine months of the year. This
improvement was the result of lower death benefits and an experience rated
refund from a reinsurer of approximately $400,000. Deferred acquisition costs
are recorded for purposes of generally accepted accounting principles as an
asset consisting of the commissions and other costs of underwriting a new
insurance policy and are amortized over the life of the policy. Such payments
are treated as an expense under statutory accounting principles applicable to
insurance companies, resulting in differing earnings patterns. The present value
of future profits was actuarially determined as of the date of acquisition of
Rushmore Life based on the expected future earnings of those policies. That
value is being amortized with interest as those earnings emerge. During the year
1997 the average credited interest rates on outstanding universal life policies
was 5.22% as compared to 5.69% for the year 1996.
- 10 -
<PAGE>
General and administrative expenses increased 53% from $663,172 to
$1,012,491 due to staff increases and office relocation expenses in 1997.
In May 1997 the Company commenced a private placement of common stock
to raise operating capital. Such offering closed in November 1997, and the
Company sold 175,758 shares at a price of $1.92 per share. Because of the
proximity of the closing to the Company's initial public offering and because
employees and independent agents were among the purchasers of the common stock,
the Company recorded a one-time expense for stock-based compensation in the
fourth quarter of 1997 in the amount of $300,533.
Operating income (loss)
The Company's operating income for the year 1997 of $313,275 represents
an increase of $429,127 from the loss of $115,852 for the year 1996. The
Company's net loss applicable to common shareholders for the year 1997 decreased
$1,699 from $180,778 or $0.13 per share to $179,079 or $0.10 per share. The net
loss in 1997 included $16,283 of preferred dividends paid compared to $9,887 in
1996.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
Revenues.
Revenues increased 85% from $1,019,662 in 1995 to $1,885,492 in 1996. The
primary component of revenues in both years was commissions and other income
from investment services (84% of revenues in 1995 and 81% of revenue in 1996).
The increase during 1996 included a 78% increase in investment services, and a
129% increase in insurance services. The growth in revenue was due to an
increase in producing representatives, more favorable market conditions, and the
settlement proceeds described above.
Expenses.
Investment services expenses included commissions paid to representatives,
which increased 74% from $713,308 to $1,241,476, resulting from increased sales
of securities. Commission expense as a percentage of commission revenue was 83%
in 1996 and 83% in 1995. Direct overhead increased 13% from $74,058 to $83,803
due primarily to licensing fees to expand operations to additional states.
Insurance services expense in both years consisted solely of the equity in
subsidiary loss, which decreased 61% from $33,184 to $12,893.
General and administrative expenses increased 54% from $430,551 to $663,172
due to legal fees and expenses associated with litigation and increases in
staff.
Operating Loss.
Operating loss decreased 50% from $231,439 to $115,852. The Company's net
loss applicable to common shareholders decreased 16% from $216,065 or $0.18 per
share in 1995 to $180,778 or $0.13 per share in 1996. Net loss in 1996 of
$180,778 included a loss from discontinued operations of $50,504 and preferred
dividends paid of $9,887 compared to income from discontinued operations of
$24,207 and preferred dividends paid of $5,844 in 1995.
Discontinued Operations
The Company experienced net losses totaling $61,925 during the four years
ended December 31, 1997 from its mortgage lending operation, which was
discontinued in March 1997. The revenues and expenses of such operations are
combined and reflected as a loss from discontinued operations.
Liquidity
Cash Flows from Operating Activities. The Company's net loss of $162,796
for the year ended December 31, 1997 was increased by non-cash expenses
consisting of depreciation ($32,361), loss from equity investment ($19,214) and
stock-based compensation ($300,533) and offset by various cash flow adjustments
aggregating a net use of cash in the amount of $326,762 to yield a net cash flow
used by operating activities in the amount of $137,400.
- 11 -
<PAGE>
Cash Flows From Investing Activities. Cash flow from investing activities
during the year ended December 31, 1997 was a positive $1,102,445 due to cash
received in the acquisition of Rushmore Life of $1,181,143, reduced by capital
expenditures of $56,561 and loans to affiliates of $21,340.
Cash Flows from Financing Activities. During the year ended December 31,
1997, the Company raised $357,355 from the sale of Common Stock and acquired
82,062 shares of the Company's common stock at a cost of $78,881. The remaining
changes in both periods resulted from loan principal payments, additional
borrowings and dividends.
Credit Facilities and Resources. The Company's cash and cash equivalents at
December 31, 1997 was $1,218,362, of which $1,080,209 is held by Rushmore Life
and is not immediately available to the Company for operating needs. The Company
is entitled to receive monthly management fee payments from Rushmore Life equal
to $14,000 plus expenses directly attributable to Rushmore Life. The Company
believes that the proceeds of the Offering and revenues from operations during
1998 will be adequate to meet its cash needs for at least the next twelve
months.
The Company has historically grown through acquisitions and will continue
to review companies for possible acquisition. Any such future acquisitions will
be financed through Company securities or new sources of funding, although
certain proceeds of the initial public offering may be applied to fund
acquisitions if they are not otherwise required to meet the Company's basic cash
needs.
- 12 -
<PAGE>
Initial Public Offering and Use of Proceeds
The Company completed its initial public offering of its common stock in
April 1998, in which it sold 815,341 shares of Common Stock at $5.50 per share
(total of $4,484,375). The proceeds of such offering have been applied or
allocated in the following manner:
<TABLE>
<CAPTION>
Use of Proceeds Through June 1, 1998
<S> <C>
Offering costs
Underwriters fee $ 358,750
Legal fees 188,442
Accounting 116,377
Printing 96,481
Other 144,794
Contribution to Rushmore Life 300,000
Repayment of payable to Rushmore Life 381,825
Repayment of collateral loan to Rushmore Life 83,693
Repayment of note 41,657
Contribution to Rushmore Securities 98,200
Contribution to Rushmore Agency 31,000
Contribution to Rushmore Advisors 15,000
General working capital 242,174
------------
Disposition of proceeds through June 1, 1998 2,098,393
Planned contribution to Rushmore Agency to support the addition of new
agents through internal growth and acquisition 1,338,989
Planned contribution to Rushmore Securities to support the addition of new
representatives through internal growth and acquisitions 514,996
Planned contribution to Rushmore Advisors to support the addition of
marketing and advisory personnel 411,997
Leasehold improvements, equipment and software 120,000
Total $ 4,484,375
============
</TABLE>
Recent Accounting Pronouncements
Set forth below are recent accounting pronouncements which may have a
future effect on the Company's operations. These pronouncements should be read
in conjunction with the significant accounting policies which the Company has
adopted that are set forth in the Company's Notes to Consolidated Financial
Statements.
The American Institute of Certified Public Accountants issued a Statement
of Position (SOP) 97-3, "Accounting by Insurance and Other enterprises for
Insurance-Related Assessments." SOP 97-3 provides guidance for determining when
an entity should recognize a liability for guaranty-fund and other insurance
related assessments. SOP 97-3 is effective for financial statements for fiscal
years beginning after December 15, 1998. Management does not anticipate that
this SOP will have a material adverse impact on the consolidated financial
position or the future results of operations of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, and losses)
in a full set of general purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. SFAS No. 130
requires that an enterprise (a) classify items of other comprehensive income by
their nature in a financial statement and (b) display the accumulated balance of
other comprehensive income separately from retained earnings and additional
paid-in capital in the equity section of a statement of financial position. SFAS
No. 130 is effective for fiscal years beginning after December 14, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. Management does not anticipate that this
Statement will have a material adverse impact on the consolidated financial
position or the future results of operations of the Company.
- 13 -
<PAGE>
In July 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 requires disclosures for
each segment that are similar to those required under current standards with the
addition of quarterly disclosure requirements and a finer partitioning of
geographic disclosures. It requires limited segment data on a quarterly basis.
It also requires geographic data by country, as opposed to broader geographic
regions as permitted under current standards. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997 with earlier application
permitted. Management does not anticipate that this Statement will have a
material adverse impact on the consolidated financial position or the future
results of operations of the Company.
Item 7. Financial Statements
<TABLE>
<CAPTION>
Below is an index of financial statements. The financial statements required
by this item begin at Page F-1 hereof.
Page
----
<S> <C> <C>
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Independent Auditors' Report F-3
Consolidated Balance Sheet - December 31, 1997 F-4
Consolidated Statements of Income for the Years Ended December 31, 1997 and 1996 F-5
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended
December 31, 1997 and 1996 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997 and 1996 F-7
Notes to Consolidated financial Statements F-9
</TABLE>
- 14 -
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Rushmore Financial Group, Inc.:
We have audited the accompanying consolidated balance sheet of Rushmore
Financial Group, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
year then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. We did not audit the
financial statements of Rushmore Securities Corporation, a wholly-owned
subsidiary, which statements reflect total assets constituting 1 percent and
total revenues constituting 37 percent in 1997 of the related consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Rushmore Securities Corporation, is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provides a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Rushmore Financial Group, Inc. and
Subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
June 2, 1998
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Rushmore Securities Corporation
We have audited the statement of financial condition of Rushmore Securities
Corporation, as of December 31, 1997, and the related statements of income,
changes in stockholder's equity, changes in liabilities subordinated to claims
of general creditors, and cash flows for the year 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rushmore Securities
Corporation, as of December 31, 1997 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
February 6, 1998,
except for note 8 of such
financial statements for
which the date is
February 17, 1998
F-2
<PAGE>
Independent Auditor's Report
To the Board of Directors and Stockholders
of Rushmore Financial Group, Inc. and Subsidiaries
We have audited the accompanying consolidated statements of income,
shareholders' equity, and cash flows of Rushmore Financial Group, Inc. and
Subsidiaries (formerly Rushmore Capital Corporation) for the year ended December
31, 1996. These consolidated financial statements are the responsibility of the
Companies' management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit of the consolidated statements
of income, shareholders' equity and cash flows provide a reasonable basis for
our opinion.
In our opinion, the consolidated statements of income, shareholders' equity and
cash flows referred to above present fairly, in all material respects, the
results of operations and cash flows of Rushmore Financial Group, Inc. and
Subsidiaries for the year ended December 31, 1996, in conformity with generally
accepted accounting principles.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
October 10, 1997
F-3
<PAGE>
<TABLE>
<CAPTION>
RUSHMORE FINANCIAL GROUP INC. AND SUBSIDIARIES
Consolidated Balance Sheet
December 31, 1997
Assets
<S> <C>
Investments:
Cash and cash equivalents $ 1,218,362
Amounts on deposit with reinsurer 30,483,274
Equity securities available for sale 687
------------
Total investments 31,702,323
Deferred policy acquisition costs 2,295,697
Present value of future profits 763,327
Notes, accounts receivable and uncollected premiums 464,588
Prepaid expenses and deposits 80,098
Equipment, net of accumulated depreciation 110,877
Goodwill 255,060
Other assets and intangibles 196,341
------------
Total Assets $ 35,868,311
============
Liabilities and Shareholders' Equity
Liabilities:
Future policy benefits $ 86,192
Universal life contract liabilities 31,899,928
Claims payable 308,866
Notes payable 87,295
Deferred federal income taxes 323,156
Due to reinsurers 995,883
Accrued expenses and other liabilities 411,937
------------
Total Liabilities 34,113,257
Shareholders' equity:
Preferred stock - 9% cumulative preferred stock, $10 par value, 4,300 shares
issued and outstanding 43,000
Preferred stock - Series A cumulative preferred stock, $10 par value, 13,792
shares issued and outstanding 137,920
Common stock - $0.01 par value. 10,000,000 shares authorized, 2,187,016
shares issued and outstanding 21,870
Common stock subscribed 4,567 shares at $1.92 46
Additional paid-in capital 2,486,244
Treasury stock, 81,980 shares, at cost (78,881)
Retained earnings (deficit) (694,042)
Unrealized losses on equity securities available for sale (110)
Shareholder/affiliate loans:
Common stock subscriptions receivable (8,769)
Shareholder loans (102,460)
Receivable from affiliates (49,764)
------------
Total shareholders' equity 1,755,054
------------
Total liabilities and shareholders' equity $ 35,868,311
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Income
For the years ended December 31, 1997 and 1996
1997 1996
---------- ----------
<S> <C> <C>
Revenue:
Revenue from insurance services:
Insurance policy income $ 1,957,105 $ --
Net investment income 1,553,970 --
Agent management fee 99,600 346,968
Revenue from investment services:
Commissions and fees 2,218,888 1,493,908
Asset management 154,500 28,705
Other 24,432 15,911
----------- -----------
Total revenues 6,008,495 1,885,492
----------- -----------
Expenses:
Insurance services expenses:
Other insurance services expenses 813,823 --
Policyholder benefits 613,312 --
Amortization of deferred policy acquisition costs 502,949 --
Amortization of present value of future profits 392,581 --
Equity in losses of subsidiary 19,264 12,893
Investment services expenses:
Commission expense 1,928,500 1,241,476
Other investment services expenses 111,767 83,803
General and administrative 1,012,491 663,172
Stock based compensation 300,533 --
----------- -----------
Total expenses 5,695,220 2,001,344
----------- -----------
Operating income (loss) 313,275 (115,852)
Interest expense 7,156 4,535
----------- -----------
Income (loss) from continuing operations
before income taxes 306,119 (120,387)
Provision for income taxes 438,770 --
Income (loss) from continuing operations (132,651) (120,387)
Discontinued operations, net (30,145) (50,504)
----------- -----------
Net income (loss) $ (162,796) $ (170,891)
=========== ===========
Income (loss) from continuing operations applicable to
common shareholders (notes 2 and 10) $ (148,934) $ (130,274)
=========== ===========
Net income (loss) applicable to common shareholders (notes 2 and 10) $ (179,079) $ (180,778)
=========== ===========
Basic and diluted:
Income (loss) from continuing operations per share of common stock, after
dividends on preferred stock (notes 2 and 10) $ (.08) $ (.09)
=========== ===========
Net income (loss) per share of common stock, after dividends on
preferred stock (notes 2 and 10) $ (.10) $ (.13)
=========== ===========
Weighted average common shares outstanding 1,821,327 1,376,777
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For the years ended December 31, 1997 and 1996
Unrealized
gains
(losses)
on equity
Common Additional Retained securities
stock paid-in earnings
Preferred Common available
stock stock subscribed capital (deficit) for sale
----------- ----------- ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C>
Balance, December 31, 1995 $ 65,920 $ 13,245 $ -- $ 674,988 $ (360,355) --
Preferred stock issued, 11,500 shares 115,000 -- -- -- -- --
Common stock issued 94,776 shares -- 948 -- 135,232 -- --
Common stock subscribed, 17,593 shares -- -- 176 26,214 -- --
Preferred stock dividends paid -- -- -- (9,887) -- --
Stock subscriptions receivable -- -- -- -- -- --
Loans and advances to officers/shareholders -- -- -- -- -- --
Receivable from affiliates -- -- -- -- -- --
Net (loss) -- -- -- -- (170,891) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1996 180,920 14,193 176 826,547 (531,246) --
Common stock issued, 104,775 shares -- 1,048 -- 118,981 -- --
Common stock issued for purchase of
Rushmore Life 534,187 shares
-- 5,342 -- 1,020,297 -- --
Common stock issued for stock based
compensation 128,761 shares
-- 1,287 -- 554,193 -- --
Common stock subscribed, 4,567 shares -- -- 46 8,723 -- --
Treasury stock acquired -- -- -- -- -- --
Unrealized gains (losses) -- -- -- -- -- (110)
Preferred stock dividends paid -- -- -- (16,283) -- --
Stock subscriptions receivable -- -- (176) (26,214) -- --
Loan and advances to officers/shareholders -- -- -- -- -- --
Receivable from affiliates -- -- -- -- -- --
Net (loss) -- -- -- -- (162,796) --
----------- ----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 $ 180,920 $ 21,870 $ 46 2,486,244 $ (694,042) $ (110)
=========== =========== =========== =========== =========== ===========
Shareholder/
Treasury affiliate
stock loans Total
----------- ------------- -----------
Balance, December 31, 1995 $ -- $ (46,202) $ 347,596
Preferred stock issued, 11,500 shares -- -- 115,000
Common stock issued 94,776 shares -- -- 136,180
Common stock subscribed, 17,593 shares -- -- 26,390
Preferred stock dividends paid -- -- (9,887)
Stock subscriptions receivable -- (26,389) (26,389)
Loans and advances to officers/shareholders -- (52,304) (52,304)
Receivable from affiliates -- (14,758) (14,758)
Net (loss) -- -- (170,891)
----------- ----------- -----------
Balance, December 31, 1996 -- (139,653) 350,937
Common stock issued, 104,775 shares -- -- 120,029
Common stock issued for purchase of
Rushmore Life 534,187 shares
-- -- 1,025,639
Common stock issued for stock based
compensation 128,761 shares
-- -- 555,480
Common stock subscribed, 4,567 shares -- -- 8,769
Treasury stock acquired (78,881) -- (78,881)
Unrealized gains (losses) -- -- (110)
Preferred stock dividends paid -- -- (16,283)
Stock subscriptions receivable -- 17,619 (8,771)
Loan and advances to officers/shareholders -- (3,954) (3,954)
Receivable from affiliates -- (35,005) (35,005)
Net (loss) -- -- (162,796)
----------- ----------- -----------
Balance, December 31, 1997 (78,881) (160,993) $ 1,755,054
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the years ended December 31, 1997 and 1996
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net (loss) $ (162,796) $ (170,891)
Adjustments to reconcile net (loss) to net cash provided (used) by
operating activities:
Depreciation and amortization 32,361 13,859
Loss from equity investment 19,264 12,893
Stock based compensation 300,533 --
Change in assets and liabilities net of effects from purchase of
Rushmore Life:
(Increase) decrease in assets:
Notes, accounts receivable and uncollected premiums (91,234) (28,262)
Prepaid expenses and deposits (63,079) (602)
Deferred policy acquisition costs (229,503) --
Present value of future profits 392,581 --
Amounts on deposit with reinsurer (2,694,507) --
Increase (decrease) in liabilities:
Accrued expenses and other liabilities 139,352 96,335
Due to reinsurers 837,607 --
Future policy benefits (5,184) --
Universal life contract liabilities 696,520 --
Claims payable 103,650 --
Deferred federal income taxes 587,035 --
----------- -----------
Net cash flows used by operating activities (137,400) (76,668)
----------- -----------
Cash flows from investing activities:
Loans to officers and affiliate (21,340) (55,754)
Purchase of equipment (56,561) (26,749)
Cash acquired in acquisition of Rushmore Life, net of cash paid 1,181,143 --
Purchase of equity securities available for sale (797) --
----------- -----------
Net cash flows provided (used) by investing activities 1,102,445 (82,503)
-----------
Cash flows from financing activities:
Proceeds from sale of common stock, net of prepaid offering cost 357,355 136,180
Proceeds from sale of preferred stock -- 115,000
Other assets and intangibles (189,883) (2,890)
Purchase of treasury stock (78,881) --
Preferred stock dividends paid (16,283) (9,887)
Borrowings under term loans 63,271 20,000
Payments on term loans -- (29,008)
----------- -----------
Net cash flows provided by financing activities 135,579 229,395
----------- -----------
</TABLE>
F-7
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
1997 1996
---- ----
Change in cash and cash equivalents 1,100,624 70,224
Cash and cash equivalents at beginning of year 117,738 47,514
----------
Cash and cash equivalents at end of year $1,218,362 $ 117,738
==========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 5,455 $ 4,503
========== ==========
Cash paid for income taxes $ 47,702 --
========== ==========
See accompanying notes to consolidated financial statements.
F-8
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(1) The Companies
Rushmore Financial Group, Inc. and Subsidiaries (the "Company"), was
incorporated as Dominion Associates Corporation in September 1990, and in
1991 it began doing business as an independent marketing company. The
Company has since evolved as a holding company of the financial services
companies described below, which offer insurance and investment products
to clients through a network of agents and representatives.
Rushmore Securities Corporation ("Rushmore Securities"), a wholly-owned
subsidiary of the Company, was incorporated in July 1980 as Ken Davis
Securities, Inc. Rushmore Securities is registered under federal and
state securities laws as a broker-dealer and is a member of the National
Association of Securities Dealers ("NASD"). Licensed registered
representatives offer clients a variety of investments, including stocks,
bonds, mutual funds, variable annuities and public and private limited
partnerships. Rushmore Securities is a "fully disclosed introducing
broker-dealer," which means that it does not hold any customer funds or
securities or have a seat on any stock exchange. It "clears" its
securities trades through Southwest Securities, Inc. and First Southwest
Company, which hold customer funds and securities and execute trades for
such transactions. The clearing broker-dealers receive a portion of the
gross commissions as compensation for handling such transactions.
Rushmore Life Insurance Company ("Rushmore Life"), a wholly-owned
subsidiary of the Company, was incorporated January 27, 1989 as First
Financial Life Insurance Company. Rushmore Life is licensed to conduct
the business of reinsurance by the state of Arizona. Rushmore Life
coinsurers up to a 50% interest in the policies written through
representatives of Rushmore Agency that are issued by life insurance
companies that have entered into modified coinsurance agreements with
Rushmore Life. The Company acquired Rushmore Life on April 8, 1997 in a
transaction described in note 4.
Rushmore Financial Corporation ("RFC") was organized in 1993 as a
wholly-owned subsidiary. The primary business of RFC was offering
consumer lending services, including first mortgage loans, real estate
loans, private mortgage acquisitions and other services through its
national marketing agreements with a number of national lenders. The
business of this subsidiary was discontinued in 1996 and its net results
of operations are set forth in "loss from discontinued operations." On
March 3, 1997, the Company sold RFC for $10 and the resulting loss on
sale is set forth in loss from discontinued operations. This event did
not have a material adverse effect on the financial position or results
of operations of the Company.
Rushmore Investment Advisors, Inc. ("Rushmore Advisors"), was
organized in 1996 as a wholly - owned subsidiary. The business of
Rushmore Advisors is to provide fee-based investment advice and funds
management to customers of the Company. Rushmore Advisors is
registered as an investment adviser with the Securities and Exchange
Commission and the Texas Securities Board. Rushmore Advisors offers
both
F-9
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
discretionary and nondiscretionary management of customer accounts, but
does not hold custody of customer funds.
Rushmore Insurance Services, Incorporated ("Rushmore Agency") is an
insurance agency and an affiliate of the Company by means of service
agreements. The agency offers life, health, and disability insurance and
annuities through a network of agents. Rushmore Agency is 100% owned by
D.M. "Rusty" Moore, Jr. The Company and Mr. Moore have entered into an
administrative services agreement whereby net revenues and expenses are
charged via a management fee to Rushmore Agency by the Company as allowed
by regulatory requirements. Rushmore Agency is not consolidated in these
financial statements.
(2) Summary of Significant Accounting Policies
(a) Consolidation Policy
--------------------
The accompanying consolidated financial statements include the
accounts of Rushmore Financial Group, Inc. and its subsidiaries,
Rushmore Securities, RFC, Rushmore Advisors and Rushmore Life in
1997. All significant intercompany transactions have been
eliminated in consolidation.
(b) Accounting Method
-----------------
The Company uses the accrual method of accounting. All income is
recorded when earned, and all expenses are recorded when incurred.
Securities transactions and related commission revenue and expense
are recorded on a trade date basis. Rushmore Life maintains its
accounts in conformity with accounting practices prescribed or
permitted by state insurance regulatory authorities. In the
accompanying financial statements, such accounts have been
adjusted to conform with generally accepted accounting principles.
(c) Equity Investment
-----------------
As of December 31, 1996, the Company owned approximately 25% of
the outstanding common stock of First Financial Life Companies,
Inc. ("FFLC"). FFLC owned 100% of the common stock of First
Financial Life Insurance Company ("FFLIC"), an Arizona based
domestic life and disability reinsurance company. The investment
in Rushmore Life prior to 1997 is accounted for using the equity
method and the Company's proportional share of any intercompany
profits or losses are eliminated.
On April 8, 1997, the Company acquired the remainder of FFLC,
which was consolidated at that time (see note 4).
(d) Investments
-----------
Short-term investments, which consist of certificates of deposit
purchased with maturities of less than three months, are
reflected at amortized cost, which approximates estimated fair
value. All short-term investments are considered to be cash
equivalents.
F-10
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The Company has adopted Statement of Financial Accounting
Standards No. 115, which prescribes accounting for certain debt
and equity securities.
(e) Deferred Policy Acquisition Costs
---------------------------------
Costs which vary with and which are directly related to the
acquisition of new business have been deferred to the extent that
such costs are deemed recoverable through future revenues. These
costs primarily include commissions and allowances. For universal
life, such costs are amortized generally in proportion to the
present value (principally using the assumed credit rate) of
expected gross profits. This amortization is adjusted
retrospectively when the insurance subsidiary revises its
estimates of current or future gross profits to be realized from a
group of policies. For traditional products, such costs are
amortized with interest over the premium-paying period in
proportion to the ratio of anticipated annual premium revenue to
the anticipated total premium revenue. Anticipated investment
income is considered in the determination of recoverability of
deferred policy acquisition costs.
(f) Present Value of Future Profits
-------------------------------
The present value of future profits represents the anticipated
gross profits to be realized from future revenues on insurance in
force at the date such insurance was purchased, discounted to
provide an appropriate rate of return and amortized, with
interest, based on credited rate, over the years that such profits
are anticipated to be received in proportion to the estimated
gross profits. Accumulated amortization was $392,581 at December
31, 1997.
(g) Future Policy Benefits
----------------------
The liability for future policy benefits of long-term duration
contracts has been computed by the net level premium method based
on estimated future investment yield, mortality, morbidity, and
withdrawal experience. Reserve interest assumptions are based on
amounts guaranteed in the Modified Coinsurance Treaty. Mortality,
morbidity, and withdrawal assumptions reflect the experience of
the life insurance subsidiary modified as necessary to reflect
anticipated trends and to include provisions for possible
unfavorable deviations. The assumptions vary by plan, year of
issue, and duration.
(h) Universal Life Contract Liabilities
-----------------------------------
With respect to universal life contracts, the insurance subsidiary
utilizes the retrospective deposit accounting method. Contract
liabilities include the accumulated fund balances of such policies
and represent the premiums received plus accumulated interest,
less mortality and administration charges.
Contract liabilities also include the unearned revenue reserve
which reflects the unamortized balance of the excess of first year
administration charges over renewal period administration charges
on
F-11
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
universal life products. These excess charges have been deferred
and are being recognized in income over the period benefited using
the same assumptions and factors used to amortize deferred policy
acquisition costs.
(i) Recognition of Premium Revenue and Related Expenses
---------------------------------------------------
Traditional life insurance premiums are recognized as revenue over
the premium-paying period. Future policy benefits and policy
acquisition costs are associated with the premiums as earned by
means of the provision of future policy benefits and amortization
of deferred policy acquisition costs.
Revenues for universal life products consist of policy charges for
the cost of insurance, policy administration charges, amortization
of policy initiation fees and surrender charges assessed against
policyholder account balances during the period. Expenses related
to these products include interest credited to policy holder
account balances and benefit claims incurred in excess of
policyholder account balances.
(j) Policy and Contract Claims
--------------------------
Policy and contract claims include provisions for reported claims
in process of settlement, valued in accordance with the terms of
the related policies and contracts.
(k) Reinsurance
-----------
In the normal course of business, the Company seeks to limit its
exposure to loss on any single insured and to recover a portion of
the benefits paid over such limits. This is done by ceding
reinsurance to other insurance enterprises or reinsurers under
excess coverage and coinsurance contracts.
The Company reports assets and liabilities related to insurance
contracts before the effects of reinsurance. Reinsurance
receivables and prepaid reinsurance premiums (including amounts
related to insurance liabilities) are reported as assets.
Estimated reinsurance receivables are recognized in a manner
consistent with the liabilities related to the underlying
reinsured contracts.
(l) Property and Equipment
----------------------
Property and equipment are recorded at cost. Depreciation is
provided on the accelerated method over the estimated useful lives
of the assets ranging from 5 to 10 years. Expenditures for
maintenance and repairs are charged against income in the year in
which they are incurred, and betterments are capitalized. When
depreciable assets are sold or disposed of, the cost and
accumulated depreciation accounts are reduced by the applicable
amounts, and any profit or loss is credited or charged to income.
F-12
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(m) Income Taxes
------------
Deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred
tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
The Company's consolidated tax return does not include Rushmore
Life as Rushmore Life files a separate tax return.
(n) Authorized Shares
-----------------
On April 5, 1997 the shareholders of the Company voted to amend
the Articles of Incorporation to increase the authorized shares of
common stock from 4,000,000 to 20,000,000. On October 23, 1997 the
Articles of Incorporation were amended to decrease the number of
authorized shares to 10,000,000 shares and the outstanding shares
were split 1 for 2. All shares presented in these financial
statements and earnings per share calculations are retroactively
stated to reflect the capital structure changes through October
23, 1997.
(o) Net Income (Loss) per Common Share
----------------------------------
In February 1997, the Financial Accounting Standards Board issued
SFAS No. 128, "Earnings per Share." SFAS No. 128 revised the
previous calculation methods and presentations of earnings per
share. The statement requires that all prior period earnings per
share data be restated. The Company adopted SFAS No. 128 in the
fourth quarter of 1997 as required by the statement. The effect
of adopting SFAS No. 128 was not material to the Company's prior
period earnings per share data. The previously reported amounts
for earnings per share were restated using basic earnings per
share and diluted earnings per share.
Under the provisions of SFAS No. 128, basic earnings per share is
computed by dividing net income (loss) applicable to common stock
by the weighted average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential
dilution that could occur if the Company's outstanding stock
options were exercised (calculated using the treasury stock
method). Stock options to purchase common stock outstanding for
the years ended December 31, 1997 and 1996 were not included in
the computation of diluted income (loss) per share because of the
net loss for the years ended December 31, 1997 and 1996 and as
such were considered antidilutive.
F-13
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following table reconciles the net loss applicable to common
shares and weighted average common shares outstanding used in the
calculation of basic and diluted earnings per common share for the
years 1997 and 1996:
<TABLE>
1997 1996
---- ----
<S> <C> <C>
Income (loss) from continuing operations: $ (132,651) $ (120,387)
Less dividends on preferred stock (16,283) (9,887)
-----------
Income (loss) from continuing operations applicable
to common shares, basic and diluted (148,934) (130,274)
Less discontinued operations (30,145) (50,504)
----------- ------------
Net loss applicable to common shares basic and diluted $ (179,079) $ (180,778)
=========== ============
Weighted average number of common shares
outstanding - basic and diluted 1,821,327 1,376,777
=========== ============
</TABLE>
(p) Use of Accounting Estimates
---------------------------
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
certain assets and liabilities and disclosures. Accordingly, the
actual amounts could differ from those estimates. Any adjustments
applied to estimated amounts are recognized in the year in which
such adjustments are determined.
(q) Reclassification
----------------
Certain 1996 balances have been reclassified to conform with the
1997 presentation.
(3) Industry Segment Information
----------------------------
The following summarizes the Company's industry segment data of
identifiable assets as of December 31, 1997:
Identifiable assets:
Investment services $ 185,750
Insurance services 35,131,341
Other 551,220
------------
Total assets per consolidated balance sheet $ 35,868,311
============
(4) Acquisition
-----------
On April 8, 1997 the Company acquired the remaining 74.6% of FFLC for
534,187 shares of common stock and cash of $137,900. This acquisition has
been accounted for as a purchase. On November 12, 1997, FFLIC's name was
changed to Rushmore Life Insurance Company.
F-14
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
All assets and liabilities have been adjusted to fair value for the
remaining 74.6% purchase of FFLC. Unaudited balance sheet information for
FFLC at fair value, on the date of acquisition is as follows:
Assets:
Cash and short-term investments $ 1,319,043
Amounts on deposit with reinsurer 27,788,767
Deferred policy acquisition costs 2,066,194
Present value of future profits 1,155,908
Notes, accounts receivable and uncollected premiums 318,640
Equipment 6,571
Deferred federal income taxes 263,879
------------
Total assets 32,919,002
Liabilities and shareholders' equity:
Future policy benefits 91,376
Universal life contract liabilities 31,203,408
Claims payable 205,216
Due reinsurer 158,296
Accrued expenses and other liabilities 129,765
------------
Total liabilities 31,788,061
------------
Net assets at fair value $ 1,130,941
=============
The excess of the purchase price for the remaining 74.6% of FFLC of
approximately $1,163,539 was allocated to goodwill in the amount of
approximately $263,000 and is being amortized over 30 years.
The unaudited pro forma consolidated net loss for the Company for the
years ended December 31, 1997 and 1996 as if the transaction occurred on
January 1 of the respective years was $(56,000) and $(275,000),
respectively:
(5) Net Capital Requirements
------------------------
Pursuant to the net capital provisions of Rule 15c3-1 under the
Securities Exchange Act of 1934, Rushmore Securities is required to
maintain a minimum net capital, as defined under such provisions. Net
capital and the related net capital ratio may fluctuate on a daily basis.
At December 31, 1997, Rushmore Securities had net capital of
approximately $93,480 and net capital requirements of $5,457. Rushmore
Securities' ratio of aggregate indebtedness to net capital was 0.88 to 1.
The Securities and Exchange Commission permits a ratio of no greater than
15 to 1.
(6) Concentration Risk
------------------
At December 31, 1997, and at various other times throughout 1997, the
Company had cash balances in excess of federally insured limits. Cash
accounts in banks are insured by the FDIC for up to $100,000. The amount
exceeding the insured limit was approximately $100,000 at December 31,
1997.
F-15
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(7) Reinsurance
-----------
Substantially all of the Company's consolidated business activity is the
result of modified coinsurance treaties entered into with Conseco Life
Insurance Company ("CLIC"), a subsidiary of Conseco, Inc. ("LPG") and
Southwestern Life Insurance Company ("SWL"), a subsidiary of Southwestern
Life Corporation ("SLC"). Under the terms of the agreements, Rushmore
Life assumes a quota share risk on all policies which are issued by CLIC
and SWL as a result of applications submitted by agents affiliated with
the Company. The quota share the Company percentage falls between 33-1/3%
and 50% of on all business submitted. Because the treaties are on the
basis of modified coinsurance, CLIC and SWL establish 100% of the
reserves required to be held by the various state insurance regulatory
authorities. Rushmore Life, in turn, deposits with CLIC and SWL an amount
equal to its quota share of the reserves. CLIC and SWL pay Rushmore Life
interest on the deposits at the investment rate assumed in the pricing of
each product. These deposits are included in the amounts on deposit with
reinsurer account balance in the financial statements. Although Rushmore
Life is credited with interest based on the reserve deposits, the legal
owners of the assets are CLIC and SWL, not Rushmore Life. The universal
life contract liabilities recorded on the consolidated balance sheet at
December 31, 1997 also include amounts that have been assessed to
compensate the Company for services to be performed in the future. Such
amounts are not earned in the period assessed. Such unearned revenue
amounts are recognized in income over the period benefited using the same
assumptions and factors used to amortize deferred acquisition costs.
Amounts that are assessed against the policyholder balance as
consideration for origination of the contract, often referred to as
initiation or front-end fees, are unearned revenues. At December 31,
1997, unearned revenue reserves included in universal life contract
liabilities were $1,159,039.
For the year ended December 31, 1997 the Company assumed statutory
premiums of approximately $7,507,000 and paid approximately $1,821,000 in
retroceded premiums.
CLIC, Conseco Inc. (CLIC's parent), SWL and Facilities Management
Installation ("FMI") provide all necessary functions to fully process,
administer, and account for the insurance business of Rushmore Life. For
the year ended December 31, 1997, Rushmore Life paid these companies for
such services and policy maintenance as follows:
Conseco, Inc. fees $ 206,312
FMI fees 20,379
MGL & SWL policy maintenance fees 301,972
Rushmore Life has set its retention limit for acceptance of risk on
life insurance policies at $25,000. Risk in excess of the $25,000
limit is reinsured back to CLIC and SWL pursuant to certain
reinsurance agreements. Rushmore Life pays CLIC and SWL to reinsure
the excess risk according to mortality schedules which are contained
in the reinsurance agreements. Rushmore Life paid CLIC and SWL
approximately $1,821,000 reinsurance costs for the year ended December
31, 1997. CLIC has ceded to Rushmore Life Company approximately
$916,976,000 of insurance in force as of December 31, 1997. Pursuant
to the reinsurance agreements with CLIC Rushmore Life has in turn
retroceded approximately $516,519,000 of insurance in force to CLIC,
retaining risk equal to the difference.
F-16
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
SWL has ceded to Rushmore Life approximately $45,965,000 of insurance in
force as of December 31, 1997. Pursuant to the reinsurance agreement with
SWL, Rushmore Life has in turn retroceded approximately $30,509,000 of
insurance in force to SWL, retaining risk equal to the difference.
(8) Related Party Transactions
--------------------------
Management fees of $85,800 were paid to the Company by Rushmore Agency
during the year 1997. At December 31, 1997 the Company had $49,764
receivable from Rushmore Agency and $903 payable to a corporation owned
by Mr. Moore.
Loans and advances to from officers/shareholders total approximately
$102,460. Of this amount, $24,673 is supported by notes that bear
interest of 9%. The notes are payable in monthly principal and interest
installments that fully amortize the loans by August 1998.
(9) Equipment
---------
The principal categories of equipment are summarized as follows:
Computer equipment and software $ 71,442
Office furniture and fixtures 81,621
Leasehold improvements 10,708
--------
Total costs 163,771
Less accumulated depreciation 52,894
$ 110,877
==========
Depreciation included in the determination of net income amounted to
$19,897 and $12,586 in 1997 and 1996, respectively.
(10) Notes Payable
-------------
The Company has no long-term debt at December 31, 1997.
Term notes payable of $87,295 to financial institutions consist of monthly
principal and interest installments ranging from $500 to $777 bearing interest
between 9% to 10.25% and maturing at various dates through April 1998. The notes
are secured by certain furniture and equipment and personal guarantee of D.M.
Moore, Jr.
(11) Preferred Stock
---------------
The Company has authorized 100,000 shares of preferred stock, par value
$10 per share, which may be issued in series or classes as determined by
the Board of Directors from time to time. There are two classes of
Preferred Stock now outstanding totaling 18,092 shares or $180,920. The
Board of Directors has designated an authorized class of 25,000 preferred
shares, called 9% Cumulative Preferred Stock, which was sold at a price
of $10 per share and an authorized class of 13,792 preferred shares,
called Series A
F-17
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Cumulative Preferred Stock which was offered at a price of $10 per share.
Preferred Stock has the following rights and preferences:
Dividends. The Company will declare and pay a 9% quarterly
dividend on its par value each year. Dividends will be paid if
funds are lawfully available, and, if not, will be accumulated and
paid on the next dividend date if funds are available, plus
interest at the 9% dividend rate. No dividends will be payable on
Common Stock if any payment of a Preferred Stock dividend has been
missed.
Voting. Shares of Preferred Stock carry no voting rights except as
are provided by law, including the right to vote as a class to
approve certain corporate transactions, such as charter amendments
and mergers.
Liquidation Preference. Holders of Preferred Stock are entitled to
receive a payment in the amount of $10 per share plus any
accumulated but unpaid dividends in the event the Company is
liquidated, before any payment is made by the Company to the
holders of Common Stock with respect to their shares.
Conversion. Shares of Preferred Stock are not convertible into any
other security of the Company.
Sinking Fund. The 9% Cumulative Preferred Stock calls for the
creation of a sinking fund for the purpose of redeeming these
outstanding shares. Shareholders of 9% Cumulative Preferred have
entered into an agreement with the Company to waive this
requirement.
(12) Commitments and Contingencies
-----------------------------
(a) Leases
------
The Company leases its offices, furniture and equipment under operating
leases which expire at various dates through 1999. Future minimum lease
payments are as follows:
Year ending
December 31,
------------
1998 $ 282,564
1999 282,564
2000 270,588
2001 144,714
Thereafter 51,378
Rent expense for the year totaled approximately $158,630 and
$63,215 in 1997 and 1996, respectively, and is included in general
and administrative expense.
F-18
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(b) Litigation
The Company is a party to litigation in which it alleges that the
former chief executive officer of Rushmore Life failed to turn
over all money, property and books and records of Rushmore Life in
his possession upon his termination. In addition, the Company
alleges that he overstated to the Company the value of a block of
insurance business coinsured to an Insurer, resulting in an
overpayment of the redemption price to him and entitling the
Company to be relieved of any further obligations under the
redemption agreement. In January 1998, the defendants filed a
counterclaim against the Company and a third party compliant
against the Company's directors, alleging that the Company
breached the redemption agreement and charging the Company with
oppression of a minority shareholder, tortuous interference with
contract and breach of fiduciary duty. In the opinion of Company's
management, the ultimate disposition of this matter will not have
a material adverse effect on the Company's financial condition.
(13) Income Taxes
------------
The provision for income taxes for the years ended December 31, 1997 and
1996 consists of the following:
1997 1996
----
Current (benefit) $ (148,265) $ -
Deferred expense (benefit) 468,175 (52,948)
Change in valuation allowance 118,860 52,948
------- ------
$ 438,770 $ -
======= ==========
F-19
<PAGE>
<TABLE>
<CAPTION>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
<S> <C> <C>
Deferred federal income tax were comprised of the following at December
31, 1997:
Deferred federal income tax assets:
Life reserves $ 10,869,375
Accrued expenses 155,289
Net operating loss carryforward 181,461
Equity investment in Rushmore Life at date of
acquisition 33,477
Alternative minimum tax credit carryforward 35,400
------------
Gross deferred income tax assets 11,275,002
Valuation allowance (214,938)
------------
Total gross deferred income tax assets 11,060,064
Deferred income tax liabilities:
Funds on deposit (10,364,314)
Deferred acquisition costs (757,013)
Present value of future profits (259,531)
Due premium (2,362)
-------------
Total deferred income tax liabilities (11,383,220)
-------------
Deferred federal income taxes $ (323,156)
=============
A reconciliation of expected federal income tax expense to federal income
tax expense as shown in the consolidated statements of net income (loss)
is as follows:
1997 1996
---- ----
Computed "expected" federal income tax expense (benefit) $ 93,831 $ (58,102)
Tax adjustments:
Meals and entertainment 10,825 5,154
Stock compensation 102,181 -
Small life company deduction 95,535 -
Change in valuation allowance 118,860 52,948
Other 17,537 -
---------
Reported federal income tax expense $ 438,769 -
========= ==========
</TABLE>
The Company has net operating losses of $533,709, excluding the insurance
operations of Rushmore Life which files a separate return, that may be
used to offset future taxable income. These loss carryforwards expire at
various dates through 2012. No tax benefit has been reported in the
financial statements due to historical losses of the Company. The Company
has recorded a valuation allowance to offset any deferred tax benefits
arising from net operating losses and equity investment in Rushmore Life
at the date of acquisition.
F-20
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(14) Deferred Policy Acquisition Costs and Present Value of Future Profits
---------------------------------------------------------------------
Changes in deferred acquisition costs were as follows:
Balance at date of acquisition $ 2,066,194
Additions 732,452
Amortization related to operations (502,949)
-----------
Balance, end of year $ 2,295,697
===========
As part of the purchase accounting for the Company's acquisitions, a
present value of future profits asset is established which represents the
value of the rights to receive future profits from insurance contracts
existing at the date of acquisition. Such value is the actuarially
determined present value of the projected profits from the acquired
policies, discounted at an appropriate rate of return.
The methods used by the Company to value the insurance products purchased
are consistent with the valuation methods used most commonly to value
blocks of insurance business. It is also consistent with the basic
methodology generally used to value insurance assets. The method used by
the Company includes identifying the future profits from the acquired
business, the risks inherent in realizing those profits, the rate of
return the Company believes it must earn in order to accept the risks
inherent in realizing profits, and determining the value of the insurance
asset by discounting the expected future profits by the discount rate the
Company requires.
The discount rate used to determine such values is the rate of return
required in order to invest in the business being acquired. In selecting
the rate of return, the Company considered the magnitude of the risk
associated with actuarial factors described in the following paragraph,
cost of capital available to the Company to fund the acquisition,
comparability with other Company activities that may favorably affect
future profits, and the complexity of the acquired company.
Expected future profits used in determining such values are based on
actuarial determinations of future premium collection, mortality,
morbidity, surrenders, operating expenses and yields on assets held to
back policy liabilities as well as other factors. The expected future
profits derived from these assumptions combined with the contract
features and guarantees are positive in early durations and negative in
later durations. The initial present value of these profits is positive,
while later present values are negative producing a net liability. As a
result of these assumptions, the net amortization projected at December
31, 1997 for the next five years is as follows; $1,373,845, $1,135,605,
$899,577, $665,458 and $415,385. Variances from original projections,
whether positive or negative, are included in income as they occur. To
the extent that these variances indicate that future profits will differ
from those included in the original scheduled amortization of the value
of the future profits, current and future amortization may be adjusted.
Recoverability of the value of future profits is evaluated annually and
appropriate adjustments are then determined and reflected in the
financial statements for the applicable period.
F-21
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Information related to the present value of future profits for the year
ended December 31, 1997 is as follows:
Balance at date of acquisition $ 1,155,908
Accretion of interest 33,369
Amortization (425,950)
----------
Balance at end of year $ 763,327
===========
(15) Stock Option Plans
------------------
The Company has an Incentive Stock Option Plan available to certain key
employees and agents. The Company has authorized a maximum of 250,000
shares to be purchased under this plan. Options for a total of 232,500
shares were granted under the plan as of December 31, 1996 and 249,999
shares as of December 31, 1997.
The Company also has a 1997 Stock Option Plan (the "1997 Option Plan")
which provides for the grant to eligible employees and directors of
options for the purchase of common stock. The 1997 Option Plan covers, in
the aggregate, a maximum of 500,000 shares of common stock and provides
for the granting of both incentive stock options (as defined in Section
422 of the Internal Revenue Code of 1986) and nonqualified stock options
(options which do not meet the requirements of Section 422). Under the
1997 Option Plan, the exercise price may not be less than the fair market
value of the common stock on the date of the grant of the option.
The per share weighted-average fair value of stock options granted during
1997 and 1996 was $0.61 and $0.21, respectively, on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions: 1997 - no expected volatility or dividend
yield, risk-free interest rate of 6.495% and an expected life of 6.7
years. 1996 - no expected volatility or dividend yield, risk-free
interest rate of 5.492% and an expected life of 3.5 years.
The Company applies APB Opinion No. 25 in accounting for its stock
options and, accordingly, no compensation cost has been recognized for
stock options in the financial statements. Had the Company determined
compensation cost based on the fair value at the grant date for its stock
options under SFAS No. 123, the Company's net earnings would have been
reduced to the pro forma amounts indicated below:
1997 1996
---- ----
Net loss applicable to common shareholders:
As reported $(179,079) $(180,778)
Pro forma (186,580) (183,313)
Earnings per share - basic and diluted:
As reported (.10) (.13)
Pro forma (.10) (.13)
F-22
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Pro forma net earnings reflects only options granted in 1997 and 1996.
Therefore, the full impact of calculating compensation cost for stock
options under SFAS No. 123 is not reflected in the pro forma net earnings
amounts presented above because compensation cost is reflected over the
options' vesting period and compensation cost for options granted prior
to January 1, 1995 is not considered.
Stock option activity during the periods indicated is as follows:
Weighted-
average
Number of exercise
shares price
------ -----
Balance at December 31, 1995 $ 95,000 0.20
Granted 42,500 1.18
--------
Balance at December 31, 1996 $ 137,500 0.50
==========
Granted 54,499 1.79
Exercised (28,426) (0.32)
----------
Balance at December 31, 1997 $ 163,573 0.96
==========
At December 31, 1997, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $0.20 - $1.92 and
2.5 years, respectively.
At December 31, 1997 and 1996, the number of options exercisable was
148,573 and 137,500 respectively; and the weighted-average exercise price
of those options was $0.86 and $0.50, respectively.
(16) Stock Based Compensation
------------------------
During 1997, 128,761 shares of common stock were issued to employees and
agents at an average price per share of $1.98 and an average fair value
per share of $4.31. Stock based compensation of $300,533 was recognized
by the Company and is included in the consolidated statements of income
for the year ended December 31, 1997.
(17) Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires that the Company disclose
estimated fair values for its financial
F-23
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
instruments. Fair value estimates, methods and assumptions are set forth below
for the Company's financial instruments at December 31, 1997:
<TABLE>
Carrying Estimated
amount fair value
------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 1,218,362 1,219,049
Amounts on deposit with reinsurer 30,483,274 30,483,274
Equity securities available for sale 687 687
Notes, accounts receivable and uncollected premiums 464,588 464,588
Shareholder loans 102,460 102,460
Receivable from affiliates 49,764 49,764
Financial liabilities - notes payable 87,295 87,295
</TABLE>
The carrying amounts of cash and short-term investments, notes, accounts
receivable and uncollected premiums, shareholder loans and receivables
from affiliates approximates fair value due to the short maturity period
for these financial instruments.
The fair value of amounts on deposit with reinsurer and notes payable,
approximates the carrying value due to the fact the interest rate
approximates market interest rate at December 31, 1997.
The fair value of equity securities available for sale is based on quoted
market prices.
Fair value estimates are made at a specific period in time, based on
relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that
could result from offering for sale at one time the Company's entire
holdings of a particular financial instrument. These estimates are
subjective in nature and involve uncertainties and matters of significant
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
(18) Stockholders' Equity and Restrictions
-------------------------------------
At December 31, 1997 substantially all the net assets of Rushmore Life
cannot be transferred to the Company in the form of dividends, loans or
advances. Generally, the net assets of Rushmore Life available for
transfer to the Company are limited to the lesser of the Rushmore Life's
net gain from operations during the preceding year or 10% of the Rushmore
Life's net surplus as of the end of the preceding year as determined in
accordance with accounting practices prescribed or permitted by
regulatory authorities. Payment of dividends in excess of such amounts
would generally require approval by regulatory authorities.
Rushmore Life is domiciled in the state of Arizona, which is also the
only state in which it is licensed to conduct business. On the basis of
reporting as prescribed or permitted by the Arizona Department of
Insurance, Rushmore Life had statutory capital and surplus of
approximately $565,511 as of December
F-24
<PAGE>
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
31, 1997 and a net loss of $477,634 for the year ended December 31, 1997.
Rushmore Life maintains at least $250,000 of statutory capital and
surplus in order to retain $25,000 of risk on any one issued. Arizona law
prohibits an Arizona reinsurer from retaining insurance risk on any one
insured in excess of 10% of its capital and surplus.
At December 31, 1997, Rushmore Life calculated its risk-based capital
("RBC") in accordance with Arizona rules. The RBC was below the Company
action level. Subsequent to December 31, 1997, the Company filed a
company action plan, contributed $300,000 and repaid the affiliated
receivable of approximately $381,000 that was nonadmitted at December 31,
1997, increasing Rushmore Life's capital and surplus for an amount that
exceeds the Company action level for Rushmore Life.
(19) Subsequent Event
----------------
In April 1998, the Company completed its initial public offering of
common stock, issuing 815,341 shares at a price of $5.50 per share for a
total of $4,484,375. Total costs of the offering are expected to be
$904,844.
F-25
<PAGE>
Item 8. Changes In and Disagreement with Accountants on Accounting and
Financial Disclosure
On April 29, l998, the Company appointed the accounting firm of KPMG
Peat Marwick LLP as its independent auditors for the fiscal year ending December
31, 1997, and chose not to renew the engagement of Cheshier & Fuller, L.L.P.,
who served as the Company's independent auditors for the fiscal year ended
December 31, l996. The Company's Board of Directors approved the selection of
KPMG Peat Marwick LLP as new independent auditors upon the recommendation of the
Company's Audit Committee. Neither management nor anyone on its behalf has
consulted with KPMG Peat Marwick LLP regarding the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's financial statements,
and neither a written report nor oral advice was provided to the Company that
KPMG Peat Marwick LLP concluded was an important factor considered by the
Company in reaching a decision as to the accounting auditing or financial
reporting issue during the Company's two most recent fiscal years prior to
engaging KPMG Peat Marwick LLP.
The Cheshier & Fuller, L.L.P. reports on the Company's financial
statements for the years ended December 31, l996 and December 31, 1995 did not
contain an adverse opinion or disclaimer of opinion and were not qualified or
modified as to uncertainty, audit scope or accounting principles. Since January
1, 1995, the Company has not had any disagreements with Cheshier & Fuller,
L.L.P. on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedures that would require disclosure in this
report.
Cheshier & Fuller, L.L.P. has furnished to the Company a letter
addressed to the SEC stating that it agrees with the statements in the
immediately preceding paragraph. A copy of such letter, dated May 5,1998 was
filed as exhibit 1 to the Company's Form 8-K filed on May 5, 1998.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with 16(a) of the Exchange Act
Management
<TABLE>
<CAPTION>
The executive officers, directors and key employees of the Company as
of June 1, 1998 and their respective ages and positions are as follows:
Term as
Director
Name Age Position(s) Expires
- - - ----- --- ----------- --------
<S> <C> <C>
D. M. (Rusty) Moore, Jr. 48 Chairman, President, Chief Executive Officer and Director 1999
James W. Clark 46 President of Rushmore Securities, Director and Secretary 2000
F. E. (Fritz) Mowery(1) 42 President of Rushmore Advisors and Director 1998
Robert W. Hendren 44 Chief Financial Officer
Timothy J. Gardiner 43 Director 1999
Mark S. Adler 44 Director 2000
James Fehleison 39 Director 1999
Harlan T. Cardwell, III(2) 42 Director 1998
Gayle C. Tinsley 67 Director 2000
William C. Keane(3) 68 Director
Charles M. Duke, Jr.(3) 62 Director
</TABLE>
-15-
<PAGE>
Key Employees
- - - -------------
Christine E. Miller 60 Vice President of Administration
Howard M. Stein 49 Controller
G. A. Brunott, Jr. 48 President of Rushmore Agency
Thomas G. Coleman, Jr. 46 Vice President of Rushmore Securities
Benjamin H. Dean 35 Director of RushMAP
Richard C. Lee 32 Director of Career Partners Division
- - - --------------------------
(1) Will stand for reelection at 1998 Annual Meeting.
(2) Term will expire at 1998 Annual Meeting.
(3) Will be nominated at 1998 Annual Meeting.
D. M. (Rusty) Moore, Jr., is the founder and has been President of the
Company since its formation in 1990. Prior to that he was a senior vice
president and national sales director of a large insurance and securities
marketing organization.
James W. Clark has been President of Rushmore Securities since 1991 and
Secretary of the Company since 1993. He is a general securities registered
principal and financial operations principal and supervises all registered
representatives and branch office operations.
F. E. (Fritz) Mowery has been President of Rushmore Advisors since
January 1996. From November 1990 to September 1995, he was a senior portfolio
manager with Comerica Bank-Texas, and from September 1995 to January 1996, he
was President of Guardian Financial Management. He is a certified financial
planner.
Robert W. Hendren began serving as Chief Financial Officer in January
1998. Prior to that he served from October 1997 to January 1998 as an examiner
for the Oklahoma Department of Insurance, from June 1997 to October 1997 as
Chief Financial Officer of United Benefit Managed Care Corp. and from September
1985 to June 1997 as Chief Financial Officer of National Health Insurance
Corporation. Mr. Hendren is a certified public accountant, a Fellow of the Life
Management Institute and holds of bachelor of business administration degree
from Oklahoma State University.
Timothy J. Gardiner has been a director of the Company since April
1997. He has been a regional director of Managed Economics for Doctors, Inc.
since 1991, a company engaged in financial planning to members of the medical
profession.
Mark S. Adler has been a director of the Company since April, 1997 and
a director of Rushmore Life since 1996. He has served as President and a
co-founder of A&R Associates, Inc., since 1984, a company that markets insurance
and investment services to Public Safety Unions throughout California.
Harlan T. (Tra) Cardwell, III has served as a director of the Company
since April 1997. He formerly served as a loan officer for Herring Bank. He is
also director of the Company's annuity division and is a certified financial
planner.
James Fehleison became a director following the closing of the Initial
Public Offering. He is currently the Chief Financial Officer of First Southwest
Holdings, Inc. From 1995 to 1997, he was Chief Financial Officer of the
corporate services division of Fidelity Investments. From 1985 to 1995, he was
Senior Vice President and Controller of Rauscher Pierce Refsnes, Inc. He is a
certified public accountant.
Gayle C. Tinsley became a director following the closing of the Initial
Public Offering. He has served as a consultant to small businesses since 1988 in
the areas of business and marketing plan development and capital funding. Prior
to 1988, he was Vice President of Sales, Marketing and Technical Services of VMX
Corporation, and is a former President and Chief Executive Officer of
Docutel/Olivetti Corporation. Mr. Tinsley has held management positions with
Xerox Corporation, Recognition Equipment, Inc. and IBM Corporation.
William C. Keane will become a director if elected at the annual
meeting. He is currently retired, but has over 20 years experience in insurance
and securities, serving as President of A.L. Williams Corp. and A.L. Williams
Life Insurance Company for eight years, Vice President and General Manager of
Massachusetts Indemnity Life, a subsidiary of Penn Corp. Financial, Inc. for
approximately two years and as Senior Vice President for over ten years for
National Home Life Assurance Company, a subsidiary of National Liberty Corp.
-16-
<PAGE>
Charles M. Duke will become a director upon his election at the annual
meeting. Mr. Duke is a former astronaut who piloted the lunar module on the
Apollo 16 mission on April 16-27, 1972. For the last sixteen years, he has been
engaged in personal investments and travels as a speaker. He has been President
of Charlie Duke Enterprises, Inc., a video productions and sales company, since
January 1989.
Christine E. Miller has served as Vice President of Administration of
the Company since February 1992 and has been employed by the Company since its
inception.
Howard M. Stein has served as Controller and Chief Financial Officer of
the Company since February 1995. Prior to joining the Company, he was a
Controller for First Gibraltar Bank and FTS Life Insurance Agency, Inc. He is a
certified public accountant in the State of Texas.
G.A. (Chip) Brunott, Jr. has served as President of Rushmore Agency
since January, 1996 and as director of marketing from 1993 to 1996. He has a
background in retail sales, small business management and church and ministry
organization.
Thomas G. Coleman, Jr. has served as Vice President of Rushmore
Securities in charge of its discount brokerage division since February, 1994.
Prior to that he was a registered representative with Ellsworth Investments,
Inc. Mr. Coleman is a certified public accountant.
Benjamin H. Dean has served as director of RushMAP since July 1996.
Prior to that he was manager of advisory services for 1st Global Capital Corp.
Mr. Dean is a certified financial planner.
Richard C. Lee has served as director of Rushmore Agency's Career
Partners Division since April 1997. Prior to that, he served as President of ASA
Promotions from 1989 to 1996, a specialty advertising and promotions firm for
the telecommunications industry.
Committees of Directors
The Board of Directors has the following committees:
Committee Members
--------- -------
Executive D. M. Moore, Jr. - Chairman
James W. Clark
F. E. Mowery
Audit James Fehleison - Chairman
Gayle C. Tinsley
Compensation Gayle C. Tinsley- Chairman
James Fehleison
The Executive Committee conducts the normal business operations of the
Company except for certain matters reserved to the Board of Directors. The Audit
Committee recommends an independent auditor for the Company, consults with such
independent auditor and reviews the Company's financial statements. The
Compensation Committee recommends to the Board of Directors the compensation of
officers and key employees for the Company and the granting of stock options.
Item 10. Executive Compensation
Compensation of Directors
The Company pays each non-employee director a fee of $2,500 per year,
plus a meeting fee of $250 for each Board meeting attended, and automatically
grants to each director non-qualified stock options for 2,500 shares of Common
Stock per year.
-17-
<PAGE>
Executive Compensation
The following table sets forth the compensation paid by the Company for
services rendered during the fiscal years ended December 31, 1997 and 1996, and
the number of options granted, to the Chief Executive Officer of the Company and
each other executive officer of the Company whose total cash compensation for
the fiscal year ended December 31, 1997 exceeded $100,000:
<TABLE>
<CAPTION>
Summary Compensation Table
Long Term Compensation-
Annual Securities
Name and Compensation Underlying
Principal ----------------------------------------------- Options or Warrants
Position Year Salary Bonus Other(2) -----------------------
-------- ---- ------ ----- -----
<S> <C> <C>
D.M. (Rusty) Moore, Jr. 1997 $79,023 $ - $ 74,365 7,083
Chief Executive Officer 1996 60,000(1) - 114,124 -
James W. Clark. 1997 9,863 - 128,532 5,833
President, Rushmore 1996 9,678 - 79,732 -
Securities Corporation
</TABLE>
- - - ----------------------
(1) Only $3,602 of such amount was paid at the election of Mr. Moore.
(2) Constitutes commissions paid for sales of securities and insurance.
-18-
<PAGE>
<TABLE>
<CAPTION>
Option/SAR Grant Table
(Option/Warrant/SAR Grants in Last Fiscal Year)
Number of
Securities Percent of
Underlying Total
Options or Option/Warrant Market Price
Warrants Granted to Exercise or on Date
Granted Employees in Base Price of Grant Expiration
Name # Fiscal Year ($/Sh) ($/Sh) Date
---- -------------------------------- ------------- ---------------- ---------
<S> <C> <C>
D. M. (Rusty) Moore, Jr. 5,833 10.7% $1.50 $1.50(1) 3/1/2004
1,250 2.3% 1.92 1.92(2) 4/1/2007
James W. Clark 5,833 10.7% 1.50 1.50(1) 3/1/2004
625 1.2% 1.92 1.92(2) 4/1/2007
- - - -------------------------
(1) There was no market for the Common Stock on the date of grant and the market price as of such date was
determined by the Board of Directors.
(2) There was no market for Common Stock on the date of the grant and the market price as of such date was
determined by appraisal.
Aggregated Option/Warrant/SAR Exercises in Last Fiscal
Year and FY-End Option/Warrant/SAR Values
Value of Unexercised
In-the-Money
Shares Number of Securities Options/Warrants/
Acquired Underlying Unexercised SARs at 1997
on Value Options/Warrants/SARs FY-End
Exercise Realized at 1997 FY-End(1) $
Name # $ # ------
---- -------- -------- ----------------
D. M. (Rusty) Moore, Jr. 13,260 -(1) 23,823 $ -(2)
James W. Clark -0- -- 36,458 -(2)
</TABLE>
- - - ------------------------
(1) The options were exercised on April 16, 1997. On such date, there was
no market for the Common Stock so the difference between the fair
market value and the exercise price was not readily ascertainable.
However, based on the $5.50 offering price of the Common Stock pursuant
to the Company's initial public offering on February 17, 1998, the
value realized would have been $5.30 per share, or $70,278.
(2) All options are vested. At December 31, 1997, there was no market for
the Common Stock and the fair market value was not readily
ascertainable. However, based on the $5.50 initial public offering
price for the Common Stock, the difference between the exercise price
and such $5.50 value would have yielded a value of unexercised options
of $116,529 for Mr. Moore and $184,570 for Mr. Clark.
Employment Agreements
The Company has entered into employment agreements with D. M. Moore,
Jr. and James W. Clark for three year periods that are renewed each month. Such
agreements are terminable only upon death, disability or for good cause,
including resignation. Upon termination for any other reason, the executive is
entitled to receive three year's severance pay.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of June 1, 1998, for (1)
each person known by the Company to own beneficially 5% or more of the Common
Stock, (2) each director and executive officer of the Company and (3) all
directors and executive officers of the Company as a
-19-
<PAGE>
group. Except pursuant to applicable community property laws and except as
otherwise indicated, each shareholder identified in the table possesses sole
voting and investment power with respect to its or his shares. The addresses of
all such persons are in care of the Company.
Beneficial Ownership of Common Stock
------------------------------------
Percentage
Name Shares of Class
- - - ---- ------ -----------
D. M. Moore, Jr. (1) 535,395 17.9%
Mark S. Adler (2) 188,941 6.3
James W. Clark (4) 86,866 2.9
F. E. Mowery (3) 29,391 1.0
Robert W. Hendren(5) 25,000 0.8
Timothy J. Gardiner 26,041 0.9
Harlan T. Cardwell, III 11,410 0.4
James Fehleison 5,000 0.2
Gayle C. Tinsley 12,000 0.4
William C. Keane 2,000 0.1
Charles M. Duke 1,000 --
All executive officers and 1,002,257 30.8
directors and prospective directors
as a group (11 persons)
- - - --------------------------------
(1) Includes options to purchase 7,083 shares of Common Stock and 7,629 shares
held of record by Mr. Moore's spouse.
(2) Includes options to purchase 1,500 shares of Common Stock.
(3) Includes options to purchase 2,334 shares of Common Stock and 14,666 shares
held of record by Mr. Mowery's spouse.
(4) Includes options to purchase 6,458 shares of Common Stock.
(5) Includes options to purchase 15,000 shares of Common Stock, none of which
are presently vested.
Item 12. Certain Relationships and Related Transactions
The Company believes that all of the transactions set forth below were
made on terms no less favorable to the Company than could have been obtained
from unaffiliated third parties. All future transactions, including loans,
between the Company and its officers, directors, principal shareholders and
affiliates, will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors, and will be
on terms no less favorable to the Company than could be obtained from
unaffiliated third parties.
D. M. Moore, Jr., the Company's President and Chief Executive Officer,
owns 100% of Rushmore Agency, due to provisions of the Texas Insurance Code that
prohibit ownership of life insurance agencies by corporations. Pursuant to an
agreement between Mr. Moore and the Company, all activities of the agency are
administered by Rushmore, and all revenues and expenses of the agency are passed
through to the Company. Mr. Moore has also granted the Company an irrevocable
option for the Company to appoint any other qualified person to acquire Rushmore
Agency on its behalf.
As of December 31, 1997, Mr. Moore was the 100% owner of a company
known as Rushmore Realty Advisors, Inc., which is a licensed real estate agent
in Texas ("Rushmore Realty"). Rushmore Realty acted as the real estate agent for
Rushmore in negotiating two new office leases during 1997, and received
commissions of $27,693 that were paid by the landlord and sublessor. In April
1998, Rushmore Realty Advisors, Inc. was acquired by the Company for nominal
consideration.
-20-
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
21. Subsidiaries
27. Financial Data Schedule
(b) Reports on Form 8-K
Registrant filed a Form 8-K on April 29, 1998 to report a change
in Registrant's certifying public accountant.
-21-
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
RUSHMORE FINANCIAL GROUP, INC.
June 15, 1998 By: /s/ D.M. Rusty Moore
---------------------
D.M. Rusty Moore, President and
Chief Executive Officer and Director
(Principal Executive Officer)
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Company and in the
capacities and on the dates indicated.
<TABLE>
<S> <C>
June 15, 1998 /s/ Robert W. Hendren
-----------------------------
Robert W. Hendren, Chief Financial Officer
(Principal Financial and Accounting Officer)
June 15, 1998 /s/ James W. Clark
-----------------------------
James W. Clark, Secretary and Director
June 15, 1998 /s/ F.E. Mowery
-----------------------------
F.E. Mowery, Director
June 15, 1998 /s/ Timothy J. Gardiner
-----------------------------
Timothy J. Gardiner, Director
June 15, 1998 /s/ Mark S. Adler
-----------------------------
Mark S. Adler, Director
June 15, 1998 /s/ James Fehleison
-----------------------------
James Fehleison, Director
June 15, 1998 /s/ Harlan T. Cardwell, III
-----------------------------
Harlan T. Cardwell, III, Director
June 15, 1998 /s/ Gayle C. Tinsley
-----------------------------
Gayle C. Tinsley, Director
</TABLE>
-22-
<PAGE>
EXHIBIT 21
RUSHMORE FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
Name of Subsidiary State of Organization
- - - ------------------------------------------------------------------------------
Rushmore Securities Corporation Texas
Rushmore Investment Advisors, Inc. Texas
Rushmore Life Insurance Company Arizona
Rushmore Realty Advisors, Inc.* Texas
- - - -----------------
All subsidiaries are wholly owned and conduct business in their legal
names.
Rushmore Insurance Services, Inc. is owned 100% by D.M.Moore, Jr. and is
treated as an affiliate of the Registrant. See "Business--Insurance Services."
*Acquired by the Company in April, 1998.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
</LEGEND>
<CIK> 0000884892
<NAME> Rushmore Financial Group Inc.
<MULTIPLIER> 1
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> Year
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 687
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 31,702,323
<CASH> 1,218,362
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 2,295,696
<TOTAL-ASSETS> 35,868,311
<POLICY-LOSSES> 30,827,081
<UNEARNED-PREMIUMS> 1,159,039
<POLICY-OTHER> 308,866
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 87,295
0
180,920
<COMMON> 21,870
<OTHER-SE> 1,755,054
<TOTAL-LIABILITY-AND-EQUITY> 35,868,311
1,957,105
<INVESTMENT-INCOME> 1,553,970
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 2,497,420
<BENEFITS> 613,312
<UNDERWRITING-AMORTIZATION> 502,949
<UNDERWRITING-OTHER> 813,823
<INCOME-PRETAX> 275,974
<INCOME-TAX> 438,770
<INCOME-CONTINUING> 306,119
<DISCONTINUED> (30,145)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (162,796)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> (148,265)
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 47,702
<RESERVE-CLOSE> 323,156
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
