<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition Period from ________________ to ________________
Commission file number 000-24057
Rushmore Financial Group, Inc.
---------------------------------------
(Exact name of registrant as specified in its charter)
Texas 75-2375969
----- ----------
(State of Incorporation) (I. R. S. Employer Identification No.)
13355 Noel Road, Suite 650, Dallas, Texas 75240
-----------------------------------------------
972-450-6000
------------------------------------------------
(Issuer's telephone number, including area code)
Check whether the issuer filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by the court.
Yes No
----- -----
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 XXX No
-----
State the number of shares outstanding of each of the issuer's classes
of common equity as of September 30, 1999: 3,557,737 shares of common stock,
$0.01 par value.
Transitional Small Business Disclosure Format;
Yes No XXX
----
<PAGE> 2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- -------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Investments:
Cash and cash equivalents $ 1,256,261 $ 613,814
Certificates of deposit 200,000 1,201,284
Amounts on deposit with reinsurer 4,605,736 32,785,657
Bonds available for sale; amortized cost $203,883 at December 31, 1998 -- 204,641
Equity securities available for sale 50,000 --
------------- -------------
Total investments 6,111,997 34,805,396
------------- -------------
Deferred policy acquisitions costs 38,575 1,989,174
Accounts receivable and due from reinsurers 762,466 1,328,659
Prepaid expenses and deposits 274,426 270,894
Equipment, net of accumulated depreciation 605,433 470,837
Deferred federal income taxes -- 91,674
Goodwill 3,441,384 246,326
Other assets 281 628
------------- -------------
Total assets $ 11,234,562 $ 39,203,588
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 5,112 $ 87,393
Universal life contract liabilities 4,575,364 34,189,968
Present value of future profits -- 610,519
Claims payable -- 128,216
Notes payable 715,809 60,352
Due to reinsurers 87,229 1,127,099
Accrued expenses & other liabilities 661,373 383,291
------------- -------------
Total liabilities 6,044,887 36,586,838
------------- -------------
Shareholders' Equity:
Preferred stock-9% cumulative preferred stock, $10 par value, 2,000 shares
issued and outstanding at September 30, 1999 and December 31, 1998 20,000 20,000
Preferred stock-Series A cumulative preferred stock, $10 par value;
13,687 shares issued and outstanding at September 30, 1999 and
December 31, 1998 136,870 136,870
Common stock-$0.01 par value, 10,000,000 shares authorized,
3,647,210 shares issued at September 30, 1999; and 3,066,597 issued
at December 31, 1998 36,472 30,666
Common stock subscribed-8,138 shares at $0.01 at September 30, 1999;
10,000 shares at $0.01 at December 31,1998 81 100
Additional paid in capital 9,165,691 6,086,850
Treasury stock: 89,473 shares at cost (116,345) (116,345)
Accumulated deficit (3,986,909) (3,453,470)
Accumulated other comprehensive income -- 758
Shareholder/subscription receivables:
Common stock subscriptions receivable (36,185) (43,920)
Shareholder loans (30,000) (44,759)
------------- -------------
Total shareholders' equity 5,189,675 2,616,750
------------- -------------
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,234,562 $ 39,203,588
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
2
<PAGE> 3
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months and Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
-------------------------- --------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue:
Revenue from Insurance Services:
Insurance policy income $ 349,202 $ 843,940 $ 768,297 $ 2,518,722
Net investment income 79,240 644,478 266,295 1,718,496
Agency management fee 96,981 14,517 223,814 19,098
Gain on sale of insurance block -- -- 1,016,268 --
Revenue from Investment Services:
Commissions and fees 664,046 651,095 2,216,492 1,767,725
Asset management 738,988 52,461 878,041 151,939
Other 1,979 25,207 14,452 93,544
----------- ----------- ----------- -----------
Total revenues 1,930,436 2,231,698 5,383,659 6,269,524
----------- ----------- ----------- -----------
Expenses:
Insurance Services Expenses:
Other insurance services expenses 278,028 298,514 661,357 883,261
Policyholder benefits 66,482 798,592 245,388 1,927,167
Amortization of deferred policy
acquisition costs 30,552 337,708 146,867 766,571
Amortization of present value of insurance in force -- 341,101 -- 1,043,248
Investment services expenses:
Commission expense 625,529 548,509 1,948,702 1,526,578
Other investment services expenses 84,170 23,522 208,303 77,705
General and administrative 998,935 741,960 2,565,238 1,535,566
----------- ----------- ----------- -----------
Total expenses 2,083,696 3,089,906 5,775,855 7,760,096
----------- ----------- ----------- -----------
Operating loss (153,260) (858,208) (392,196) (1,490,572)
Interest expense 5,366 (11,496) 9,297 1,912
----------- ----------- ----------- -----------
Loss before income taxes (158,626) (846,712) (401,493) (1,492,484)
Income tax expense (benefit) (20,801) 7,990 131,946 10,750
----------- ----------- ----------- -----------
Net loss $ (137,825) $ (854,702) $ (533,439) $(1,503,234)
=========== =========== =========== ===========
Net loss applicable to common shareholders $ (141,355) $ (858,232) $ (544,028) $(1,514,905)
=========== =========== =========== ===========
Basic and diluted per share data:
Net loss per share of common stock,
after dividends on preferred stock $ (0.04) $ (0.29) $ (0.17) $ (0.56)
=========== =========== =========== ===========
Weighted average common shares outstanding 3,374,324 2,984,617 3,126,330 2,705,699
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and 1998
(Unaudited)
<TABLE>
<CAPTION>
1999 1998
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (533,439) $ (1,503,234)
Adjustments to reconcile net loss to net cash provided (used)
by operating activities:
Gain on sale of insurance block net of federal income tax (806,637) --
Realized (gains) net (3,933) --
Stock-based compensation 8,735 --
Depreciation and amortization 154,699 24,871
CHANGE IN ASSETS AND LIABILITIES, NET OF EFFECTS OF SALE OF
INSURANCE BLOCK AND JOHN VANN ACQUISITION:
(Increase) decrease in assets:
Accounts receivable and due from reinsurers (425,078) (607,325)
Prepaid expenses and deposits 11,955 (133,063)
Deferred policy acquisition costs 47,303 206,256
Amounts on deposit with reinsurer (232,125) (1,286,872)
Net deferred federal income taxes -- (86,002)
Other assets (68,086) --
Increase (decrease) in liabilities:
Accrued expenses and other liabilities 27,646 (43,293)
Due to reinsurers 151,153 (405,286)
Future policy benefits 499 5,232
Universal Life liabilities 182,745 1,216,334
Present value of future profits -- 1,043,248
Claims payable -- (113,884)
-------------- --------------
Net cash flows used by operating activities (1,484,563) (1,683,018)
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (55,423) (91,115)
Purchase of equity securities available for sale (50,000) (133,761)
Purchase of bonds available for sale -- (803,638)
Decrease in certificates of deposit 1,001,284 --
Sales of bonds available for sale 207,816 495,212
Cash received on purchase of John Vann Co 14,355 --
Cash received on sale of insurance block 500,000 --
-------------- --------------
Net cash flows provided (used) by investing activities 1,618,032 (533,302)
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to officers and affiliate 14,759 34,932
Proceeds from sale of Common Stock, net of offering cost 36,958 3,755,737
Preferred Stock dividends paid (10,589) (11,671)
Preferred Stock redeemed -- (24,050)
Purchase of treasury stock -- (37,465)
Payments on notes payable (32,150) (85,000)
Proceeds from notes payable 500,000 --
-------------- --------------
Net cash flows provided by financing activities 508,978 3,632,483
-------------- --------------
Change in cash and cash equivalents 642,447 1,416,163
Cash and cash equivalents at beginning of period 613,814 1,222,820
-------------- --------------
Cash and cash equivalents at end of period $ 1,256,261 $ 2,638,983
============== ==============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,948 $ 9,374
Cash paid for income taxes $ -- $ 86,558
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements included herein have been prepared by Rushmore
Financial Group, Inc. ("Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures contained herein are adequate to make the information
presented not misleading. In the opinion of management, the information
furnished in the unaudited consolidated financial statements reflects all
adjustments which are ordinary in nature and necessary to present fairly the
Company's financial position, results of operations and changes in financial
position for such interim period. These interim financial statements should be
read in conjunction with the Company's financial statements and the notes
thereto as of December 31, 1998, included in the Company's annual report on Form
10-KSB for the year ended December 31, 1998.
Rushmore Insurance Services, Incorporated ("Rushmore Agency") is an insurance
agency and an affiliate of the Company by means of service agreements. The
Company has entered into an administrative services agreement whereby net
revenues and expenses are charged via a management fee to the Company. Rushmore
Agency has been consolidated in the accompanying consolidated financial
statements. All financial information contained herein has been reclassified,
where applicable, to include these net revenues and expenses for the three
months ended September 30, 1998 and the nine months ended September 30, 1998.
5
<PAGE> 6
2. Sale of Insurance Block
On January 22, 1999 the Company executed a termination and recapture agreement
with Conseco Life Insurance Company ("CLIC") effective January 1, 1999. Under
the terms of the agreement all reinsurance is terminated and all risks formerly
assumed by CLIC were recaptured. On March 9, 1999 CLIC paid $500,000 to the
Company as consideration and in settlement of the amounts due CLIC from the
Company and the amounts due the Company from CLIC. The following table
summarizes the categories of net asset changes relating to this sale:
<TABLE>
<CAPTION>
Assets Increase Decrease
- ----------------------------------- ------------- --------------
<S> <C> <C>
Cash $ 500,000 $ --
Amounts on deposit with reinsurers -- 28,412,046
Accounts receivable -- 995,721
Deferred federal income tax -- 91,674
Deferred policy acquisition costs -- 1,903,296
Goodwill -- 216,552
</TABLE>
<TABLE>
<CAPTION>
Liabilities Decrease Increase
- ----------------------------------- ------------- --------------
<S> <C> <C>
Future policy benefits $ 82,780 $ --
Universal life policy liabilities 29,797,349 --
Present value of future profits 610,519 --
Claims payable 128,216 --
Due to reinsurers 1,191,023 --
Accrued expenses & other liabilities 116,039 --
</TABLE>
<TABLE>
<CAPTION>
Net Income Decrease Increase
- ----------------------------------- ------------- --------------
<S> <C> <C>
Gain on sale of insurance block $ -- $ 1,016,268
Provision for federal income tax 209,631 --
</TABLE>
3. Industry Segment Information
The following summarizes the Company's industry segment data of identifiable
assets as of September 30, 1999:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 662,698 $ 29,165
Insurance Company 8,567,208 34,567,822
Investment Services 507,524 175,023
Other 1,497,132 754,970
------------- -------------
Total $ 11,234,562 $ 35,526,980
============= =============
</TABLE>
The corresponding information regarding income segments is contained in the
following management discussion and analysis of financial condition and results
of operations.
6
<PAGE> 7
4. Comprehensive Income (Loss)
Comprehensive income (loss) for the periods ending September 30, 1999 and 1998
consists of:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Loss $ (137,825) $ (854,702) $ (533,439) $ (1,503,234)
Other comprehensive income (loss), net of tax
Unrealized gains (losses) on securities, net
of reclassification adjustment -- -- (758) 868
------------- ------------- ------------- -------------
Comprehensive loss $ (137,825) $ (854,702) $ (534,197) $ (1,502,366)
============= ============= ============= =============
</TABLE>
5. Acquisition of Subsidiary
On July 15, 1999, the Company acquired via merger The John Vann Company ("JVC"),
a Texas corporation engaged in business as a registered investment advisor. The
transaction is structured as a merger of the Company's wholly owned subsidiary,
Rushmore Investment Advisors, Inc., into JVC in exchange for 550,000 shares of
the Company's common stock. The surviving corporation changed its name in the
merger back to Rushmore Investment Advisors, Inc. The purchase price was
determined by means of arms-length negotiations between the Company and the
shareholder of JVC. JVC was a privately owned corporation owned by an affiliate
of Mr. John A. Vann of Dallas. Mr. Vann will remain with Rushmore Investment
Advisors, Inc. as its chairman, chief executive officer and chief investment
officer, pursuant to a three year Employment Agreement. The transaction was
accounted for as a purchase.
6. Related Party Transactions
On August 27, 1999 the Company agreed to loan John A. Vann ("Vann") the sum of
$360,000. Vann is President of Rushmore Investment Advisors, Inc. and Chief
Investment Officer of the Company. The principal amount of the loan is being
advanced in monthly increments of $30,000 that bear interest at 9%. Principal is
due eighteen months from the date of the note. Interest is due in two
installments on twelve and eighteen months from the date of the note. The note
is secured by 500,000 shares of common stock of the Company.
7. Subsequent Events
On September 16, 1999 the Company entered into an agreement with
Kohler-Stephens, Ltd ("KSL") whereby KSL agreed to loan the Company up to
$2,000,000 under the terms of a promissory note bearing interest at 7.5% and
maturing on or before March 31, 2000. KSL advanced $500,000 of that amount on
September 23 and that loan was repaid on October 20, 1999 by the issuance of
125,000 shares of the Company's common stock. As additional consideration for
the loan, the Company issued to KSL warrants to purchase 250,000 shares of
restricted, letter-type common stock. The warrants must be exercised, if at all,
within five years after the issue at exercise prices ranging from the greater of
60% of the stock price or $4.00 per share to the greater of 60% of the stock
price or $7.00 per share.
On October 18, 1999 the Company's on-line trading unit, RushTrade.com, inc.
completed the acquisition of the software trading platform from Block Trading,
Inc. for a purchase price of $800,000. The Company intends to enhance to
software to have it ready for Internet-based trading in the year 2000. The
Company currently uses software provided by a third party vendor for its on-line
trading operations.
On October 19, 1999 the Company's on-line trading unit, RushTrade.com, inc.
completed a source code licensing agreement with a private company. Under the
terms of the agreement the Company granted a nonexclusive license to use the
software acquired from Block Trading, Inc. for a fee of $400,000.
7
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Results of Operations
Three Months Ended September 30, 1999 and 1998
Revenues
The following table sets forth the components of the Company's revenues for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 419,944 $ 59,989
Insurance Company 105,479 1,442,946
Investment Services 1,403,034 703,556
Other 1,979 25,207
------------- -------------
Total $ 1,930,436 $ 2,231,698
============= =============
</TABLE>
Total revenues decreased 13% from $2,231,698 for the third quarter of 1998 to
$1,930,436 during the third quarter of 1999. On January 22, 1999 the Company
executed a termination and recapture agreement with Conseco Life Insurance
Company ("CLIC") effective January 1, 1999. Revenues associated with that
business accounted for $1,226,917 during the third quarter of 1998. Excluding
those revenues, all other revenue increased $925,655 or 92%. Insurance Agency
revenues have increased 600% as the company has begun to earn commissions and
fees relating to the sale of life, accident and health insurance policies that
were sold over the previous six quarters. Investment services revenue increased
$699,478 or 99% as a result of the acquisition via merger of The John Vann
Company. This acquisition contributed revenues of $665,936 during the third
quarter of 1999.
As a result of the insurance block sale, insurance company revenue decreased 93%
from $1,442,946 in 1998 to $105,479 in the most recent quarter. Insurance
premium income decreased 97% from $798,468 to $26,239 and net investment income
decreased 88% from $644,478 to $79,240 as a result of the sale discussed above.
Expenses
The following table sets forth the components of the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 395,475 $ 194,643
Insurance Company 116,981 1,706,322
Investment Services 1,258,190 760,180
Other 313,050 428,761
------------- -------------
Total $ 2,083,696 $ 3,089,906
============= =============
</TABLE>
Insurance agency expenses increased 103% from $194,643 in the third quarter of
1998 to $395,475 in the third quarter of 1999. That increase was a result of an
increase in commission expenses associated with the increased revenue described
above. Those commission expenses increased $175,077. The gross profit on those
commissions increased $102,435. Expenses to acquire sales leads rose to $33,167
in 1999 from $13,825 in 1998.
Insurance company expenses decreased 93% from $1,706,322 in 1998 to $116,981 in
1999 due primarily to the sale of reinsurance business to CLIC.
Investment services expenses increased $498,010 or 66% from $760,180 in 1998 to
$1,258,190 in 1999. Expenses of the Company's investment advisory unit, Rushmore
Investment Advisors, increased $378,408 as a result of the acquisition via
merger of The John Vann Company on July 15, 1999. During the most recent quarter
the Company incurred expenses of $132,092 in developing, marketing and operating
its Internet based on-line brokerage platform, RushTrade.com. That unit was not
operational during the third quarter of 1998.
8
<PAGE> 9
Other expenses decreased $115,711 or 27% from $428,761 in 1998 to $313,050 in
1999 due primarily to decreases in the expenses of incentive trips, professional
fees and the annual meeting of shareholders. During 1999 the Company has elected
not to provide an incentive trip to its producers. The expenses related to an
incentive trip in 1998 totaled $52,958 contributing to the overall decline in
meeting and banquet expenses of $58,556. In 1999 the Company's annual meeting
was held earlier in the year. Legal fees declined from $31,904 in 1998 to $5,550
in 1999. Printing costs declined from $28,025 in 1998 to $3,431 in 1999.
Operating income (loss)
The following table sets forth the components of the Company's net income for
the periods indicated:
<TABLE>
<CAPTION>
Three Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 24,469 $ (123,034)
Insurance Company 9,299 (271,366)
Investment Services 140,701 (56,624)
Other (312,294) (403,678)
------------- -------------
Total $ (137,825) $ (854,702)
============= =============
</TABLE>
The Company had a net loss of $137,825 for the third quarter of 1999 compared to
a net loss of $854,702 for the same period in 1998. The net loss applicable to
common shareholders for the third quarter of 1999 was $141,355, or $0.04 per
share (basic and diluted). For 1998, the net loss applicable to common
shareholders of $858,232 was $0.29 per share (basic and diluted).
The performance of the insurance agency has improved as a result of increased
commissions derived from the sale of life insurance and accident and health
insurance policies.
The performance of the insurance company has improved as a result of sale of
reinsurance business to CLIC. Those policies produced a net loss of $329,190
during the third quarter of 1998.
Profitability of the investment services division improved $197,325 from a net
loss of $56,624 for the third quarter of 1998 to a net income of $140,701 for
the third quarter of 1999. Net income of the Company's investment advisory unit,
Rushmore Investment Advisors, increased from a loss of $37,630 for the third
quarter of 1998 to a net income of $277,249 for the third quarter of 1999 as a
result of the acquisition via merger of The John Vann Company on July 15, 1999.
Those gains were partially offset by losses of RushTrade.com which recorded a
net loss of $67,328 as the Company continued to expand and develop its internet
based on-line brokerage capability.
Nine Months Ended September 30, 1999 and 1998
Revenues
The following table sets forth the components of the Company's revenues for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 898,330 $ 124,201
Insurance Company 1,376,344 4,132,115
Investment Services 3,094,533 1,919,664
Other 14,452 93,544
------------- -------------
Total $ 5,383,659 $ 6,269,524
============= =============
</TABLE>
Total revenues decreased 14% from $6,269,524 for the first nine months of 1998
to $5,383,659 during the first none months of 1999. On January 22, 1999 the
Company executed a termination and recapture agreement with Conseco Life
Insurance Company ("CLIC") effective January 1, 1999. Revenues associated with
that business accounted for $1,016,268 and $3,716,917 during the first nine
months of 1999 and 1998 respectively. Excluding those revenues, all other
revenue increased $1,814,784 or 71%.
9
<PAGE> 10
Insurance Agency revenues have increased $774,129 or 623% as the Company has
begun to earn commissions and fees relating to the sale of accident and health
insurance policies that were sold over the previous six quarters.
As a result of the insurance block sale, insurance company revenue decreased
from $4,132,115 in 1998 to $1,376,344 (including $1,016,268 in gain on the sale
to CLIC). Insurance premium income decreased $2,411,940 to $93,781; and net
investment income decreased $1,452,201 to $266,295 as a result of the sale
discussed above.
The investment services division also experienced significant growth in that
revenues increased $1,174,869 or 61% from the year earlier period. Investment
services revenue increased primarily as a result of the acquisition via merger
of The John Vann Company on July 15, 1999. This acquisition contributed revenues
of $665,936 during the third quarter of 1999. Investment services revenues were
further improved by the generation of trading and training fees of $145,001
associated with the Company's entry into the on-line brokerage business coupled
with an increase in retail brokerage income of $321,288. The increase in retail
brokerage income was the result of continued recruiting and addition of new
representatives.
Expenses
The following table sets forth the components of the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ 999,677 $ 316,069
Insurance Company 466,951 4,514,419
Investment Services 3,224,815 2,110,239
Other 1,084,412 819,369
------------- -------------
Total $ 5,775,855 $ 7,760,096
============= =============
</TABLE>
Insurance agency expenses increased $683,608 or 216% from $316,069 in 1998 to
$999,677 in 1999. Agents' commissions and personnel costs increased $376,328 and
$147,941 respectively as a direct result of the 623% increase in agency revenue.
Expenses to acquire sales leads rose $103,529 in 1999.
Insurance company expenses decreased from $4,514,419 in 1998 to $466,951 in 1999
due primarily to the sale of reinsurance business to CLIC.
Investment services expenses increased 53% from $2,110,239 in 1998 to $3,224,815
in 1999. Expenses of the Company's investment advisory unit, Rushmore Investment
Advisors, increased $372,036 as a result of the acquisition via merger of The
John Vann Company on July 15, 1999. During the first nine months of 1999 the
Company incurred expenses of $299,623 in developing, marketing and operating its
Internet based trading platform, RushTrade.com. That unit was not operational
during 1998. Commission expenses of the retail brokerage division increased
$238,641 due to increased revenue. The commission ratio decreased slightly from
85.9% in 1998 to 85.1% in 1999. Legal and settlement costs of the retail
brokerage division also increased $132,865. Arbitration settlements of $65,000
were the result of disputes over transactions which occurred in 1995 and 1996.
Other expenses increased $265,043 or 32% from $819,369 in 1998 to $1,084,412 in
1999 due primarily to increases in personnel costs, depreciation, and
professional costs. Compensation and benefits increased $140,707 due mainly to
additional personnel. As a result of acquiring additional computer and office
equipment, and expanding office space, depreciation and amortization expense
increased from $28,533 in 1998 to $86,922 in 1999. Professional fees increased
to $185,618 in 1999 from $139,093 in 1998. These increases included Directors
fees of $11,500 in 1999 versus none in 1998, investor relations costs of $39,499
in 1999 versus 28,417 in 1998, and consulting fees of $55,778 versus $3,505 in
1998.
10
<PAGE> 11
Operating income (loss)
The following table sets forth the components of the Company's net income for
the periods indicated:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1999 1998
------------- -------------
<S> <C> <C>
Insurance Agency $ (101,347) $ (186,107)
Insurance Company 777,447 (393,054)
Investment Services (134,544) (190,575)
Other (1,074,995) (733,498)
------------- -------------
Total $ (533,439) $ (1,503,234)
============= =============
</TABLE>
The Company reported a net loss of $533,439 for the nine months ended September
30, 1999 compared to a net loss of $1,503,234 for the same period in 1998. The
net loss applicable to common shareholders for the first nine months of 1999 was
$544,028 or $0.17 per share (basic and diluted). For 1998, the net loss
applicable to common shareholders of $1,514,905 was $0.56 per share (basic and
diluted). The decrease in net loss is partially attributable to the pre-tax gain
of $1,016,268 on the disposition of the block of reinsurance policies. The net
loss was further decreased by the acquisition via merger of The John Vann
Company on July 15, 1999. This acquisition contributed revenues of $665,936
during the third quarter of 1999. As a result the Company's investment advisory
firm, Rushmore Investment Advisors, is now profitable on a year to date basis
and reported net income of $212,104. Increased commission revenue of the
Company's insurance agency further decreased the net loss. That unit had a net
loss of $101,347 for the nine months ended September 30, 1999 but reported net
income of $24,469 for the third quarter. Those gains were partially offset by
increases in expenses for personnel costs, depreciation, and professional fees
totaling $245,621 and an increase in the provision for income taxes of $121,196.
The provision for income taxes was primarily the result of the sale of the
insurance block by Rushmore Life Insurance Company. Although the Company has
significant net operating loss deductions available, it is unable to consolidate
Rushmore Life Insurance Company for tax purposes until the year 2003. The
increase in provision for income taxes includes the result of an increase in
additions to the deferred tax asset valuation allowance of $406,034.
Liquidity
Registrant's requirements for normal cash expenditures will be met through cash
flow from operations. Additional cash to complete the acquisition and
enhancement of the proprietary software to be used in Registrant's on-line
trading service will require infusions of capital through equity investment, and
registrant is offering a private placement of up $10,000,000 of common and/or
convertible preferred stock during the fourth quarter of 1999.
Year 2000
The Year 2000 will have a broad impact on the business environment in which the
Company operates. This is due to the possibility that many computerized systems
across all industries will be unable to process information containing dates
beginning in the Year 2000. The Company established an enterprise-wide program
in the first quarter of 1998 to prepare its computer systems, applications, and
transactional bridges between internal systems and external agents for the Year
2000. The Company is utilizing both internal and external resources to identify,
correct, and test the systems for Year 2000 compliance. The majority of its
inventory, research, and modifications were completed by December 31, 1998.
Further validations through testing and follow-up procedures will be conducted
throughout calendar year 1999. As of June 30, 1999, all mission-critical systems
have been tested with no significant difficulties encountered. Furthermore,
because of recent acquisitions and the affiliations with other companies, the
Company's Year 2000 Project scope has been enlarged. Preliminary research and
verification of newly acquired mission-critical systems have shown Year 2000
compliance. Further research, testing, and any remediation was completed
September 30, 1999.
Because third party failures could have a material impact on the Company's
ability to conduct business, questionnaires were sent to all of the Company's
vendors including the clearing firms and primary insurers to certify that plans
are being developed to address the Year 2000 issue. The questionnaires were
assessed by the Company,
11
<PAGE> 12
and categorized based upon readiness for the Year 2000 issues. They were
prioritized in order of significance to the business of the Company. The Company
intends to make every reasonable effort to assess the Year 2000 readiness of the
critical business partners and to create actions plans to address the identified
risks.
In addition to safeguarding against internal and external possible malfunctions,
the Company developed a contingency plan to operate independent of systems that
could be affected by the Year 2000 problem. The plan, which includes backup
telephone systems and manual routing of transactions such as security trades,
was completed August 31, 1999. Updates and completion of vendors' own
contingency plans will possibly modify the Company's plans. The company expects
any possible vendor updates to only enhance current plans.
Remaining testing and remediation of all of the Company's systems and
applications is expected to cost approximately $10,000. All estimated costs have
been budgeted, and are expected to be funded by cash flows from operations.
Total costs of testing and remediation relating to the Year 2000 project are not
expected to exceed $25,000.
The Company does not believe the costs related to the Year 2000 compliance
project will be material to its financial position or results of operations.
However, the cost of the project and the date on which the Company plans to
complete the Year 2000 modifications are based on management's best estimates.
These estimates were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans and other factors. Unanticipated failures by clearing firms
and primary insurers, as well as the failure by the Company to execute its own
remediation efforts could have a material adverse effect on the cost of the
project and its completion date. As a result, there can be no assurance that
these forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risks.
Forward looking statements
This document includes statements which may constitute "forward-looking"
statements, usually containing the words "believe", "estimate", "project",
"expect" or similar expressions. These statements are made pursuant to the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements inherently involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements.
Factors that would cause or contribute to such differences include, but are not
limited to, continued acceptance of the Company's products in the marketplace,
competitive factors, changes in regulatory environments, and other risks
detailed in the Company's periodic report filings with the Securities and
Exchange Commission. By making these forward-looking statements, the Company
undertakes no obligation to update these statements for revisions or changes
after the date of this filing.
12
<PAGE> 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and its chief executive officer are defendants in two lawsuits
brought in the District Courts of Dallas county, Texas, styled U.S. Teachers
Insurance Agency, Inc. v. Rushmore Financial Group, Inc. and U.S. Teachers
Insurance Agency, Inc. v. Dewey Malone Moore, Jr., alleging breach of contract
and fraud in connection with a failed contract to form an affiliation to market
insurance and annuities. The defendants deny that a contract ever existed and
are defending the suits vigorously.
The Company has had claims made against it by three investors in Florida
resulting from financial instruments placed by the Company's brokerage
subsidiary in a company that declared bankruptcy. The first claim for $257,000
resulted in an arbitral award for $50,000, which the Company paid. Other
threatened claims totaling $275,000 have not been filed.
On November 3, 1999 Jim Clark, former president of Rushmore Securities
Corporation and director of the Company filed suit in the District Courts of
Dallas county, Texas alleging breach of contract arising out of his termination
by the Company and requests damages in excess of $389,000. The Company has
denied that any amounts are owed under the agreement.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders
Information concerning the Company's annual meeting of shareholders held May 7,
1999 was disclosed in the Company's Form 10QSB for the quarter ended March 31,
1999 and is incorporated by reference.
The company held a special meeting of its shareholders on October 4, 1999. The
shareholders approved a resolution that approved the decision of the Board of
Directors to issue up to 3,500,000 shares of the Company's common stock in a
private placement, either directly or upon conversion or exercise of convertible
securities and warrants. The resolution was adopted by a vote of 2,222,932 for,
38,874 shares against, 5,158 shares abstained and 1,290,773 shares did not vote.
Item 5. Exhibits and Reports on Form 8K
(a) Exhibits. Exhibit 10.13 - Letter of Agreement -
Kohler-Stephens, Ltd.
Exhibit 11 - Earnings per share
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8k - On July 28, 1999, the Company filed a Form 8k
disclosing in Item 2 the merger transaction with John Vann Company. On
August 19, l999, the Company appointed the accounting firm of Grant
Thornton LLP as its independent auditors for the fiscal year ending
December 31, 1999, and accepted the resignation of KPMG, LLP who served
as the Corporation's independent auditors for the fiscal year ended
December 31, l998 There has been no disagreement with auditors.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Rushmore Financial Group, Inc.
Dated: November 15, 1999 By /s/ Robert W. Hendren
------------------------------------------
By Robert W. Hendren
13
<PAGE> 14
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
10.13 Letter of Agreement - Kohler-Stephens, Ltd.
11 Earnings per share
27 Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 10.13
September 16, 1999
CONFIDENTIAL
Mr. Mark Kohler
Kohler-Stephens, Ltd.
P.O. Box 601354
Dallas, Texas 75360
Gentlemen:
This letter sets forth the intent of the parties and certain agreements
by which Rushmore Financial Group Inc., a Texas corporation ("Rushmore") will
borrow and Kohler-Stephens, Ltd. ("KSL") will loan to Rushmore up to $2 million
as set forth in this letter.
1. Upon the execution of this Letter of Agreement, KSL will loan
Rushmore at least $490,000 and not more than $2 million (the "Loan"). The Loan
will be evidenced by a promissory note in the principal amount of $2 million, or
so much thereof as may be advanced pursuant hereto. The initial advance of
$490,000 will be made by Noon, C.D.T. on September 24, 1999, in currently
available funds deposited to Rushmore's credit in the Town North National Bank.
KSL has already advanced $10,000 of the initial advance. If KSL fails or refuses
to advance the balance of the initial $490,000, Rushmore shall be entitled to
retain the $10,000 as liquidated damages. The amount of the Loan in excess of
$490,000 (the "Second Advance"), will be at the sole discretion of KSL. The
Second Advance must be funded on or before the close of business on October 15,
1999 in the same manner as the initial advance.
2. The Loan will bear interest to maturity at 7.5% per annum and shall
be due on or before March 31, 2000.
3. It is the intent of the parties hereto that Rushmore pay off the
Loan by issuing to KSL Rushmore Common Stock (the "Stock") at $4.00 per share on
or before October 10, 1999. Rushmore shall exercise its best efforts to obtain
the approval of its shareholders for the issuance of Stock for this purpose. It
is contemplated, but not assured, that such approval will be obtained at a
special shareholders' meeting on October 4, 1999. If such approval is obtained,
Rushmore will pay off the Loan by issuing Stock as soon as practicable after
October 4, 1999. The Stock shall be issued out of Rushmore fully authorized
previously unissued Stock.
4. As additional consideration for the Loan, Rushmore shall issue to
KSL warrants (the "Warrants") to purchase up to 250,000 shares of Rushmore Stock
upon the following terms:
4.1 the Warrants must be exercised, if at all, within five years
after the issue date;
4.2 if exercised prior to March 31, 2000, the exercise price shall
be the greater of sixty percent (60%) of the "Stock Price" (as
defined below) or $4.00 per share;
<PAGE> 2
4.3 if exercised after March 30, 2000, but before December 31,
2000, the exercise price shall be the greater of sixty percent
(60%) of the Stock Price or $5.50 per share; and
4.4 if exercised after December 30, 2000, the exercise price shall
be the greater of sixty percent (60%) of the Stock Price or
$7.00 per share.
4.5 As used herein "Stock Price" means the average closing bid
price for publicly-traded Rushmore Stock during the last five
trading days prior to the date of Warrant exercise.
5. The Stock, Warrants and Stock issued pursuant to exercise of the
Warrants, shall be restricted, letter-type stock, which may not be transferred
except pursuant to a public offering of Stock incident to such an offering, if
any, by Rushmore, or if in the opinion of counsel to Rushmore, the proposed
disposition does not require registration and will not be deemed a distribution
by Rushmore.
If this letter of intent meets with your approval please execute a copy
of this letter in the space provided below and return one original.
Sincerely,
Rushmore Financial Group, Inc.
By /s/ D. M. (Rusty) Moore, Jr.
---------------------------------
By: D. M. (Rusty) Moore, Jr.
President
Agreed:
Kohler-Stephens, Ltd.
a Texas Limited Partnership
By: M2KGO.Com, L.L.C., General Partner
By /s/ Mark Kohler
-------------------------------
By: Mark Kohler, Manager
<PAGE> 1
Exhibit 11 - Earnings per share
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Net loss $ (533,439) $(1,503,234)
Less dividends on preferred stock (10,589) (11,671)
----------- -----------
Net loss applicable to common shareholders $ (544,028) $(1,514,905)
=========== ===========
Weighted average common shares outstanding 3,126,330 2,705,699
Dilutive Potential Common Shares 0 0
Net loss per common share
Basic $ (0.17) $ (0.56)
Diluted $ (0.17) $ (0.56)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> NOV-30-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 50,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 6,111,997
<CASH> 1,256,261
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 38,575
<TOTAL-ASSETS> 11,234,562
<POLICY-LOSSES> 4,557,150
<UNEARNED-PREMIUMS> 23,326
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 715,809
0
156,870
<COMMON> 36,472
<OTHER-SE> 4,996,333
<TOTAL-LIABILITY-AND-EQUITY> 11,234,562
768,297
<INVESTMENT-INCOME> 266,295
<INVESTMENT-GAINS> 3,933
<OTHER-INCOME> 4,345,134
<BENEFITS> 245,388
<UNDERWRITING-AMORTIZATION> 146,867
<UNDERWRITING-OTHER> 661,357
<INCOME-PRETAX> (401,493)
<INCOME-TAX> 131,946
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (533,439)
<EPS-BASIC> (0.17)
<EPS-DILUTED> (0.17)
<RESERVE-OPEN> (91,674)
<PROVISION-CURRENT> 131,946
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
