<PAGE> 1
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, 1998
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.
Yes [X] No [ ]
The registrant's revenues for its most recent fiscal year were: $8,420,204.
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 December 31, 1998, the registrant had outstanding 2,977,124 shares of par
value $0.01 common stock.
DOCUMENTS INCORPORATED BY REFERENCE
Part III (except Item 13) will be contained in Registrant's definitive Proxy
Statement for the annual meeting of Shareholders to be held May 7, 1999.
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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TABLE OF CONTENTS
<TABLE>
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PAGE
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PART I
<S> <C> <C>
Item 1. Description of Business 3
Item 2. Description of Property 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters 9
Item 6. Management's Discussion and Analysis or Plan of Operation 11
Item 7. Financial Statements 16
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 17
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act 17
Item 10. Executive Compensation 17
Item 11. Security Ownership of Certain Beneficial Owners and Management 17
Item 12. Certain Relationships and Related Transactions 17
Item 13. Exhibits and Reports on Form 8-K 17
</TABLE>
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
Rushmore Financial Group, Inc. ("Rushmore", "Registrant" or the "Company")
is a financial services holding company that provides a wide range of investment
and insurance services and products to its clients over the Internet and through
a national distribution network of approximately 135 securities representatives
operating in over 30 states and more than 1,600 insurance agents in 41 states.
The Company believes 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 over the Internet and through more than 1,600 independent or
exclusive agents of its affiliated agency, Rushmore Insurance Services, Inc.
("Rushmore Agency"). In addition, Rushmore Life Insurance Company ("Rushmore
Life") acquires and coinsures 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. 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,
o providing its sales force with a wide range of financial products,
services and marketing support programs;
o offering incentives to its agents and employees, including favorable
commission structures, stock option plans and award programs to
attract and retain a loyal base of highly motivated sales
representatives;
o expanding its on-line Internet-based investment services divisions,
RushTrade.com and its Internet-based insurance division, RushQuote.com
to expand distribution, capture assets and to provide support to its
agents and representatives;
o seeking acquisitions of other insurance, securities or investment
advisory firms and other complementary financial services companies
that are a strategic fit and advance the overall mission and goals of
the Company.
Insurance Services. Rushmore Agency intends to expand distribution through
recruiting producing general agents and by expanding its Internet-based term
life insurance quoting division, RushQuote.com. The Company intends to capture
assets by expanding its coinsurance activities with existing and new carriers,
and actively seeks to foster relationships with other life insurance companies
to begin selling the products of such companies through the Company's agency
force.
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. Rushmore Securities will also seek to grow its on-line, Internet
based securities day trading division, RushTrade.com, which facilitates direct
on-line trading by customers.
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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
135 registered representatives operating in over 30 states. Rushmore Securities
is a member of the National Association of Securities Dealers, Inc. ("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 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 new division formed February 1999, RushTrade.com, is an
Internet-based day trading division. RushTrade.com utilizes software that allows
investors and traders to access the stock market from remote terminals via the
Internet. The trading software includes real-time quotes and technical data
linked with an order entry system to facilitate swift executions and
confirmations. RushTrade.com also offers training classes for customers
interested in Internet-based trading.
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 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 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 Great
Southern Life Insurance Company and is seeking other companies that will serve
as its Primary Insurers ("Primary Insurers"). The Company has entered into
co-insurance agreements with Southwestern Life Insurance Company. 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. (Rusty) 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 accident insurance, 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 the Rushmore Agency.
Sales and Marketing. The Company either employs or has contracted with more
than 1,600 independent or exclusive agents in 41 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.
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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 33 1/3% 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. Rushmore Life will continue to pursue
national marketing and coinsurance agreements with other Primary Insurers.
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, qualified registered
representatives and insurance agents.
Insurance Services. The Company's agency operations are competitive in all
phases. 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 effectively compete on the basis of the quality and pricing of the
insurance products offered by the Primary Insurers and Other Insurers,
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 effectively compete 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, 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 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.
EMPLOYEES
Rushmore has a total of 157 employees, including 135 in its securities
operations, 9 in its insurance services area, 2 in its advisory business, and 11
in its executive offices. A total of 36 are located at the Company's offices in
Dallas. All but 15 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 1,600 independent or
exclusive agents to market life insurance in 41 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.
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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.
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 include 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.
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 Advisor Regulation. Depending on their size, investment advisors
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 Year 2000 will have a substantial effect on the business of the
Company. 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. The
remainder of research, modification and testing efforts will be concluded by
June 30, 1999. Further validations through testing and follow-up procedures will
be conducted throughout calendar year 1999. The Company expects that all
mission-critical systems will be Year 2000 compliant prior to June 30, 1999.
Because third party failures could have a material impact on the Company's
ability to conduct business, questionnaires have been 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 that have been returned to date are being assessed by the Company
and are being categorized based upon readiness for the Year 2000 issues. They
are also being prioritized in order of significance to the business of the
Company. To the extent that business-critical vendors do not provide the Company
with satisfactory evidence of the readiness to handle Year 2000 issues,
contingency plans will be developed. The Company intends to make every
reasonable effort to assess the Year 2000 readiness of its critical business
partners and to create actions plans to address the identified risks.
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In addition to safeguarding against possible internal and external
malfunctions, the Company is developing a contingency plan to operate
independent of systems that could be affected by the Year 2000 problem. The
plan, which includes backup telephone systems, contingent vendors and suppliers
and manual routing of transactions, such as security trades, will be in place by
June 30, 1999.
Testing and remediation of all the Company's systems and applications is
expected to cost approximately $25,000 from inception in calendar year 1998
through completion in calendar year 1999. All estimated costs have been budgeted
and are expected to be funded by cash flows from operations.
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.
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 on the third and sixth floors of 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
None.
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 NASDAQ, the
following table shows the price range of the Company's Common Stock since it
began trading on April 28, 1998.
<TABLE>
<CAPTION>
BID ASK
HIGH LOW HIGH LOW
---- --- ---- ---
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April 28 - June 30, 1998 5 3/4 4 1/4 6 5
July 1 - September 30, 1998 5 1 5 1/8 1 1/4
October 1 - December 31, 1998 1 7/8 1 1/4 2 1/2 1 1/2
</TABLE>
HOLDERS
As of March 19, 1999, there were approximately 152 holders of record 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.
<TABLE>
<CAPTION>
NUMBER OF OFFERING EXEMPTION
DATE SHARES PRICE CLAIMED
---- ------ ----- -------
<S> <C> <C> <C> <C>
February 1998 (4) 64,240 $0.20 (1)
November 1997 175,758 1.92 (1)(2)
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)
December 1996 34,151 1.50 (1)
July 1996 46,026 1.50 (1)
April 1996 5,759 1.50 (1)
</TABLE>
- --------------------
(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
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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.
(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.
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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. The information for the
years ended December 31, 1998, 1997 and 1996, are derived from the audited
financial statements of the Company.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997 1996
---------------- ---------------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from investment services $2,452 $2,373 $1,523
Revenues from insurance services 5,876 4,224 379
Total revenues 8,420 6,624 1,917
Investment services expense 2,081 2,040 1,325
Insurance services expense 6,376 3,915 45
General and administrative expenses 2,144 1,023 663
Total expenses 10,611 7,278 2,033
Operating loss (2,191) (654) (116)
Net loss (2,113) (810) (171)
Net loss per share of Common
Stock after dividends on preferred stock (0.77) (0.45) (0.13)
Operating margin
Investment services 15% 14% 13%
Insurance services -8% 7% 88%
G&A expenses as % of Revenues 25% 15% 35%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
1998 1997
---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and certificates of deposit $ 1,815 $ 1,218
Amounts on deposit with reinsurers 32,786 30,483
Total assets 39,204 35,878
Policy Reserves 34,277 32,966
Total debt 60 87
Shareholders' equity 2,617 1,108
</TABLE>
Page 11
<PAGE> 12
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
The following table sets forth the components of the Company's revenues for the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1998 1997
---- ----
<S> <C> <C>
Investment services $2,452,073 $2,373,388
Insurance agency services 262,360 145,127
Insurance 5,613,876 4,079,129
Other 91,895 25,883
---------- ----------
Total revenue $8,420,204 $6,623,527
========== ==========
</TABLE>
Total revenues increased 27% from $6,623,527 in 1997 to $8,420,204 in 1998.
The increase resulted from the acquisition in full of Rushmore Life Insurance
Company in April 1997 coupled with growth of the insurance sales division. This
increase included $3,328,928 in insurance policy income during 1998 compared to
$2,525,159 during 1997. This insurance policy income represents Rushmore Life's
quota share of policy income under modified coinsurance agreements. Investment
income also increased from $1,553,970 to $2,284,948 as a result of that
acquisition. Revenue growth was further enhanced by an increase in revenue of
the insurance agency services division of $117,233 or 81%.
The revenue increase of the insurance agency services resulted from
increased recruiting and sales. The result has been steady increases in new
annualized premium submitted from $257,000 in the first quarter of 1998, to
$408,000 during the second quarter, to $611,000 during the third quarter and
$1,517,000 for the fourth quarter. This premium, net of denials and lapses, will
ultimately produce commission overrides ranging from 4% to 15%. However, the
bulk of that commission revenue will be earned in 1999.
EXPENSES
Insurance Services expense components changed substantially due to the
consolidation of Rushmore Life beginning in April 1997. In the first quarter of
1997, insurance service expenses included only the loss of the Company's
minority ownership in Rushmore Life, accounted for on the equity method. That
loss amounted to $19,264. The first three months of 1997 included equity in
losses of subsidiary, whereas the first three months of 1998 included the
consolidated operations of Rushmore Life. As a result of consolidating the
results of Rushmore Life for the entire year ended December 31, 1998 and
consolidating only the last three quarters of 1997, insurance benefits and
expenses increased proportionately. The consolidated operations of Rushmore Life
include expense categories of benefits, claims and losses, representing claims
against policies coinsured by Rushmore Life and interest credited to
policyholder accounts in the amount of $2,599,087 during 1998 compared to
$2,239,093 in 1997. Amortization of deferred policy acquisition costs increased
$732,917 to $944,911 and amortization of present value of insurance in force
increased $981,265. Based on the expected future profits of policies in force at
the time of the acquisition of Rushmore Life, an asset was established in the
amount of $1,155,908. 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. Amortization was then established based on the
expected pattern of those future profits. These increases were offset by other
insurance services expenses and policyholder benefits which increased only 23%
in spite of consolidating the full year of life company operations in 1998.
During the year 1998, the average credited interest rates on outstanding
universal life policies was 5.06% as compared to 5.22% for the year 1997.
Investment services expenses increased 2% from $2,040,267 to $2,080,511.
Commissions paid as a percentage of commission revenue decreased from 87% in
1997 to 86% in 1998. The commission ratio has continued to decline as more
representatives have been added at lower payout percentages. Direct overhead
associated with investment services increased 26% from $111,767 to $141,283.
This was primarily due to increases in staff that resulted in increases in quote
service and telephone expenses.
Page 12
<PAGE> 13
General and administrative expenses increased 110% from $1,022,536 to
$2,143,695 due to increases in staff, office space accounting, legal and
promotional expenses. Payroll expenses and payroll taxes increased $533,802.
Office rent increased $113,695. Fees to attorneys, accountants and consultants
increased $187,151. Advertising and promotional expenses increased $67,628.
These increases were the result of the implementation of the Company's business
plan upon receipt of the proceeds of the initial public offering.
OPERATING INCOME (LOSS)
The Company's operating loss for the year ended December 31, 1998 of
$2,190,535 represents an increase of $1,536,111 from the loss of $654,424 for
the year 1997. The Company's net loss applicable to common shareholders for the
year 1998 increased $1,301,840 from $825,934 or $0.45 per share (basic and
diluted) to $2,127,774 or $0.77 per share (basic and diluted). The net losses in
1998 and 1997 were increased by deductions for preferred dividends paid of
$15,201 and $16,283 respectively. In the first quarter of 1997, insurance
services expenses included only the loss of the Company's minority ownership in
Rushmore Life, accounted for on the equity method, whereas the first three
months of 1998 included the consolidated operations of Rushmore Life. Excluding
intercompany expenses and revenues, Rushmore Life reported a net loss of
$264,862 during 1998 compared to a net income of $104,195 for 1997. The increase
in the deferred tax asset valuation allowance of $702,414 in 1998 compared to an
increase of $118,860 in 1997 further increased the net loss. The increase in the
Company's net loss was also the result of increases in general and
administrative expenses of $1,121,159.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues increased 245% from $1,917,470 for the year 1996 to
$6,623,527 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; and $4,084,803 from the consolidated operations of Rushmore
Life following its acquisition in full in April 1997. The revenues of Rushmore
Life included $2,525,159 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 $1,917,470 to $2,538,724. 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 $2,239,093,
amortization of deferred acquisition costs of $211,994, amortization of present
value of future profits of $392,581 and other insurance company expenses of
$1,027,134. 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.
General and administrative expenses increased 54% from $663,172 to
$1,022,536 due to staff increases and office relocation expenses in 1997.
Page 13
<PAGE> 14
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 loss for the year 1997 of $654,424 represents an
increase of $538,572 from the loss of $115,852 for the year 1996. The Company's
net loss applicable to common shareholders for the year 1997 increased $645,156
from $180,778 or $0.13 per share to $825,934 or $0.45 per share. The net loss in
1997 included $16,283 of preferred dividends paid compared to $9,887 in 1996.
LIQUIDITY
Cash Flows from Operating Activities. The Company's net loss of $2,112,573
for the year ended December 31, 1998 was adjusted by non-cash expenses
consisting of realized gains and losses $10,742, depreciation ($54,875), and
stock-based compensation ($10,980) and offset by various cash flow adjustments
aggregating a net use of cash in the amount of $474,269 to yield a net cash flow
used by operating activities in the amount of $2,531,729.
Cash Flows From Investing Activities. Cash flow from investing activities
during the year ended December 31, 1998 was a use of $1,799,729, primarily due
to the purchases of certificates of deposit of $1,201,284, purchases of
furniture and equipment totaling $406,101 and net purchases of bonds available
for sale of $196,420.
Cash Flows from Financing Activities. During the year ended December 31,
1998, the Company raised $3,768,409 from the sale of Common Stock, acquired
7,493 shares of the Company's common stock at a cost of $37,464 and redeemed
2,405 shares of preferred stock at a cost of $24,050. The remaining changes in
both periods resulted from loan principal payments, additional borrowings and
dividends.
Credit Facilities and Resources. The Company's cash and investments (other
than amounts of deposit with reinsurer) at December 31, 1998 was $2,019,739, of
which $1,398,869 is held by Rushmore Life and is not immediately available to
the holding 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, proceeds from the
recapture of the Conseco Life Insurance Company business, reduced benefits and
expenses due to that recapture and revenues from operations 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.
MARKET RISK
The Company assumes risks on interest sensitive insurance products via
modified coinsurance agreements. These agreements call for all funds to be
withheld by the insurance company issuing the policies. Therefore, all interest
rate and default risks associated with the underlying investments are retained
by the company issuing the insurance policy. These same coinsurance agreements
also call for investment income credits to the Company equal to the rate being
credited to the policyholder plus a fixed percent. Therefore, the issuing
company also retains disintermediation risks associated with these policies. The
majority of these risks were recaptured subsequent to December 31, 1998. See
note seventeen of the notes to consolidated financial statements.
Page 14
<PAGE> 15
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 in the
following manner:
<TABLE>
<S> <C>
Offering Costs
Underwriters fee $ 339,363
Legal fees 204,913
Accounting 126,202
Printing 96,472
Other 160,616
Contribution to Rushmore Life Insurance 300,000
Repayment of payable to Rushmore Life Insurance 381,825
Repayment of loan to Rushmore Life Insurance 83,693
Repayment of note 41,657
Capital contributed to Rushmore Securities 62,200
Working capital to Rushmore Securities 80,198
Commission advances to agents of Rushmore Agency 257,449
Working capital to Rushmore Agency 533,870
Working capital to Rushmore Advisors 138,726
Acquisition of fixed assets 406,101
Short term investments 460,992
General working capital 810,098
----------
Total Proceeds Applied $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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that an entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999 with earlier application permitted. Management does not
anticipate this Statement will have a material adverse impact on the
consolidated financial position or the results of operations of the Company.
Page 15
<PAGE> 16
Subsequent Event
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 Conseco
will recapture all risks formerly assumed by Rushmore Life. 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 with
a realized gain before taxes of approximately $1,016,000. (Please reference
Footnote 17)
ITEM 7. FINANCIAL STATEMENTS
Below is an index of financial statements. The financial statements required by
this item begin at Page F-1 hereof.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report F-1
Independent Auditors' Report F-2
Consolidated Balance Sheet - December 31, 1998 F-3
Consolidated Statements of Income for the Years Ended December 31, 1998 and 1997 F-4
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1997 F-6
Notes to Consolidated financial Statements F-7
</TABLE>
Page 16
<PAGE> 17
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, 1998, and the related
consolidated statements of income, shareholders' equity, and cash flows for the
years ended December 31, 1998 and 1997. 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
audits. We did not audit the financial statements of Rushmore Securities
Corporation, a wholly-owned subsidiary, which statements reflect total assets
constituting 1 percent in 1998 and total revenues constituting 28 percent in
1998 and 34 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 audits 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 audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits 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, 1998, and the results of their operations and
their cash flows for the years ended December 31, 1998 and 1997 in conformity
with generally accepted accounting principles.
KPMG LLP
March 17, 1999
Page F-1
<PAGE> 18
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, 1998, 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 years ended December 31, 1998 and
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide 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, 1998 and the results of its operations and its
cash flows for the years ended December 31, 1998 and 1997 in conformity with
generally accepted accounting principles.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
January 15, 1999
Page F-2
<PAGE> 19
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Investments:
Cash and cash equivalents $ 613,814
Certificates of deposit 1,201,284
Amounts on deposit with reinsurer 32,785,657
Bonds available for sale; amortized cost $203,883 204,641
------------
Total investments 34,805,396
------------
Deferred policy acquisitions costs 1,989,174
Accounts receivable and due from reinsurers 1,328,659
Prepaid expenses and deposits 270,894
Equipment, net of accumulated depreciation 470,837
Deferred federal income taxes 91,674
Goodwill 246,326
Other assets 628
------------
Total assets $ 39,203,588
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 87,393
Universal life contract liabilities 34,189,968
Present value of future profits 610,519
Claims payable 128,216
Notes payable 60,352
Due to reinsurers 1,127,099
Accrued expenses & other liabilities 383,291
------------
Total liabilities 36,586,838
------------
Shareholders' Equity:
Preferred stock-9% cumulative preferred stock, $10 par value,
2,000 shares issued and outstanding at December 31, 1998 20,000
Preferred stock-Series A cumulative preferred stock, $10 par
value, 13,687 shares issued and outstanding at December 31, 1998 136,870
Common stock-$0.01 par value, 10,000,000 shares authorized,
3,066,597 shares issued and 2,977,124 outstanding at December 31, 1998 30,666
Common stock subscribed, 10,000 shares at $0.01 at December 31,1998 100
Additional paid in capital 6,086,850
Treasury stock, 89,473 shares at cost (116,345)
Retained earnings (deficit) (3,453,470)
Accumulated other comprehensive income 758
Shareholder/subscription receivables:
Common stock subscriptions receivable (43,920)
Shareholder loans (44,759)
------------
Total shareholders' equity 2,616,750
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,203,588
============
</TABLE>
See accompanying notes to consolidated financial statements
Page F-3
<PAGE> 20
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
Revenue:
<S> <C> <C>
Revenue from Insurance Services:
Insurance policy income $ 3,541,675 $ 2,656,486
Net Investment income 2,284,948 1,553,970
Agency Management fee 49,613 13,800
Revenue from Investment Services:
Commissions and fees 2,243,608 2,218,888
Asset management 208,465 154,500
Other 91,895 25,883
------------ ------------
Total revenues 8,420,204 6,623,527
------------ ------------
Expenses:
Insurance Services Expenses:
Other insurance services expenses 1,457,709 1,051,683
Policyholder benefits 2,599,087 2,239,093
Amortization of deferred policy
acquisition costs 944,911 211,994
Amortization of present value of insurance in force 1,373,846 392,581
Equity in losses of subsidiary -- 19,264
Investment services expenses:
Commission expense 1,939,228 1,928,500
Other investment services expenses 141,283 111,767
General and administrative 2,143,695 1,022,536
Stock based compensation 10,980 300,533
------------ ------------
Total expenses 10,610,739 7,277,951
------------ ------------
Operating loss (2,190,535) (654,424)
Interest expense 2,961 19,540
------------ ------------
Loss from continuing
operations before income taxes (2,193,496) (673,964)
Provision (benefit) for income taxes (80,923) 105,542
------------ ------------
Loss from continuing operations (2,112,573) (779,506)
Discontinued operations (net) -- (30,145)
------------ ------------
Net loss $ (2,112,573) $ (809,651)
============ ============
Loss from continuing operations
applicable to common shareholders $ (2,127,774) $ (795,789)
============ ============
Net loss applicable to common
shareholders $ (2,127,774) $ (825,934)
============ ============
Basic and diluted:
Loss from continuing operations per
share of common stock, after dividends on
preferred stock $ (0.77) $ (0.44)
============ ============
Net loss per share of common stock,
after dividends on preferred stock $ (0.77) $ (0.45)
============ ============
Weighted average common shares outstanding 2,775,428 1,821,327
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Page F-4
<PAGE> 21
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
PREFERRED COMMON STOCK PAID IN EARNINGS
STOCK STOCK SUBSCRIBED CAPITAL (DEFICIT)
----- ----- ---------- ------- ---------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 180,920 14,193 176 826,547 (531,246)
Comprehensive income (loss):
Net loss -- -- -- -- (809,651)
Unrealized Gains(Losses) on securities
available for sale -- -- -- -- --
Comprehensive income (loss)
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 -- 1,287 -- 554,193 --
Common stock subscribed, 4,567 shares -- -- 46 8,723 --
Treasury stock acquired -- -- -- -- --
Preferred stock dividends paid -- -- -- (16,283) --
Stock subscriptions receivable -- -- (176) (26,214) --
Loan and advances to officers/shareholders,
net of repayments -- -- -- -- --
Increase in receivable from affiliates -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1997 180,920 21,870 46 2,486,244 (1,340,897)
Comprehensive income (loss):
Net loss -- -- -- -- (2,112,573)
Unrealized Gains(Losses) on securities
available for sale -- -- -- -- --
Comprehensive income (loss)
Common stock issued, 815,341 shares -- 8,154 (46) 3,548,701 --
Common stock subscribed, 10,000 shares -- -- 100 54,900 --
Common stock options exercised, 64,240 shares -- 642 -- 12,206 --
Treasury stock acquired 7,493 shares -- -- -- -- --
Preferred stock redeemed (24,050) -- -- -- --
Preferred stock dividends paid -- -- -- (15,201) --
Stock subscriptions receivable -- -- -- -- --
Loan and advances to officers/shareholders,
net of repayments -- -- -- -- --
Decrease in receivable from affiliates -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 $ 156,870 30,666 100 6,086,850 (3,453,470)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED SHAREHOLDER/
COMPREHENSIVE TREASURY SUBSCRIPTION
INCOME (LOSS) STOCK RECEIVABLES TOTAL
------------- ----- ----------- -----
<S> <C> <C> <C> <C>
Balance, December 31, 1996 -- -- (139,653) 350,937
Comprehensive income (loss):
Net loss -- -- -- (809,651)
Unrealized Gains(Losses) on securities
available for sale (110) -- -- (110)
-----------
Comprehensive income (loss) (809,761)
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 -- -- -- 555,480
Common stock subscribed, 4,567 shares -- -- -- 8,769
Treasury stock acquired -- (78,881) -- (78,881)
Preferred stock dividends paid -- -- -- (16,283)
Stock subscriptions receivable -- -- 17,619 (8,771)
Loan and advances to officers/shareholders,
net of repayments -- -- (3,954) (3,954)
Increase in receivable from affiliates -- -- (35,005) (35,005)
----------- ----------- ----------- -----------
Balance, December 31, 1997 (110) (78,881) (160,993) 1,108,199
Comprehensive income (loss):
Net loss -- -- -- (2,112,573)
Unrealized Gains(Losses) on securities
available for sale 868 -- -- 868
-----------
Comprehensive income (loss) (2,111,705)
Common stock issued, 815,341 shares -- -- -- 3,556,809
Common stock subscribed, 10,000 shares -- -- -- 55,000
Common stock options exercised, 64,240 shares -- -- -- 12,848
Treasury stock acquired 7,493 shares -- (37,464) -- (37,464)
Preferred stock redeemed -- -- -- (24,050)
Preferred stock dividends paid -- -- -- (15,201)
Stock subscriptions receivable -- -- (35,151) (35,151)
Loan and advances to officers/shareholders,
net of repayments -- -- 57,701 57,701
Decrease in receivable from affiliates -- -- 49,764 49,764
----------- ----------- ----------- -----------
Balance, December 31, 1998 758 (116,345) (88,679) 2,616,750
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page F-5
<PAGE> 22
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(2,112,573) $ (809,651)
Adjustments to reconcile net (loss) to net
cash (used) by operating activities:
Realized (gains) and losses net (10,742) --
Depreciation and amortization 54,875 32,361
Loss from equity investment -- 19,264
Stock based compensation 10,980 300,533
CHANGE IN ASSETS AND LIABILITIES NET OF
EFFECTS FROM PURCHASE OF RUSHMORE LIFE:
(Increase) decrease in assets:
Accounts receivable and due from reinsurers (811,742) (108,559)
Prepaid expenses and deposits (190,796) (63,079)
Deferred policy acquisition costs 306,523 (229,503)
Present value of future profits 1,373,846 392,581
Amounts on deposit with reinsurer (2,302,383) (2,694,507)
Net deferred federal income taxes (81,602) --
Other assets 6,297 734
Increase (decrease) in liabilities:
Accrued expenses and other liabilities (36,136) 125,105
Due to reinsurers 131,216 837,607
Future policy benefits 1,201 (5,184)
Universal Life liabilities 1,309,957 1,676,603
Claims payable (180,650) 103,650
Net deferred federal income taxes -- 253,807
----------- -----------
Net cash flows (used) by operating activities (2,531,729) (168,238)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (406,101) (56,561)
Cash acquired in acquisition of Rushmore Life net of cash paid -- 1,181,143
Purchase of equity securities available for sale (290,719) (797)
Purchase of bonds available for sale (1,296,420) --
Increase in certificates of deposit (1,201,284) --
Sales of equity securities available for sale 294,795 --
Sales of bonds available for sale 1,100,000 --
----------- -----------
Net cash flows provided (used) by investing activities (1,799,729) 1,123,785
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to officers and affiliate 57,701 (3,954)
Proceeds from sale of Common Stock, net of offering cost 3,768,409 185,092
Preferred stock redeemed (24,050) --
Purchase of treasury stock (37,464) (78,881)
Preferred Stock dividends paid (15,201) (16,283)
Payments on notes payable (26,943) 63,271
----------- -----------
Net cash flows provided by financing activities 3,722,452 149,245
----------- -----------
Change in cash and cash equivalents (609,006) 1,104,792
Cash and cash equivalents at beginning of period 1,222,820 118,028
----------- -----------
Cash and cash equivalents at end of period $ 613,814 $ 1,222,820
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 9,772 $ 19,966
Cash paid (received) for income taxes $ (8,299) $ 47,702
</TABLE>
See accompanying notes to consolidated financial statements
Page F-6
<PAGE> 23
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 coinsures 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 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 has
been consolidated in the accompanying consolidated financial statements.
Rushmore Realty, Incorporated ("Rushmore Realty") is a wholly owned subsidiary
that was acquired from a related party, D. M. "Rusty" Moore, in April 1998 for a
cash purchase price of $10. Rushmore Realty was organized as a Texas
corporation in 1993 and has no current operations.
Page F-7
<PAGE> 24
(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, Rushmore Life, and Rushmore Realty and its
affiliate Rushmore Agency. 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 Rushmore Life. The investment in
Rushmore Life prior to April 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
Certificates of deposit purchased with maturities generally less than one
year, are reflected at cost, which approximates estimated fair value. All
short-term investments with maturities of less than three months are
considered to be cash equivalents. Bonds available for sale have maturities
of less than three years and are carried at fair value based on quoted
market price. The Company recorded a change in unrealized gains of $868 for
1998. The Company also reported net realized gains of $10,742 as a
component of Net Investment Income for the year ended December 31,1998. Net
realized gains were composed of gross gains of $11,837 and gross losses of
$1,095. Proceeds from sales of investments available for sale were
$1,394,795 for the year ended December 31, 1998. The Company determines
realized gains or losses based on the specific identification method.
The Company had assets of $100,000 as of December 31, 1998 and 1997, on
deposit with state regulatory authorities to fulfill statutory
requirements.
(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
crediting 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.
Page F-8
<PAGE> 25
(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 $1,766,427 at
December 31, 1998.
(g) Future Policy Benefits
The liability for future policy benefits of long 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 universal life
products. These excess charges have been deferred and are being recognized
in income over the period that 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 policyholder account balances and benefit claims
incurred in excess of policyholder account balances.
(j) Recognition of Commission Revenue
Commission revenue on insurance agency policy sales is recognized when the
premium is billed to the policyholder and therefore earned and is included
in insurance policy income in the consolidated statements of income.
Commission revenue on securities transactions (and related expense) is
recorded on a trade date basis. Securities commissions related to mutual
funds are recognized as income when received.
(k) Policy and Contract Claims
Policy and contract claims include provisions for reported claims in
process of settlement and incurred but not reported claims valued in
accordance with the terms of the related policies and contracts.
Page F-9
<PAGE> 26
(l) 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 maximum risk retained by the Company on any one life is $25,000.
The Company reports assets and liabilities related to insurance contracts
before the effects of reinsurance. Reinsurance recoverables and prepaid
reinsurance premiums (including amounts related to insurance liabilities)
are reported as assets. Estimated reinsurance recoverables are recognized
in a manner consistent with the liabilities related to the underlying
reinsured contracts.
(m) Equipment
Equipment is recorded at cost. Depreciation is provided on the
straight-line 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.
(n) 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.
(o) 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.
(p) Net Income (Loss) per Common Share
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 reflect 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, 1998 and 1997 were not included in the computation of diluted income
(loss) per share because of the net loss for the years ended December 31,
1998 and 1997 and as such were considered antidilutive.
Page F-10
<PAGE> 27
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 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Loss from continuing operations: $(2,112,573) $ (779,506)
Less dividends on preferred stock (15,201) (16,283)
----------- -----------
Loss from continuing operations applicable
To common shares, basic and diluted (2,127,774) (795,789)
Less discontinued operations -- (30,145)
----------- -----------
Net loss applicable to common shares
basic and diluted $(2,127,774) $ (825,934)
=========== ===========
Weighted average number of common shares
outstanding - basic and diluted 2,775,428 1,821,327
=========== ===========
</TABLE>
(q) Comprehensive Income
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
130, "Reporting Comprehensive Income," in 1998. SFAS No. 130 establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of financial statements. Comprehensive income
consists of net income and net unrealized gains (losses) on securities
available for sale and is presented in the consolidated statements of
shareholders' equity. The Statement required only additional disclosures in
the consolidated financial statements; it does not affect the Company's
financial position or results of operations. Prior year financial
statements have been reclassified to conform to the requirements of SFAS
No. 130.
(r) 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 financial statement amounts 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.
(s) Reclassification
Certain 1997 balances have been reclassified to conform to the 1998
presentation.
(3) INDUSTRY SEGMENT INFORMATION
The Company has adopted 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 previous 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 previous standards. The statement required only
additional disclosures in the consolidated financial statements; it does not
affect the consolidated financial position or results of operations of the
Company.
The Company's segments have been identified based on products and services
offered as well as risks assumed in a manner consistent with the data utilized
by the Chief Executive Officer in evaluating operations. Rushmore Securities and
Rushmore Advisors offer broker dealer services and funds management
respectively. Their operations have been included in the investment services
segment. Both Rushmore Agency and Rushmore Life offer insurance products but
have been further segregated. Rushmore agency offers life, health and disability
Page F-11
<PAGE> 28
insurance and annuities and earns commissions on the sales of those products.
The operations of Rushmore Agency are reported as the insurance agency services
segment. Rushmore Life assumes mortality risks by way of coinsurance agreements
under which it assumes up to a 50% interest in the policies written through
representatives of Rushmore Agency. The operations of Rushmore Life have been
reported as the insurance segment.
The assets of the parent company, Rushmore Financial Group, Inc., are included
in the Other category of identifiable assets and include primarily equipment of
$469,472, net of accumulated depreciation, and cash and investments of $488,043.
The expenses of the parent company are included in Other Expenses and are
composed primarily of salaries, professional fees and rent relating to holding
company operations.
Page F-12
<PAGE> 29
The following summarizes the Company's industry segment data of identifiable
assets as of December 31, 1998:
<TABLE>
<S> <C>
Identifiable assets:
Investment services $ 258,415
Insurance agency services 291,252
Insurance 37,530,455
Other 1,123,466
-----------
Total assets per consolidated
balance sheet $39,203,588
===========
</TABLE>
The following summarizes the Company's industry segment data of net income for
the years ended December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Revenue
Investment services $ 2,452,073 $ 2,373,388
Insurance agency services 262,360 145,127
Insurance 5,613,876 4,079,129
Other 91,895 25,883
------------ ------------
Total revenue 8,420,204 6,623,527
------------ ------------
Expenses
Investment services 2,766,405 2,369,353
Insurance agency services 702,428 49,594
Insurance 5,982,855 3,875,066
Other 1,159,051 983,938
------------ ------------
Total expenses 10,610,739 7,277,951
------------ ------------
Interest
Investment services -- 62
Insurance agency services (5,761) 12,384
Other 8,722 7,094
------------ ------------
Total interest 2,961 19,540
------------ ------------
Provision for income taxes
Insurance (80,923) 105,542
------------ ------------
Net income (loss)
Investment services (314,332) 3,973
Insurance agency services (434,307) 83,147
Insurance (288,056) 98,521
Other (1,075,878) (965,149)
Discontinued Operations (net) -- (30,145)
------------ ------------
Net (loss) per consolidated statements
of income $ (2,112,573) $ (809,651)
============ ============
</TABLE>
Page F-13
<PAGE> 30
(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.
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:
<TABLE>
<S> <C>
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
============
</TABLE>
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.
(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, 1998, Rushmore Securities had net capital of approximately
$69,431 and net capital requirements of $50,000. Rushmore Securities' ratio of
aggregate indebtedness to net capital was 2.17 to 1. The Securities and Exchange
Commission permits a ratio of no greater than 15 to 1.
(6) CONCENTRATION RISK
At December 31, 1998, and at various other times throughout 1998, 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. None of the cash balances exceeded
the insured limit at December 31, 1998.
(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. ("Conseco") 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 that are issued by CLIC and SWL as a result of applications
submitted by agents affiliated with the Company. The quota share of the Company
percentage falls between 33-1/3% and 50% on all business submitted. Because the
treaties are on the basis of modified coinsurance, CLIC and SWL establish 100%
Page F-14
<PAGE> 31
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, 1998 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 periods 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, 1998, unearned revenue reserves included
in universal life contract liabilities were $978,515.
For the years ended December 31, 1998 and 1997 the Company assumed statutory
premiums of approximately $6,288,000 and $7,507,000, respectively, and paid
approximately $1,834,000 and $1,821,000, respectively, in retroceded premiums.
CLIC, Conseco, 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 years ended December 31, 1998 and 1997,
Rushmore Life paid these companies for such services and policy maintenance as
follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Conseco, Inc. fees $201,006 $206,312
FMI fees 19,498 20,379
CLIC & SWL policy maintenance
fees 288,834 301,972
</TABLE>
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
that are contained in the reinsurance agreements. Rushmore Life paid CLIC and
SWL approximately $1,834,000 and $1,821,000 for reinsurance costs for the years
ended December 31, 1998 and 1997, respectively. CLIC has ceded to Rushmore Life
Company approximately $865,176,000 of insurance in force as of December 31,
1998. Pursuant to the reinsurance agreements with CLIC Rushmore Life has in turn
retroceded approximately $481,562,000 of insurance in force to CLIC, retaining
risk equal to the difference.
SWL has ceded to Rushmore Life approximately $44,145,000 of insurance in force
as of December 31, 1998. Pursuant to the reinsurance agreement with SWL,
Rushmore Life has in turn retroceded approximately $29,337,000 of insurance in
force to SWL, retaining risk equal to the difference.
(8) EQUIPMENT
The principal categories of equipment are summarized as follows:
<TABLE>
<S> <C>
Computer equipment and software $174,434
Office furniture and fixtures 169,796
Leasehold improvements 233,411
--------
Total costs 577,641
Less accumulated depreciation 106,804
--------
$470,837
========
</TABLE>
Page F-15
<PAGE> 32
Depreciation included in the determination of net income amounted to $45,597 and
$19,897 in 1998 and 1997, respectively.
(9) 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 15,687 shares or $156,870. 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 Cumulative Preferred Stock
which was offered at a price of $10 per share. In 1998, the Company redeemed
2,300 9% cumulative preferred shares at a cost of $23,000 and 105 series A
cumulative preferred shares at a cost of $1,050. 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. No dividends were in arrears
at December 31, 1998 and 1997.
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.
Page F-16
<PAGE> 33
(10) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases its offices under operating leases that expire at
various dates through 2002. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999 282,564
2000 270,588
2001 144,714
2002 51,378
</TABLE>
Rent expense for the year totaled approximately $272,376 and $158,630 in
1998 and 1997, respectively, and is included in general and administrative
expenses.
(b) Litigation
Rushmore Securities has been named as a defendant in an arbitration filed
with the Director of Arbitration of the National Association of Securities
Dealers, Inc. Claimants seek $257,000, damages, interest, attorney's fees
and costs. The matter is set for hearing on May 18, 1999. Rushmore
Securities is strenuously contesting the claims made by claimants.
Rushmore Securities is named as a defendant in another arbitration filed
with the National Association of Securities Dealers. The claimant alleges
losses of about $87,000 in connection with his breach of contract,
misrepresentation and fraud claims. The case is still in the early stages
of discovery and it is difficult to predict how the arbiters will
ultimately rule.
The consolidated financial statements do not include any adjustments that
might result from the outcome of the above uncertainties. In the opinion of
Rushmore Securities' management, the ultimate disposition of these matters
will not have a material adverse effect on Rushmore Securities' financial
condition.
(11) INCOME TAXES
The provision for income taxes for the years ended December 31, 1998 and 1997
consists of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Current expense (benefit) $ 679 $ (148,265)
Deferred expense (benefit) (784,016) 134,947
Change in valuation allowance 702,414 118,860
---------- -----------
$ (80,923) $ 105,542
========== ==========
</TABLE>
Page F-17
<PAGE> 34
Deferred federal income tax were comprised of the following at December 31,
1998:
<TABLE>
<S> <C>
Deferred federal income tax assets:
Life reserves $ 11,646,473
Present value of future profits 207,576
Accrued expenses 83,047
Net operating loss carryforward 801,811
Alternative minimum tax credit 36,436
Equity investment in Rushmore Life at date
of acquisition 33,477
------------
Gross deferred income tax assets 12,080,820
Valuation allowance (917,352)
------------
Total gross deferred income tax assets 11,891,468
Deferred income tax liabilities:
Funds on deposit (11,147,123)
Deferred acquisition costs (650,536)
Due premium (2,135)
------------
Total deferred income tax liabilities (11,799,794)
------------
Deferred federal income taxes $ 91,674
============
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997
---------- -------
<S> <C> <C>
Computed "expected" federal income tax expense (benefit) $(745,789) $(239,396)
Tax adjustments:
Meals and entertainment 5,583 10,825
Stock compensation -- 102,181
Goodwill amortization 3,602 --
Small life company deduction -- 95,535
Change in valuation allowance 702,414 118,860
Other (46,733) 17,537
--------- ---------
Reported federal income tax expense (benefit) $ (80,923) $ 105,542
========= =========
</TABLE>
The Company has net operating losses of $2,222,841 excluding the insurance
operations of Rushmore Life, which files a separate return, which may be
used to offset future taxable income. Rushmore Life also has a net
operating loss carryforward of $135,427. These loss carryforwards expire
at various dates through 2013. 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, equity investment in Rushmore Life at
the date of acquisition, and the effect of the small life company
deduction.
(12) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Changes in deferred acquisition costs were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 2,295,697 $ 2,066,194
Additions 638,388 441,497
Amortization related to operations (944,911) (211,994)
------------ ------------
Balance, end of year $ 1,989,174 $ 2,295,697
============ ============
</TABLE>
Page F-18
<PAGE> 35
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 was positive, while later present values are negative producing a net
liability. 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.
Information related to the present value of future profits for the year ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance at beginning of year $ 763,327 $ 1,155,908
Accretion of interest 20,734 33,369
Amortization (1,394,580) (425,950)
----------- -----------
Balance at end of year $ (610,519) $ 763,327
============ ===========
</TABLE>
(13) 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 249,999 shares were granted
under the plan as of December 31, 1998 and 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.
Page F-19
<PAGE> 36
The per share weighted-average fair value of stock options granted during 1998
and 1997 was $1.84 and $0.61, respectively, on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used: 1998 - expected volatility of 129.51%, no dividend yield, risk-free
interest rate of 4.805% and an expected life of 6.0 years. 1997 - no expected
volatility or dividend yield, risk-free interest rate of 6.495% and an expected
life of 6.7 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
consolidated 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 losses would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Net loss applicable to common shareholders:
As reported $ (2,127,774) $ (825,934)
Pro forma (2,190,182) (833,435)
Net loss per share - basic and diluted:
As reported (.77) (.45)
Pro forma (.79) (.46)
</TABLE>
Pro forma net losses reflect only options granted since 1996. Therefore, the
full impact of calculating compensation cost for stock options under SFAS No.
123 is not reflected in the pro forma net loss 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:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1996 137,500 $ 0.50
Granted 55,749 1.79
Exercised (28,426) (0 32)
-------
Balance at December 31, 1997 164,823 0.96
Granted 52,000 2.21
Exercised (64,240) (0.20)
Expired (27,500) (1.37)
-------
Balance at December 31, 1998 125,083 1.79
=======
</TABLE>
At December 31, 1998, the range of exercise prices and weighted-average
remaining contractual life of outstanding options was $1.04 - $5.00 and 5.29
years, respectively.
At December 31, 1998 and 1997, the number of options exercisable was 80,483 and
148,573 respectively; and the weighted-average exercise price of those options
was $1.51 and $0.86, respectively.
Page F-20
<PAGE> 37
(14) STOCK BASED COMPENSATION
During 1998 10,000 shares were subscribed to by employees at a subscription
price of $0.01 per share and a fair value of $5.50 per share with a vesting
schedule over 5 years. Stock based compensation of $10,980 was recognized by the
Company and is included in consolidated statements of income for the year ended
December 31, 1998. During 1997, 128,761 shares of common stock were issued to
employees and agents at an average price per share of $1.92 and an average
discounted fair value per share of $4.25. 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.
(15) 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 instruments. Fair value estimates, methods and
assumptions are set forth below for the Company's financial instruments at
December 31, 1998:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 613,814 613,814
Certificates of deposit 1,201,284 1,201,284
Amounts on deposit with reinsurer 32,785,657 32,785,657
Bonds available for sale 204,641 204,641
Accounts receivable and due from reinsurers 1,328,659 1,328,659
Shareholder loans 44,759 44,759
Financial liabilities - notes payable 60,352 60,352
</TABLE>
The carrying amounts of cash and cash equivalents, certificates of deposit,
accounts receivable and due from insurers and shareholder loans 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 rates approximate
market interest rates at December 31, 1998.
The fair value of bonds 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.
Page F-21
<PAGE> 38
(16) SHAREHOLDERS' EQUITY AND RESTRICTIONS
At December 31, 1998 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 statutory surplus at December 31, 1998 was $1,140,801 and
statutory net loss was $(112,409) and $(477,634) for the years ended December
31, 1998 and 1997, respectively.
Rushmore Life has calculated its risk based capital (RBC) in accordance with the
National Association of Insurance Commissioners (NAIC) Model Rule and RBC rules
as adopted by its state of domicile, Arizona. The RBC, as calculated by Rushmore
Life, exceeded levels requiring Company or regulatory action.
(17) SUBSEQUENT EVENT
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 Conseco will
recapture all risks formerly assumed by Rushmore Life. 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 with a
realized gain before taxes of approximately $1,016,000.
Page F-22
<PAGE> 39
This recapture represents 96% of the Company's net face amount of insurance in
force as of December 31, 1998. Had the Company effected the transaction as of
December 31, 1998 the pro forma effects on the Company's Balance Sheet
(unaudited) would have been:
RUSHMORE FINANCIAL GROUP, IN. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AS REPORTED ADJUSTMENTS PRO FORMA
----------- ----------- ---------
ASSETS
<S> <C> <C> <C>
Investments:
Cash and cash equivalents $ 613,814 $ 500,000 $ 1,113,814
Amounts on deposit with reinsurer 32,785,657 (28,412,046) 4,373,611
Other invested assets 1,405,925 -- 1,405,925
------------ ------------ ------------
Total investments 34,805,396 (27,912,046) 6,893,350
------------ ------------ ------------
Deferred policy acquisitions costs 1,989,174 (1,903,296) 85,878
Goodwill 246,326 (216,552) 29,774
Other assets and intangibles 2,162,692 (1,087,395) 1,075,297
------------ ------------ ------------
Total assets $ 39,203,588 $(31,119,289) $ 8,084,299
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Universal life contract liabilities $ 34,189,968 $(29,797,349) $ 4,392,619
Present value of future profits 610,519 (610,519) --
Other liabilities 1,786,351 (1,518,058) 268,293
------------ ------------ ------------
Total liabilities 36,586,838 (31,925,926) 4,660,912
------------ ------------ ------------
Shareholders' Equity:
Additional paid in capital 6,086,850 -- 6,086,850
Retained earnings (deficit) (3,453,470) 806,637 (2,646,833)
Other components of shareholders' equity (16,630) -- (16,630)
------------ ------------ ------------
Total shareholders' equity 2,616,750 806,637 3,423,387
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 39,203,588 $(31,119,289) $ 8,084,299
============ ============ ============
</TABLE>
Page F-23
<PAGE> 40
Had the Company effected this transaction as of January 1, 1998 the
Company's net income (loss) would have been changed to the (unaudited) pro forma
amounts indicated below. These results exclude the one time gain realized on the
recapture.
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
AS REPORTED ADJUSTMENTS PRO FORMA
----------- ----------- ---------
<S> <C> <C> <C>
Revenue:
Revenue from Insurance Services:
Insurance policy income $ 3,541,657 $ (3,113,589) $ 428,086
Net Investment income 2,284,948 (1,863,083) 421,865
Management fee 49,613 -- 49,613
Revenue from Investment Services:
Commissions and fees 2,243,608 -- 2,243,608
Asset management 208,465 -- 208,465
Other 91,895 (27,001) 64,894
------------ ------------ ------------
Total revenues 8,420,204 (5,003,673) 3,416,531
------------ ------------ ------------
Expenses:
Insurance Services Expenses:
Other insurance services expenses 1,457,709 (841,584) 616,125
Policyholder benefits 2,599,087 (2,269,384) 329,703
Amortization of deferred policy acquisition costs 944,911 (796,062) 148,849
Amortization of present value of insurance in force 1,373,846 (1,373,846) --
Investment services expenses:
Commission expense 1,939,228 -- 1,939,228
Other investment services expenses 141,283 -- 141,283
General administrative 2,143,695 -- 2,143,695
Stock based compensation 10,980 -- 10,980
------------ ------------ ------------
Total expenses 10,610,739 (5,280,876) 5,329,863
------------ ------------ ------------
Operating income (loss) (2,190,535) 277,203 (1,913,332)
Interest expense 2,961 -- 2,961
------------ ------------ ------------
Income (loss) from continuing
operations before income taxes (2,193,496) 277,203 (1,916,293)
Provision for income taxes (80,923) 39,612 (41,311)
------------ ------------ ------------
Net income (loss) $ (2,112,573) $ 237,591 $ (1,874,982)
============ ============ ============
Net income (loss) applicable to common shareholders $ (2,127,774) $ 237,591 $ (1,890,813)
============ ============ ============
Basic and diluted:
Net income (loss) per share of common stock,
after dividends on preferred stock $ (0.77) $ 0.09 $ (0.68)
============ ============ ============
Weighted average common shares outstanding 2,775,428
============
</TABLE>
Page F-24
<PAGE> 41
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH 16(a) OF THE EXCHANGE ACT
The sections entitled "Directors, Director Nominees and Executive Officers"
appearing in the Registrant's definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on May 7, 1999, sets forth certain information with
respect to the directors and executive officers of the Company.
ITEM 10. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing in the Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be held on
May 7, 1999, sets forth certain information with respect to the compensation of
management of the Registrant.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The sections entitled "Principal Shareholders and Security Ownership of
Management" appearing in the Registrant's definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on May 7, 1999, set forth certain
information with respect to the ownership of the Registrant's Common Stock.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The section entitled "Certain Transactions" appearing in the Registrant's
definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on May 7, 1999, sets forth certain information with respect to these
matters.
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 March 22, 1999 to report a
disposition of assets.
Page 17
<PAGE> 42
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.
March 30, 1999 By: /s/ D.M. (Rusty) Moore, Jr.
---------------------------------------------
D.M. (Rusty) Moore, Jr., 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.
March 30, 1999 /s/ Robert W. Hendren
------------------------------------------------
Robert W. Hendren, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 30, 1999 /s/ James W. Clark
------------------------------------------------
James W. Clark, Secretary and Director
March 30, 1999 /s/ F.E. Mowery
------------------------------------------------
F.E. Mowery, Director
March 30, 1999 /s/ Timothy J. Gardiner
------------------------------------------------
Timothy J. Gardiner, Director
March 30, 1999 /s/ Mark S. Adler
------------------------------------------------
Mark S. Adler, Director
March 30, 1999 /s/ James Fehleison
------------------------------------------------
James Fehleison, Director
March 30, 1999 /s/ Gayle C. Tinsley
------------------------------------------------
Gayle C. Tinsley, Director
March 30, 1999 /s/ William C. Keane
------------------------------------------------
William C. Keane, Director
March 30, 1999 /s/ Charles M. Duke
------------------------------------------------
Charles M. Duke, Director
Page 18
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO.
-----------
<S> <C>
21. Subsidiaries
27. Financial Data Schedule
</TABLE>
<PAGE> 1
EXHIBIT 21
RUSHMORE FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF ORGANIZATION
- ------------------ ---------------------
<S> <C>
Rushmore Securities Corporation Texas
Rushmore Investment Advisors, Inc. Texas
Rushmore Life Insurance Company Arizona
Rushmore Realty Advisors, Inc. Texas
</TABLE>
- -----------------
All subsidiaries are wholly owned and conduct business in their legal
names.
Rushmore Insurance Services, Inc. is owned 100% by D.M. (Rusty) Moore,
Jr. and is treated as an affiliate of the Registrant. See
"Business--Insurance Services."
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 204,641
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 34,805,396
<CASH> 613,814
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 1,989,174
<TOTAL-ASSETS> 39,203,588
<POLICY-LOSSES> 33,298,846
<UNEARNED-PREMIUMS> 978,515
<POLICY-OTHER> 128,216
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 60,352
0
156,870
<COMMON> 30,666
<OTHER-SE> 2,429,214
<TOTAL-LIABILITY-AND-EQUITY> 39,203,588
3,541,675
<INVESTMENT-INCOME> 2,284,948
<INVESTMENT-GAINS> (457)
<OTHER-INCOME> 2,594,038
<BENEFITS> 2,599,087
<UNDERWRITING-AMORTIZATION> 944,911
<UNDERWRITING-OTHER> 1,457,709
<INCOME-PRETAX> (2,193,496)
<INCOME-TAX> (80,923)
<INCOME-CONTINUING> (2,112,573)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,112,573)
<EPS-PRIMARY> (0.77)
<EPS-DILUTED> (0.77)
<RESERVE-OPEN> (10,072)
<PROVISION-CURRENT> (80,923)
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> (8,299)
<RESERVE-CLOSE> (91,674)
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
