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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, 1999
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: $7,758,148.
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 $5,800,000.
At December 31, 1999, the registrant had outstanding 3,700,071 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 on May 5, 2000.
Transitional Small Business Disclosure Format (check one):
Yes No X
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TABLE OF CONTENTS
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PAGE
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PART I
Item 1. Description of Business 3
Item 2. Description of Property 7
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 8
Item 6. Management's Discussion and Analysis 10
Item 7. Financial Statements 15
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 16
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with
Section 16(a) of the Exchange Act 16
Item 10. Executive Compensation 16
Item 11. Security Ownership of Certain Beneficial Owners and Management 16
Item 12. Certain Relationships and Related Transactions 16
Item 13. Exhibits and Reports on Form 8-K 17
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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 113 securities representatives
operating in over 30 states and more than 2,000 insurance agents in 41 states.
Approximately 350 of those agents were considered active by the Company during
1999. 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 2,000 independent agents of
its affiliated agency, Rushmore Insurance Services, Inc. ("Rushmore Agency").
Approximately 350 of those agents were considered active by the Company during
1999. In addition, Rushmore Life Insurance Company ("Rushmore Life") 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 to grow
its on-line, Internet based securities brokerage division, RushTrade.com, which
facilitates direct on-line securities trades by customers. Rushmore Securities
also seeks 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.
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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") and (ii) estate and financial
planning for high net worth individuals, corporations and pension funds.
INVESTMENT SERVICES
Securities Brokerage--Rushmore Securities Corporation. Rushmore Securities
provides investment services to its clients through a network of approximately
113 registered representatives. Rushmore Securities is licensed or pending in
all 50 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 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 offers mutual funds,
variable life insurance and variable annuity products.
In February 1999, Rushmore Securities announced the opening of its on-line
trading division, known as RushTrade.com, inc. (http://www.rushtrade.com),
offering customers, via the Internet, Level I and Level II quotes with highly
efficient direct order routing to the stock exchanges and electronic
communications networks ("ECNs") without the usual several minute delays. A
Level I quote displays the high bid and low asked prices for a stock on a
"real-time" basis. A Level II quote additionally provides information about the
underlying quotations of all ECNs and market makers in the stock. Most of the
on-line brokerage firms offer delayed or static quotes and process customer
orders through a browser based software that routes the order through the firm's
trading desk or to third-party wholesalers.
In October 1999, the Company completed the purchase of the proprietary
software trading platform and other assets of Block Trading, Inc. of Houston,
Texas, for approximately $800,000. The Company intends to raise funds in a
private placement to allow additional enhancements to the acquired software and
to finish the final testing and launch of the software as a service of
RushTrade.com. This will reduce our operating costs by eliminating the license
fees RushTrade.com is currently paying third-party trading software vendors and
will upgrade our software to make it more user friendly.
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.
Rushmore Securities' registered representatives 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 25 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 market capitalization from $2.67 trillion in
1987 to over $22 trillion in 1999, 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 over 2 billion shares of 1999.
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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 0.4% to 2.3% of funds under management.
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, 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.
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.
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 independent agents. The Rushmore Agency group has primarily marketed
policies under national marketing agreements with life insurance companies 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 2,000 independent 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.
Approximately 350 of those agents were considered active by the Company during
1999.
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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.
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 currently
$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. Presently Rushmore Life does
not coinsure any new policies. 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 150 employees, including 113 in its securities
operations, 8 in its insurance services area, 16 in its advisory business, and
13 in its executive offices. A total of 48 are located at the Company's offices
in Dallas. All but 28 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 2,000 independent agents
to market life insurance in 41 states. Approximately 350 of those agents were
considered active by the Company during 1999.
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REGULATION
The Company's business is subject to a high degree of regulation. The
insurance and securities businesses are two of the most highly regulated
industries in the United States, and regulatory pressures can have a direct
effect on the Company's operations.
Insurance Regulation. Rushmore Life is subject to comprehensive state
insurance regulation by the Division of Insurance of the State of Arizona.
Additionally, Rushmore Life will be subject to regulation in any other states in
which it conducts business in the future. The powers of the Commissioner of
Insurance in Arizona and other states include the granting and revocation of
certificates of authority to transact insurance business, review of adequacy of
reserves and of guaranty funds and surplus required by statute, determination of
the form and content of required financial statements, approval of policy forms,
and review of Rushmore Life's business practices so as to ascertain that certain
standards are met. These supervisory agencies periodically examine the business
and accounts of insurers and require insurers to file detailed annual statutory
statements.
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. Rushmore Advisors is subject to regulation
by the Securities and Exchange Commission and 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.
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. That property is used by the Company's
Insurance, Insurance Agency Services, and Securities Brokerage segments. The
Company's Advisory services segment leases 8,000 square feet at 1800 Preston
Park Boulevard, Plano, Texas and 10,000 square feet at 1424 Gables Court, Plano,
Texas. The Company believes these facilities are adequate to meet its
requirements for the foreseeable future.
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ITEM 3. LEGAL PROCEEDINGS
The Company and it chief executive officer are defendants in two lawsuits
brought in the District Courts of Dallas county, Texas, styled U.S. Teachers
Insurance Agency, Inc. v. Rushmore Financial Group, Inc. and U.S. Teachers
Insurance Agency, Inc. v. Dewey Malone Moore, Jr., alleging breach of contract
and fraud in connection with a failed contract to form an affiliation to market
insurance and annuities. The defendants deny that a contract ever existed and
are defending the suits vigorously.
The Company has had claims made against it by three investors in Florida
resulting from financial instruments placed by the Company's brokerage
subsidiary in a company that declared bankruptcy and in a company that has
failed to make payments on its debt obligations. The first claim for $257,000
resulted in an arbitral award for $50,000, which the Company paid. Other
threatened claims totaling $381,626 have not been filed.
On November 3, 1999 Jim Clark, former president of Rushmore Securities
Corporation and director of the Company filed suit in the District Court of
Dallas county, Texas alleging breach of contract arising out of his termination
by the Company and requesting damages in excess of $389,000. The Company has
denied that any amounts are owed under the agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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.
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HIGH LOW
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April 28 - June 30, 1998 $ 6 $5
July 1 - September 30, 1998 5 1.4375
October 1 - December 31, 1998 2.5 1.5
January 1 - March 31, 1999 11.75 1.625
April 1 - June 30, 1999 7.25 3.75
July 1 - September 30, 1999 5.8125 2.9375
October 1 - December 31, 1999 5.00 2.125
</TABLE>
HOLDERS
As of January 31, 2000, there were approximately 105 holders of record and
approximately 1,500 beneficial holders of the Company's Common Stock and 9
holders of the Company's Preferred Stock.
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DIVIDENDS
The Company does not anticipate any stock or cash dividends on its commons
shares 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>
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NUMBER OF OFFERING EXEMPTION
DATE SHARES PRICE CLAIMED
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October 1999 (6) 375,000 4.00 (1)
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)
</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
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 share.
(5) Issued to fulfill 1996 stock subscriptions.
(6) Consists of 125,000 shares of common stock and warrants to purchase 250,000
shares of common stock for a purchase price ranging from $4.00 to $7.00 per
share in connection with a private placement to a single investor.
Registrant received $500,000 proceeds less $27,000 of commissions.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
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, 1999, 1998 and 1997, are derived from the audited
financial statements of the Company.
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YEARS ENDED DECEMBER 31,
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1999 1998 1997
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(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
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STATEMENT OF OPERATIONS DATA:
Revenue from investment services $ 4,890 $ 2,452 $ 2,373
Revenues from insurance services 2,841 5,876 4,224
Total revenues 7,758 8,420 6,624
Investment services expense 2,962 2,081 2,040
Insurance services expense 1,437 6,376 3,915
General and administrative expenses 3,675 2,144 1,023
Total expenses 8,074 10,611 7,278
Operating loss (316) (2,191) (654)
Net loss (448) (2,113) (810)
Net loss per share of Common
Stock after dividends on preferred stock (0.14) (0.77) (0.45)
Operating margin
Investment services 39% 15% 14%
Insurance services 49% -8% 7%
G&A expenses as % of Revenues 47% 25% 15%
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
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1999 1998
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(DOLLARS IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and certificates of deposit $ 490 $ 1,815
Amounts on deposit with reinsurers 4,645 32,786
Total assets 11,570 39,204
Policy Reserves 4,613 34,277
Total debt 272 60
Shareholders' equity 5,995 2,617
</TABLE>
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues
The following table sets forth the components of the Company's revenues for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------------------------
<S> <C> <C>
Insurance Agency $ 1,357,217 $ 262,360
Insurance Company 1,484,040 5,613,876
Securities Brokerage 3,410,446 2,240,368
Advisory Services 1,479,154 211,705
Other 27,291 91,895
----------- -----------
Total $ 7,758,148 $ 8,420,204
=========== ===========
</TABLE>
Total revenues decreased 8% from $8,420,204 in 1998 to $7,758,148 during
1999. On January 22, 1999 the Company executed a termination and recapture
agreement with Conseco Life Insurance Company ("CLIC") effective January 1,
1999. Revenues associated with that business accounted for $1,016,268 and
$5,003,673 during 1999 and 1998 respectively. Excluding those revenues, all
other revenue increased $3,325,349 or 97%.
Insurance Agency revenues have increased $1,094,857 or 417% as the Company
has begun to earn commissions and fees relating to the sale of accident and
health insurance policies that were sold in 1999 and 1998.
As a result of the insurance block sale, insurance company revenue
decreased from $5,613,876 in 1998 to $1,484,040 (including $1,016,268 in gain on
the sale to CLIC). Insurance premium income decreased $3,207,607 to $121,321;
and net investment income decreased $1,938,497 to $346,451 as a result of the
sale discussed above.
The securities brokerage division also experienced significant growth in
that revenues increased $1,170,078 or 52% from the previous year. That division
earned $644,281 in software licensing and trading fees associated with the
Company's entry into the on-line brokerage business during 1999. Revenues
generated from traditional retail brokerage services also contributed to the
growth with an increase of $525,797. The increase in retail brokerage income was
the result of continued recruiting and addition of new representatives.
Revenues of the Advisory services division increased $1,267,449 or 599%
primarily as a result of the acquisition via merger of The John Vann Company on
July 15, 1999. This acquisition contributed revenues of $1,218,533 during the
second half of 1999.
Page 11
<PAGE> 12
Expenses
The following table sets forth the components of the Company's expenses for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------------------------
<S> <C> <C>
Insurance Agency $ 1,380,107 $ 702,428
Insurance Company 573,284 5,982,855
Securities Brokerage 3,485,539 2,422,138
Advisory Services 1,199,239 344,267
Other 1,436,267 1,159,051
----------- -----------
Total $ 8,074,436 $10,610,739
=========== ===========
</TABLE>
Insurance agency expenses increased $677,679 or 96% from $702,428 in 1998
to $1,380,107 in 1999. Agents' commissions and personnel costs increased
$493,201 and $149,298 respectively as a direct result of an increase in agency
revenue of 417%.
Insurance company expenses decreased from $5,982,855 in 1998 to $573,284 in
1999 due primarily to the sale of reinsurance business to CLIC.
Securities brokerage expenses increased 44% from $2,422,138 in 1998 to
$3,485,539 in 1999. During 1999 the Company incurred expenses of $563,202 in
developing, marketing and operating its Internet based trading platform,
RushTrade.com. That unit was not operational during 1998. Commission expenses of
the retail brokerage division increased $503,435 due to increased revenue. The
commission ratio was unchanged at 83%. Legal and settlement costs of the retail
brokerage division also increased $169,450. Arbitration settlements of $65,000
were the result of disputes over transactions, which occurred in 1995 and 1996.
Expenses of the Company's investment advisory unit, Rushmore Investment
Advisors, increased $854,972 as a result of the acquisition via merger of The
John Vann Company on July 15, 1999.
Corporate expenses increased $277,216 or 24% from $1,159,051 in 1998 to
$1,436,267 in 1999 due primarily to increases in personnel costs, depreciation,
and professional costs. Compensation and benefits increased $175,831 due mainly
to additional personnel. As a result of acquiring additional computer and office
equipment, and expanding office space, depreciation and amortization expense
increased from $53,460 in 1998 to $117,759 in 1999. Professional fees increased
to $254,075 in 1999 from $178,960 in 1998. These increases included Directors
fees of $19,800 in 1999 versus $1,500 in 1998, investor relations costs of
$49,830 in 1999 versus 31,432 in 1998, and consulting fees of $80,149 versus
$23,036 in 1998.
Operating loss
The following table sets forth the components of the Company's net loss for the
periods indicated:
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------------------------
<S> <C> <C>
Insurance Agency $ (22,890) $ (434,307)
Insurance Company 798,426 (288,056)
Securities Brokerage (75,262) (181,770)
Advisory Services 272,779 (132,562)
Other (1,420,805) (1,075,878)
----------- -----------
Total $ (447,752) $(2,112,573)
=========== ===========
</TABLE>
The Company reported a net loss of $447,752 for the year ended December 31,
1999 compared to a net loss of $2,112,573 for the prior year. The net loss
applicable to common shareholders for the year ended December 31, 1999 was
$461,870 or $0.14 per share (basic and diluted). For 1998, the net loss
applicable to common shareholders of $2,127,774 was $0.77 per share (basic and
diluted).
Page 12
<PAGE> 13
The decrease in net loss is partially attributable to the pre-tax gain of
$1,016,268 on the disposition of the block of reinsurance policies. The net loss
was further decreased by the acquisition via merger of The John Vann Company on
July 15, 1999. This acquisition contributed revenues of $1,210,669 during 1999.
As a result the Company's investment advisory firm, Rushmore Investment
Advisors, is now profitable on a year to date basis and reported net income of
$272,279. Increased commission revenue of the Company's insurance agency further
decreased the net loss. That unit had a net loss of $22,890 for, 1999 but
reported net income of $24,469 for the third quarter and $78,457 for the fourth
quarter. Those gains were partially offset by increases in expenses for
personnel costs, depreciation, and professional fees totaling $315,245 and an
increase in the provision for income taxes of $131,946. The provision for income
taxes was primarily the result of the sale of the insurance block by Rushmore
Life Insurance Company. Although the Company has significant net operating loss
deductions available, it is unable to consolidate Rushmore Life Insurance
Company for tax purposes until the year 2003. The increase in provision for
income taxes includes the result of an increase in additions to the deferred tax
asset valuation allowance of $148,594.
LIQUIDITY
Cash Flows from Operating Activities. The Company's net loss of $447,752
for the year ended December 31, 1999 was adjusted by non-cash expenses
consisting of depreciation of $298,680, and stock-based compensation of $11,480.
Cash flows from operating activities were reduced for the non-cash portion of
the gain on sale of insurance block of $806,637, by realized gains and losses of
$3,933 and by various cash flow adjustments aggregating a net use of cash in the
amount of $341,761 to yield a net cash flow used by operating activities in the
amount of $1,289,923.
Cash Flows From Investing Activities. Cash flow from investing activities
during the year ended December 31, 1999 provided $626,837, primarily due to the
sales of certificates of deposit and bonds totaling $1,209,100 and cash received
upon the sale of an insurance block of $500,000. Those receipts were offset by
purchases of furniture, equipment and software totaling $1,001,020.
Cash Flows from Financing Activities. During the year ended December 31,
1999, the Company raised $484,606 from the sale of Common Stock. The Company
also received proceeds from notes payable totaling $64,374.
Credit Facilities and Resources. The Company's cash and investments (other
than amounts on deposit with reinsurer) at December 31, 1999 were $740,401, of
which $300,801 is held by Rushmore Life and is not immediately available to the
Company for operating needs. The Company is entitled to receive monthly
management fee payments from Rushmore Life equal to $14,000 plus expenses
directly attributable to Rushmore Life.
The Company believes that, except for software development costs, revenues
from operations will be adequate to meet its cash needs for at least the next
twelve months. Costs incurred in the further development of the Company's online
trading operation are expected to be funded through the sale of convertible
preferred stock. Software development and marketing costs are anticipated to
require approximately $3 million in additional capital during 2000.
Page 13
<PAGE> 14
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.
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
utilized both internal and external resources to identify, correct, and test the
systems for Year 2000 compliance. The majority of its inventory, research, and
modifications were completed by December 31, 1998. Further validations through
testing and follow-up procedures were conducted throughout calendar year 1999.
As of June 30, 1999, all mission-critical systems had been tested with no
significant difficulties encountered. Furthermore, because of recent
acquisitions and the affiliations with other companies, the Company's Year 2000
Project scope was enlarged. Research and verification of newly acquired
mission-critical systems have shown Year 2000 compliance. Further research,
testing, and any remediation was completed September 30, 1999.
Because third party failures could have a material impact on the Company's
ability to conduct business, questionnaires were sent to all of the Company's
vendors including the clearing firms and primary insurers to certify that plans
are being developed to address the Year 2000 issue. The questionnaires were
assessed by the Company, and categorized based upon readiness for the Year 2000
issues. They were prioritized in order of significance to the business of the
Company.
In addition to safeguarding against internal and external possible
malfunctions, the Company developed a contingency plan to operate independent of
systems that could be affected by the Year 2000 problem. The plan, which
includes backup telephone systems and manual routing of transactions such as
security trades, was completed August 31, 1999.
All costs were funded by cash flows from operations. Total costs of testing
and remediation relating to the Year 2000 project were less than $25,000.
The Company has not identified any year 2000 related failures.
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.
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 in 1999. See note seven of the notes to
consolidated financial statements.
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.
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.
Page 14
<PAGE> 15
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after January 1, 2001 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.
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
Independent Auditors' Report F-3
Consolidated Balance Sheet - December 31, 1999 F-4
Consolidated Statements of Operations for the Years Ended December 31, 1998 and 1999 F-5
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1998 and 1999 F-6
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998 and 1999 F-7
Notes to Consolidated financial Statements F-8
</TABLE>
Page 15
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
of Rushmore Financial Group, Inc.
We have audited the accompanying consolidated balance sheet of Rushmore
Financial Group, Inc. and Subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, shareholders' equity, and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Rushmore Financial Group, Inc. and Subsidiaries as of December 31, 1999, and the
results of their consolidated operations and their consolidated cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
Dallas Texas
February 2, 2000 (except for note (5), as
to which the date is February 25, 2000)
Page F-1
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders Rushmore Financial Group, Inc.:
We have audited the accompanying consolidated statements of operations,
shareholders' equity and cash flows of Rushmore Financial Group, Inc. and
Subsidiaries for the year ended December 31, 1998. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit. We did not audit the financial statements of
Rushmore Securities Corporation, a wholly-owned subsidiary, which statements
reflect total revenues constituting 28 percent in 1998 of the consolidated
totals. Those statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Rushmore Securities Corporation, is based solely on the report of the other
auditors.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the results of operations and the cash flows of Rushmore
Financial Group, Inc. and Subsidiaries for the year ended December 31, 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
March 17, 1999
Page F-2
<PAGE> 18
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
of Rushmore Financial Group, Inc.
We have audited the accompanying 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 year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Rushmore Securities
Corporation, as of December 31, 1998 and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
CHESHIER & FULLER, L.L.P.
Dallas, Texas
January 15, 1999
Page F-3
<PAGE> 19
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1999
<TABLE>
<S> <C>
ASSETS
Investments:
Cash and cash equivalents $ 490,401
Certificates of deposit 200,000
Amounts on deposit with reinsurer 4,645,073
Equity securities available for sale 50,000
------------
Total investments 5,385,474
------------
Deferred policy acquisitions costs 25,700
Accounts receivable and due from reinsurers 848,961
Prepaid expenses and deposits 245,862
Equipment, net of accumulated depreciation 1,465,672
Goodwill 3,597,683
Other assets 229
------------
Total assets $ 11,569,581
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 5,100
Universal life contract liabilities 4,607,416
Notes payable 272,385
Due to reinsurers 83,537
Accrued expenses & other liabilities 606,176
------------
Total liabilities 5,574,614
------------
Shareholders' Equity:
Preferred stock-9% cumulative preferred stock, $10 par value, 2,000 shares
issued and outstanding 20,000
Preferred stock-Series A cumulative preferred stock, $10 par value;
13,687 shares issued and outstanding 136,870
Common stock-$0.01 par value, 10,000,000 shares authorized;
3,789,544 shares issued 37,895
Common stock subscribed-8,138 shares at $0.01 81
Additional paid in capital 9,851,128
Treasury stock-89,473 shares at cost (116,345)
Accumulated deficit (3,901,222)
Common stock subscriptions receivable (33,440)
------------
Total shareholders' equity 5,994,967
------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 11,569,581
============
</TABLE>
See accompanying notes to consolidated financial statements
Page F-4
<PAGE> 20
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31,
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenue:
Revenue from Insurance Services:
Insurance policy income $ 1,133,273 $ 3,541,675
Net investment income 346,451 2,284,948
Agency management fee 345,265 49,613
Gain on sale of insurance block 1,016,268 -
Revenue from Investment Services:
Commissions and fees 3,410,716 2,243,608
Asset management 1,478,884 208,465
Other 27,291 91,895
------------ ------------
Total revenues 7,758,148 8,420,204
------------ ------------
Expenses:
Insurance Services Expenses:
Other insurance services expenses 946,874 1,457,709
Policyholder benefits 306,797 2,599,087
Amortization of deferred policy
acquisition costs 183,483 944,911
Amortization of present value of insurance in force - 1,373,846
Investment services expenses:
Commission expense 2,571,391 1,939,228
Other investment services expenses 390,928 141,283
General and administrative 3,674,963 2,154,675
------------ ------------
Total expenses 8,074,436 10,610,739
------------ ------------
Operating loss (316,288) (2,190,535)
Interest expense 19,134 2,961
------------ ------------
Loss before income taxes (335,422) (2,193,496)
Income tax expense (benefit) 112,330 (80,923)
------------ ------------
Net loss $ (447,752) $ (2,112,573)
============ ============
Net loss applicable to common shareholders $ (461,870) $ (2,127,774)
============ ============
Basic and diluted per share data:
Net loss per share of common stock,
after dividends on preferred stock $ (0.14) $ (0.77)
============ ============
Weighted average common shares outstanding 3,266,876 2,775,428
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
Page F-5
<PAGE> 21
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
COMMON ADDITIONAL
PREFERRED COMMON STOCK PAID IN
STOCK STOCK SUBSCRIBED CAPITAL
------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance, January 1, 1998 $ 180,920 $ 21,870 $ 46 $ 2,486,244
Net loss - - - -
Accumulated other comprehensive income:
Unrealized gains on securities
available for sale - - - -
Comprehensive 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 - - - -
Receivable from affiliates
----------- ----------- ----------- -----------
Balance, December 31, 1998 156,870 30,666 100 6,086,850
Net loss - - - -
Accumulated other comprehensive loss:
Unrealized losses on securities
available for sale - - - -
Comprehensive loss
Common stock issued, 125,000 shares, net of
issuance cost - 1,250 - 422,388
Common stock issued for purchase of The
John Vann Company, 550,000 shares - 5,500 - 3,294,500
Common stock issued for stock based
compensation, 2,138 shares - 21 (19) 998
Common stock options exercised, 45,809 shares - 458 - 60,510
Preferred stock dividends paid - - - (14,118)
Repayments of Loan and advances to
officers/shareholders - - - -
----------- ----------- ----------- -----------
Balance, December 31, 1999 $ 156,870 $ 37,895 $ 81 $ 9,851,128
=========== =========== =========== ===========
<CAPTION>
RETAINED ACCUMULATED SHAREHOLDER/
EARNINGS COMPREHENSIVE TREASURY SUBSCRIPTIONS
(DEFICIT) INCOME (LOSS) STOCK RECEIVABLE TOTAL
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $(1,340,897) $ (110) $ (78,881) $ (160,993) $ 1,108,199
Net loss (2,112,573) - - - (2,112,573)
Accumulated other comprehensive income:
Unrealized gains on securities
available for sale - 868 - - 868
-----------
Comprehensive loss (2,111,705)
Common stock issued, 879,581 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 - - - 57,701 57,701
Receivable from affiliates 49,764 49,764
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1998 (3,453,470) 758 (116,345) (88,679) 2,616,750
Net loss (447,752) - - - (447,752)
Accumulated other comprehensive loss:
Unrealized losses on securities
available for sale - (758) - - (758)
-----------
Comprehensive loss (448,510)
Common stock issued, 125,000 shares, net of
issuance cost - - - - 423,638
Common stock issued for purchase of The
John Vann Company, 550,000 shares - - - - 3,300,000
Common stock issued for stock based
compensation, 2,138 shares - - - 10,480 11,480
Common stock options exercised, 45,809 shares - - - - 60,968
Preferred stock dividends paid - - - - (14,118)
Repayments of Loan and advances to
officers/shareholders - - - 44,759 44,759
----------- ----------- ----------- ----------- -----------
Balance, December 31, 1999 $(3,901,222) $ - $ (116,345) $ (33,440) $ 5,994,967
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
Page F-6
<PAGE> 22
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended December 31,
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (447,752) $(2,112,573)
Adjustments to reconcile net loss to net cash used in
operating activities:
Gain on sale of insurance block net of federal income tax (806,637) -
Realized gains net (3,933) (10,742)
Stock-based compensation 11,480 10,980
Depreciation and amortization 298,680 54,875
CHANGE IN ASSETS AND LIABILITIES, NET OF EFFECTS OF SALE OF
INSURANCE BLOCK AND JOHN VANN ACQUISITION:
(Increase) decrease in assets:
Accounts receivable and due from reinsurers (511,574) (811,742)
Prepaid expenses and deposits 40,519 (190,796)
Deferred policy acquisition costs 60,178 306,523
Amounts on deposit with reinsurer (271,462) (2,302,383)
Net deferred federal income taxes - (81,602)
Other assets - 6,297
Increase (decrease) in liabilities:
Accrued expenses and other liabilities (22,167) (36,136)
Due to reinsurers 147,461 131,216
Future policy benefits 487 1,201
Universal Life liabilities 214,797 1,309,957
Present value of future profits - 1,373,846
Claims payable - (180,650)
----------- -----------
Net cash flows used in operating activities (1,289,923) (2,531,729)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment (41,633) (406,101)
Purchase of computer software (959,387)
Purchase of equity securities available for sale (50,000) (290,719)
Purchase of bonds available for sale - (1,296,420)
(Increase) Decrease in certificates of deposit 1,001,284 (1,201,284)
Sales of equity securities available for sale - 294,795
Sales of bonds available for sale 207,816 1,100,000
Negative cash balances acquired in purchase of John Vann Co (31,243) -
Cash received on sale of insurance block 500,000 -
----------- -----------
Net cash flows provided by (used in) investing activities 626,837 (1,799,729)
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans to officers and affiliate 44,759 57,701
Proceeds from sale of Common Stock, net of offering cost 484,606 3,768,409
Preferred Stock dividends paid (14,118) (15,201)
Preferred Stock redeemed - (24,050)
Purchase of treasury stock - (37,464)
Payments on notes payable (42,948) (26,943)
Proceeds from notes payable 67,374 -
----------- -----------
Net cash flows provided by financing activities 539,673 3,722,452
----------- -----------
Change in cash and cash equivalents (123,413) (609,006)
Cash and cash equivalents at beginning of year 613,814 1,222,820
----------- -----------
Cash and cash equivalents at end of year $ 490,401 $ 613,814
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 19,785 $ 9,772
Cash received for income taxes $ - $ (8,299)
</TABLE>
See accompanying notes to consolidated financial statements
Page F-7
<PAGE> 23
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANIES
Rushmore Financial Group, Inc. and Subsidiaries (the "Company"), is 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, 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, 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.
Rushmore Investment Advisors, Inc. ("Rushmore Advisors") is a wholly owned
subsidiary providing 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. On
July 15, 1999, the Company acquired The John Vann Company ("JVC"), a Texas
corporation engaged in business as a registered investment advisor. The
transaction was structured as a merger of Rushmore Advisors into JVC in exchange
for 550,000 shares of the Company's common stock. The surviving corporation
changed its name in the merger back to Rushmore Investment Advisors, Inc.
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 Advisors, Inc. ("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 has no current operations.
(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,
Rushmore Advisors, Rushmore Life, and Rushmore Realty and its affiliate
Rushmore Agency. All significant intercompany transactions have been
eliminated in consolidation.
Page F-8
<PAGE> 24
(b) Insurance Company Accounting Method
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) 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. The Company recorded a change in
unrealized gains (losses) of $(758) for 1999 and $868 for 1998. The Company
also reported realized gains of $3,933 as a component of net investment
income for the year ended December 31, 1999. Proceeds from sales of
investments available for sale were $207,816 for the year ended December
31, 1999 and $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, 1999 and 1998, on
deposit with state regulatory authorities to fulfill statutory
requirements.
(d) 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.
(e) 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.
(f) Goodwill
The excess of the purchase price over the fair value of the net assets and
liabilities of acquired entities is recorded as goodwill. Goodwill is
amortized over 15 years.
(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.
Page F-9
<PAGE> 25
(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.
(l) Advertising
Costs associated with advertising and promoting products are expensed in
the year incurred. Advertising expense was approximately $51,000 and
$44,000 in 1999 and 1998, respectively.
(m) 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 currently 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.
Page F-10
<PAGE> 26
(n) 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.
(o) 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.
(p) Net Loss per Common Share
Basic loss per share is computed by dividing net loss applicable to common
stock by the weighted average number of common shares outstanding for the
period. Diluted loss per share reflects the potential dilution that could
occur if the Company's outstanding stock options were exercised (calculated
using the treasury stock method). Stock options to purchase common stock
outstanding for the years ended December 31, 1999 and 1998 were not
included in the computation of diluted loss per share because of the net
loss for the years ended December 31, 1999 and 1998 and as such were
considered antidilutive.
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 loss per common share for the years 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Loss from operations: $ (447,752) $(2,112,573)
Dividends on preferred stock (14,118) (15,201)
----------- -----------
Net loss applicable to common shares basic and diluted $ (461,870) $(2,127,774)
=========== ===========
Weighted average number of common shares
outstanding - basic and diluted 3,266,876 2,775,428
=========== ===========
</TABLE>
(q) Comprehensive Income
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.
(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
Page F-11
<PAGE> 27
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 1998 balances have been reclassified to conform to the 1999
presentation.
(3) INDUSTRY SEGMENT INFORMATION
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
offers broker dealer services and its operations have been included in the
securities brokerage segment. Rushmore Advisors offers funds management services
and its operations have been included in the advisory services segment. Both
Rushmore Agency and Rushmore Life offer insurance products but have been further
segregated. Rushmore Agency offers life, health and disability 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 company segment.
The assets of the parent company, Rushmore Financial Group, Inc., are included
in the Corporate category of identifiable assets and include primarily equipment
of $419,748, net of accumulated depreciation, and cash and investments of
$181,275. The expenses of the parent company are included in Corporate segment
and are composed primarily of salaries, professional fees and rent relating to
holding company operations.
The following summarizes the Company's industry segment data of identifiable
assets, capital expenditures and depreciation and amortization as of, or for the
year ended, December 31, 1999:
<TABLE>
Identifiable Assets
<S> <C>
Insurance Agency $ 557,984
Insurance Company 5,096,900
Securities Brokerage 1,201,327
Advisory Services 3,843,775
Corporate 869,595
-----------
Total $11,569,581
===========
Capital Expenditures
Insurance Agency $ -
Insurance Company -
Securities Brokerage 902,115
Advisory Services 33,084
Corporate 65,821
-----------
Total $ 1,001,020
===========
Depreciation and Amortization
Insurance Agency $ 200
Insurance Company 1,366
Securities Brokerage 44,748
Advisory Services 134,607
Corporate 117,759
-----------
Total $ 298,680
===========
</TABLE>
F-12
<PAGE> 28
The following summarizes the Company's industry segment data of net income
(loss) for the years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Revenue
Insurance Agency $ 1,357,217 $ 262,360
Insurance Company 1,484,040 5,613,876
Securities Brokerage 3,410,446 2,240,368
Advisory Services 1,479,154 211,705
Corporate 27,291 91,895
------------ ------------
Total $ 7,758,148 $ 8,420,204
============ ============
Expense
Insurance Agency $ 1,380,107 $ 702,428
Insurance Company 573,284 5,982,855
Securities Brokerage 3,485,539 2,422,138
Advisory Services 1,199,239 344,267
Corporate 1,436,267 1,159,051
------------ ------------
Total $ 8,074,436 $ 10,610,739
============ ============
Interest
Insurance Agency $ - $ (5,761)
Insurance Company - -
Securities Brokerage 169 -
Advisory Services 7,136 -
Corporate 11,829 8,722
------------ ------------
Total $ 19,134 $ 2,961
============ ============
Taxes
Insurance Agency $ - $ -
Insurance Company 112,330 (80,923)
Securities Brokerage - -
Advisory Services - -
Corporate - -
------------ ------------
Total $ 112,330 $ (80,923)
============ ============
Net Income (Loss)
Insurance Agency $ (22,890) $ (434,307)
Insurance Company 798,426 (288,056)
Securities Brokerage (75,262) (181,770)
Advisory Services 272,779 (132,562)
Corporate (1,420,805) (1,075,878)
------------ ------------
Total $ (447,752) $ (2,112,573)
============ ============
</TABLE>
(4) ACQUISITION
On July 15, 1999, the Company acquired The John Vann Company ("JVC"), a Texas
corporation engaged in business as a registered investment advisor. The
transaction was structured as a merger of the
Page F-13
<PAGE> 29
Company's wholly owned subsidiary, Rushmore Investment Advisors, Inc., into JVC
in exchange for 550,000 shares of the Company's common stock. The surviving
corporation changed its name in the merger to Rushmore Investment Advisors, Inc.
JVC was a privately owned corporation owned by an affiliate of Mr. John A. Vann
of Dallas. Mr. Vann will remain with Rushmore Investment Advisors, Inc. as its
chairman, chief executive officer and chief investment officer, pursuant to a
three-year Employment Agreement. The transaction was accounted for as a
purchase. The purchase price was approximately $3,300,000 based on the issuance
of 550,000 shares. The Company also issued and holds in escrow 47,405 shares of
common stock that may become deliverable twelve months after closing unless the
Company's common stock shall have achieved a closing sales price for at least
thirty trading days equal to or greater than $6.00 per share. The liabilities of
JVC exceeded assets by approximately $384,000. Therefore, goodwill in the amount
of approximately $3,685,000 was recorded equal to the sum of the purchase price
and the negative net assets. Proforma information has not been presented as the
effect on operations is not material.
(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, 1999, Rushmore
Securities had net capital of approximately $117,000 and net capital
requirements of $50,000. Rushmore Securities' ratio of aggregate indebtedness to
net capital was 1.9 to 1. The Securities and Exchange Commission permits a ratio
of no greater than 15 to 1.
The National Association of Securities Dealers (NASD) commenced an examination
of Rushmore Securities in February 2000 which had not been completed at February
25, 2000. The NASD's preliminary report to Rushmore Securities indicates a
violation of Rule 15c3-1. The NASD has asserted that Rushmore Securities minimum
net capital requirement is $250,000, which is the requirement for firms that
hold customer funds. The Company disagrees with the NASD's position that
customer funds were being held at December 31, 1999, or at any other time, and
believes that the net capital requirement is $50,000. The funds in question were
transferred to Rushmore Securities' clearing firm on February 8, 2000. It is not
possible at this time to determine whether the NASD's final report will conclude
that Rushmore Securities was in violation of Rule 15c3-1 and whether fines
and/or penalties will be imposed.
(6) CONCENTRATION RISK
At December 31, 1999, and at various other times throughout 1999, 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. One of the cash balances exceeded
the insured limit by approximately $102,000 at December 31, 1999.
(7) REINSURANCE
All of the Company's reinsurance 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% 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, 1999 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, 1999, unearned revenue reserves included
in universal life contract liabilities were $15,540.
Page F-14
<PAGE> 30
For the years ended December 31, 1999 and 1998 the Company assumed statutory
premiums of approximately $283,000 and $6,288,000, respectively, and paid
approximately $255,000 and $1,834,000, 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, 1999 and 1998,
Rushmore Life paid these companies for such services and policy maintenance as
follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Conseco, Inc. fees $ - $201,006
FMI fees 18,558 19,498
CLIC & SWL policy maintenance
fees 10,077 288,834
</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 $255,000 and $1,834,000 for reinsurance costs for the years
ended December 31, 1999 and 1998, respectively. SWL has ceded to Rushmore Life
approximately $41,474,000 of insurance in force as of December 31, 1999.
Pursuant to the reinsurance agreement with SWL, Rushmore Life has in turn
retroceded approximately $27,163,000 of insurance in force to SWL, retaining
risk equal to the difference.
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 terminated and all risks formerly
assumed by CLIC were recaptured. On March 9, 1999 CLIC paid $500,000 to the
Company as consideration and in settlement of the amounts due CLIC from the
Company and the amounts due the Company from CLIC. The following table
summarizes the categories of net asset changes relating to this sale:
<TABLE>
<CAPTION>
Assets Increase Decrease
- ------------------------------------ ----------- -----------
<S> <C> <C>
Cash $ 500,000 $ -
Amounts on deposit with reinsurers - 28,412,046
Accounts receivable - 995,721
Deferred federal income tax - 91,674
Deferred policy acquisition costs - 1,903,296
Goodwill - 216,552
Liabilities Decrease Increase
- ------------------------------------ ----------- -----------
Future policy benefits $ 82,780 $ -
Universal life policy liabilities 29,797,349 -
Present value of future profits 610,519 -
Claims payable 128,216 -
Due to reinsurers 1,191,023 -
Accrued expenses & other liabilities 116,039 -
Net Income Decrease Increase
- ------------------------------------ ----------- -----------
Gain on sale of insurance block $ - $ 1,016,268
Provision for federal income tax 209,631 -
</TABLE>
Page F-15
<PAGE> 31
(8) EQUIPMENT
The principal categories of equipment are summarized as follows:
<TABLE>
<S> <C>
Purchased computer software $1,035,357
Computer equipment 175,238
Office furniture and fixtures 397,723
Leasehold improvements 145,713
----------
Total costs 1,754,031
Less accumulated depreciation 288,359
----------
$1,465,672
==========
</TABLE>
Total depreciation included in the determination of net income amounted to
$180,104 and $45,597 in 1999 and 1998, respectively. Depreciation expense
related to purchased computer software was $62,738 in 1999 and $10,289 in 1998.
(9) PREFERRED STOCK
The Company has authorized 500,000 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, designated 9%
Cumulative Preferred Stock, which was sold at a price of $10 per share and an
authorized class of 13,792 preferred shares, designated 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. The Board of
Directors has also designated an authorized class of 400,000 shares of Series B
Convertible Preferred Stock. 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, 1999 and 1998.
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. Neither the 9% Cumulative Preferred Stock or the Series A
Cumulative Preferred Stock are convertible into any other security of
the Company. The Series B Convertible Preferred Stock shall be
convertible into Common Stock at a rate equal to its issue price, $25,
divided by the conversion price. Conversion price is the greater of $4
or 70% of the average market price of common stock for the five
trading days preceding conversion.
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> 32
(10) COMMITMENTS AND CONTINGENCIES
(a) Leases
The Company leases its offices under operating leases that expire at
various dates through 2002. The Company also leases furniture and office
equipment under both operating and capital leases that expire at various
dates through 2003. Future minimum lease payments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C> <C>
2000 495,638
2001 353,689
2002 130,700
2003 5,834
</TABLE>
Rent expense was approximately $312,146 and $272,376 in 1999 and 1998,
respectively, and is included in general and administrative expenses.
(b) Litigation
The Company and it chief executive officer are defendants in two lawsuits
brought in the District Courts of Dallas county, Texas, alleging breach of
contract and fraud in connection with a contract to form an affiliation to
market insurance and annuities. The defendants deny that a contract ever
existed and are defending the suits vigorously.
The Company has had claims made against it by three investors in Florida
resulting from financial instruments placed by the Company's brokerage
subsidiary in a company that declared bankruptcy and in a company that has
failed to make payments on its debt obligations. The first claim for
$257,000 resulted in an arbitral award for $50,000, which the Company paid.
Other threatened claims totaling $382,000 have not been filed.
On November 3, 1999 the former president of Rushmore Securities Corporation
and former director of the Company filed suit in the District Courts of
Dallas county, Texas alleging breach of contract arising out of his
termination by the Company and requests damages in excess of $389,000. The
Company has denied that any amounts are owed under the agreement.
The consolidated financial statements do not include any adjustments that
might result from the outcome of the above uncertainties. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial condition.
(11) INCOME TAXES
The provision for income taxes for the years ended December 31, 1999 and 1998
consists of the following:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Current expense $ 20,657 $ 679
Deferred expense (benefit) 91,673 (81,602)
--------- ---------
$ 112,330 $ (80,923)
========= =========
</TABLE>
Page F-17
<PAGE> 33
Deferred federal income tax were comprised of the following at December 31,
1999:
<TABLE>
<S> <C>
Deferred federal income tax assets:
Life reserves $ 1,568,256
Net operating loss carryforward 1,009,710
Alternative minimum tax credit 26,938
Equity investment in Rushmore Life at date
of acquisition 33,477
Deferred acquisition costs 6,890
-----------
Gross deferred income tax assets 2,645,271
Valuation allowance (1,065,946)
-----------
Total gross deferred income tax assets 1,579,325
Deferred income tax liabilities:
Funds on deposit (1,579,325)
-----------
Deferred federal income taxes $ -
===========
</TABLE>
A reconciliation of expected federal income tax expense to federal income
tax expense as shown in the consolidated statements of operations is as
follows:
<TABLE>
<CAPTION>
1999 1998
--------- ---------
<S> <C> <C>
Computed "expected" federal income tax benefit $(114,043) $(745,789)
Meals and entertainment 29,102 5,583
Stock compensation 3,903 -
Goodwill amortization 73,628 3,602
Small life company deduction (38,973) -
DAC tax (4,202) -
Alternative minimum tax 6,425 -
Change in valuation allowance 148,594 702,414
Other 7,896 (46,733)
--------- ---------
Reported federal income tax expense (benefit) $ 112,330 $ (80,923)
========= =========
</TABLE>
The Company has net operating losses of $2,970,000 excluding the insurance
operations of Rushmore Life, which files a separate return, which may be
used to offset future taxable income. These loss carryforwards expire at
various dates through 2014. 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 deferred tax benefits.
(12) DEFERRED POLICY ACQUISITION COSTS AND PRESENT VALUE OF FUTURE PROFITS
Changes in deferred acquisition costs were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $ 1,989,174 $ 2,295,697
Recapture by ceding insurer (1,903,296) -
Additions - 638,388
Amortization related to operations (60,178) (944,911)
----------- -----------
Balance, end of year $ 25,700 $ 1,989,174
=========== ===========
</TABLE>
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
Page F-18
<PAGE> 34
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 is as follows for the
years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Balance at beginning of year $ (610,519) $ 763,327
Recapture by ceding insurer 610,519 -
Accretion of interest - 20,734
Amortization - (1,394,580)
----------- -----------
Balance at end of year $ - $ (610,519)
=========== ===========
</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, 1999 and 1998. Under the Incentive Stock
Option Plan, the exercise price may not be less than the fair market value of
the common stock on the date of the grant of the option.
The 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. Options for a total of 377,556 and 107,750 shares were
granted under the plan as of December 31, 1999 and 1998, respectively.
Page F-19
<PAGE> 35
The per share weighted-average fair value of stock options granted during 1999
and 1998 was $2.19 and $1.84, respectively, on the date of grant using the
Black-Scholes option-pricing model. The following weighted-average assumptions
were used: 1999 - expected volatility of 221%, no dividend yield, risk-free
interest rate of 5.111% and an expected life of 5.3 years. 1998 - expected
volatility of 129%, no dividend yield, risk-free interest rate of 4.805% and an
expected life of 6.0 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>
1999 1998
------- -------
<S> <C> <C>
Net loss applicable to common shareholders:
As reported $ (461,870) $ (2,127,774)
Pro forma (843,192) (2,190,182)
Net loss per share - basic and diluted:
As reported (.14) (.77)
Pro forma (.26) (.79)
</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, 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
Granted 269,806 2.40
Exercised (45,809) (1.33)
Expired (5,000) (1.75)
-------
Balance at December 31, 1999 344,080 2.32
=======
</TABLE>
At December 31, 1999 and 1998, the number of options exercisable was 126,603 and
80,483 respectively; and the weighted-average exercise price of those options
was $2.20 and $1.51, respectively.
The following table summarizes information about stock options outstanding at
December 31, 1999.
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------- -------------------
Number Weighted Weighted Number Weighted
Outstanding At Average Average Exercisable At Average
December 31, Remaining Exercise December 31, Exercise
Range Of Exercise Prices 1999 Contract Life Price 1999 Price
- ------------------------ ---- ------------- ----- ---- -----
<S> <C> <C> <C> <C> <C>
$1.50 - $1.92 220,080 6.00 $ 1.78 87,903 $ 1.76
$2.38 - $3.50 104,000 6.38 2.89 35,800 3.04
$5.31 - $5.50 20,000 5.70 5.38 2,900 5.36
----------- -----------
$1.50 - $5.51 344,080 126,603
=========== ===========
</TABLE>
Page F-20
<PAGE> 36
(14) STOCK BONUS PLAN
The company has a stock bonus plan which provides for the granting of up to
100,000 shares of the Company's common stock. The plan is administered by the
board of directors and grants may be made to employees and agents at any price
determined to be fair and reasonable. During 1999 and 1998 employees subscribed
to 276 and 10,000 shares respectively at subscription prices of $0.00 and $0.01
per share respectively. Shares subscribed in 1999 had a fair value of $3.625 per
share and were fully vested at the end of one year. Shares subscribed in 1998
had a fair value of $5.50 per share with a vesting schedule over 5 years. Stock
based compensation of $11,480 and $10,980 was recognized by the Company and is
included in consolidated statements of operations for the years ended December
31, 1999 and 1998 respectively.
(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, 1999:
<TABLE>
<CAPTION>
CARRYING ESTIMATED
AMOUNT FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 490,401 $ 490,401
Certificates of deposit 200,000 200,000
Amounts on deposit with reinsurer 4,645,073 4,645,073
Equity securities available for sale 50,000 50,000
Accounts receivable and due from reinsurers 848,961 732,401
Financial liabilities - notes payable 272,385 272,385
</TABLE>
Page F-21
<PAGE> 37
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, 1999.
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.
(16) SHAREHOLDERS' EQUITY AND RESTRICTIONS
At December 31, 1999 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 Rushmore Life's net gain from operations during the
preceding year or 10% of 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, 1999 was $287,615 and statutory
net income or (loss) was $318,173 and $(112,409) for the years ended December
31, 1999 and 1998, 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) RELATED PARTY TRANSACTIONS
On August 27, 1999 the Company agreed to loan John A. Vann ("Vann") the sum of
$360,000. Vann is President of Rushmore Investment Advisors, Inc. and Chief
Investment Officer of the Company. The principal amount of the loan is being
advanced in monthly increments of $30,000 that bear interest at 9%. Principal is
due eighteen months from the date of the note. Interest is due in two
installments, twelve and eighteen months from the date of the note. The note is
secured by 500,000 shares of common stock of the Company. The outstanding
balance at December 31, 1999 was $150,000. Interest recognized through December
31, 1999, amounted to $2,441.
Page F-22
<PAGE> 38
ITEM 8. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On August 19, l999, the Company appointed the accounting firm of Grant
Thornton LLP as its independent auditors for the fiscal year ending December 31,
1999, and accepted the resignation of KPMG LLP who served as the Company's
independent auditors for the fiscal year ended December 31, l998. The Audit
Committee of the Corporation's Board of Directors approved the selection of
Grant Thornton LLP as new independent auditors.
The KPMG LLP reports on the Company's financial statements for the years
ended December 31, l998 and December 31, 1997 did not contain an adverse opinion
or disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principles. Since January 1, l997, the Company has not
had any disagreements with KPMG LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedures that
would require disclosure in this report.
KPMG LLP has furnished to the Corporation a letter addressed to the SEC
stating that it agrees with the statements in the immediately preceding
paragraph. A copy of such letter, dated August 23, 1999 was filed as exhibit 1
to the Company's Form 8-K filed on August 25, 1999.
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 5, 2000, 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 5, 2000, 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 5, 2000, sets 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 5, 2000, sets forth certain information with respect to these matters.
Page 16
<PAGE> 39
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
** 2.1 Plan and Agreement of Merger with First Financial Life
Companies, Inc.
# 2.2 Plan and Agreement of Merger with The John Vann Company
## 2.3 Asset Purchase Agreement - Block Trading, Inc.
## 2.4 Asset Purchase Agreement - Millennium Daqcom/Dallas LP
## 2.5 Asset Purchase Agreement - Daqcom International, LLC
** 3.1 Articles of Incorporation, as amended
** 3.2 Bylaws
** 4.1 Specimen certificate for shares of Common Stock of the
Company
** 4.2 Specimen certificate for shares of Preferred Stock of the
Company
** 10.1.1 Employment Agreement with D. M. Moore, Jr.
** 10.1.2 Employment Agreement with Jim W. Clark
# 10.1.3 Employment Agreement with John A. Vann
** 10.2.1 Modified Coinsurance Agreement with Massachusetts General
Life Insurance Company
** 10.2.2 Administrative Service Agreement with Massachusetts
General Life Insurance Company
** 10.2.3. Reinsurance Agreement with Massachusetts General Life
Insurance Company
** 10.2.4 National Marketing Agreement with Massachusetts General
Life Insurance Company
** 10.3.1 Modified Coinsurance Agreement with Southwestern Life
Insurance Company
** 10.3.2 Reinsurance Agreement with Southwestern Life Insurance
Company
** 10.3.3 Administrative Service Agreement with Southwestern Life
Insurance Company
** 10.4.1 National Marketing Contract with Legion Insurance Company
** 10.5 Administrative Services Agreement between Registrant and
Rushmore Life
** 10.6.1 Option Agreement regarding Rushmore Insurance Services,
Inc.
** 10.6.2 Overhead Services Agreement
** 10.7 Form of registered Representative Agreement
** 10.8 Form of Investment Advisory Agreement
** 10.9 Form of Affiliation Agreement with Agents
** 10.10.1 Full Disclosed Clearing Agreement with Southwest
Securities, Inc.
** 10.10.2 Fully Disclosed Clearing Agreement with First Southwest
Company
** 10.11 Form of Indemnification Agreement signed with all officers
and directors
# 10.12 Voting Agreement between John A. Vann and D.M. Moore, Jr.
***10.13 Letter of Agreement - Kohler-Stephens, Ltd.
* 21.1 Subsidiaries of the Registrant
* 23.1 Consent of Grant Thornton, L.L.P.
* 23.2 Consent of KPMG LLP
* 23.3 Consent of Cheshier & Fuller, L.L.P.
* 27.1 Financial data schedule
-------------------------
* Filed herewith
** Filed as Exhibits to Registrant's Form SB-2 registration
statement, file no 333-42225, and incorporated herein by
reference.
*** Filed with 10QSB dated November 12, 1999.
# Filed as Exhibits to Registrant's Form 8-K dated July 15, 1999
and incorporated herein by reference.
## Filed with 10QSB dated August 16, 1999.
(b) Reports on Form 8-K
None.
Page 17
<PAGE> 40
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 6, 2000 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 6, 2000 /s/ Robert W. Hendren
--------------------------------------------
Robert W. Hendren, Chief Financial Officer
(Principal Financial and Accounting Officer)
March 6, 2000 /s/ Gayle C. Tinsley
--------------------------------------------
Gayle C. Tinsley, Secretary and Director
March 6, 2000 /s/ Timothy J. Gardiner
--------------------------------------------
Timothy J. Gardiner, Director
March 6, 2000 /s/ Mark S. Adler
--------------------------------------------
Mark S. Adler, Director
March 6, 2000 /s/ James Fehleison
--------------------------------------------
James Fehleison, Director
March 6, 2000 /s/ William C. Keane
--------------------------------------------
William C. Keane, Director
Page 18
<PAGE> 41
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
<S> <C> <C>
** 2.1 Plan and Agreement of Merger with First Financial Life
Companies, Inc.
# 2.2 Plan and Agreement of Merger with The John Vann Company
## 2.3 Asset Purchase Agreement - Block Trading, Inc.
## 2.4 Asset Purchase Agreement - Millennium Daqcom/Dallas LP
## 2.5 Asset Purchase Agreement - Daqcom International, LLC
** 3.1 Articles of Incorporation, as amended
** 3.2 Bylaws
** 4.1 Specimen certificate for shares of Common Stock of the
Company
** 4.2 Specimen certificate for shares of Preferred Stock of the
Company
** 10.1.1 Employment Agreement with D. M. Moore, Jr.
** 10.1.2 Employment Agreement with Jim W. Clark
# 10.1.3 Employment Agreement with John A. Vann
** 10.2.1 Modified Coinsurance Agreement with Massachusetts General
Life Insurance Company
** 10.2.2 Administrative Service Agreement with Massachusetts
General Life Insurance Company
** 10.2.3. Reinsurance Agreement with Massachusetts General Life
Insurance Company
** 10.2.4 National Marketing Agreement with Massachusetts General
Life Insurance Company
** 10.3.1 Modified Coinsurance Agreement with Southwestern Life
Insurance Company
** 10.3.2 Reinsurance Agreement with Southwestern Life Insurance
Company
** 10.3.3 Administrative Service Agreement with Southwestern Life
Insurance Company
** 10.4.1 National Marketing Contract with Legion Insurance Company
** 10.5 Administrative Services Agreement between Registrant and
Rushmore Life
** 10.6.1 Option Agreement regarding Rushmore Insurance Services,
Inc.
** 10.6.2 Overhead Services Agreement
** 10.7 Form of registered Representative Agreement
** 10.8 Form of Investment Advisory Agreement
** 10.9 Form of Affiliation Agreement with Agents
** 10.10.1 Full Disclosed Clearing Agreement with Southwest
Securities, Inc.
** 10.10.2 Fully Disclosed Clearing Agreement with First Southwest
Company
** 10.11 Form of Indemnification Agreement signed with all officers
and directors
# 10.12 Voting Agreement between John A. Vann and D.M. Moore, Jr.
***10.13 Letter of Agreement - Kohler-Stephens, Ltd.
* 21.1 Subsidiaries of the Registrant
* 23.1 Consent of Grant Thornton, L.L.P.
* 23.2 Consent of KPMG LLP
* 23.3 Consent of Cheshier & Fuller, L.L.P.
* 27.1 Financial data schedule
-------------------------
</TABLE>
* Filed herewith
** Filed as Exhibits to Registrant's Form SB-2 registration
statement, file no 333-42225, and incorporated herein by
reference.
*** Filed with 10QSB dated November 12, 1999.
# Filed as Exhibits to Registrant's Form 8-K dated July 15, 1999
and incorporated herein by reference.
## Filed with 10QSB dated August 16, 1999.
<PAGE> 1
EXHIBIT 21.1
RUSHMORE FINANCIAL GROUP, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF ORGANIZATION
- --------------------------------------------------------------------------------
<S> <C>
Rushmore Securities Corporation Texas
RushTrade.com, Inc. 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."
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated February 2, 2000, accompanying the consolidated
financial statements included in the Annual Report of Rushmore Financial Group,
Inc. on Form 10-KSB for the year ended December 31, 1999. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
Rushmore Financial Group, Inc. on Forms S-8 (File No. 333-84897, effective
August 10, 1999, File No. 333-84899, effective August 10, 1999, and File No.
333-84901, effective August 10, 1999).
GRANT THORNTON LLP
Dallas, Texas
March 6, 2000
<PAGE> 1
EXHIBIT 23.2
We consent to incorporation by reference in the registration statements No.
333-84897, No. 333-84899 and No. 333-84901 on Forms S-8 of Rushmore Financial
Group, Inc. of our report dated March 17, 1999, relating to the consolidated
statements of operations, shareholders' equity, and cash flows for the year
ended December 31, 1998, which report appears in the December 31, 1999 annual
report on Form 10KSB of Rushmore Financial Group, Inc. We did not audit the
financial statements of Rushmore Securities Corporation, a wholly-owned
subsidiary, which statements reflect total revenues constituting 28 percent in
1998 of the 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.
KPMG LLP
Dallas, Texas
March 6, 2000
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have issued our report dated January 15, 1999, accompanying the consolidated
financial statements included in the Annual Report of Rushmore Financial Group,
Inc. on Form 10-KSB for the year ended December 31, 1999. We hereby consent to
the incorporation by reference of said report in the Registration Statements of
Rushmore Financial Group, Inc. on Forms S-8 (File No. 333-84897, effective
August 10, 1999, File No. 333-84899, effective August 10, 1999, and File No.
333-84901, effective August 10, 1999).
Cheshier & Fuller, L.L.P.
Dallas, Texas
March 6, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 50,000
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,385,474
<CASH> 490,401
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 25,700
<TOTAL-ASSETS> 11,212,396
<POLICY-LOSSES> 4,596,976
<UNEARNED-PREMIUMS> 15,540
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 272,385
0
156,870
<COMMON> 38,369
<OTHER-SE> 5,542,543
<TOTAL-LIABILITY-AND-EQUITY> 11,212,396
1,133,273
<INVESTMENT-INCOME> 346,451
<INVESTMENT-GAINS> 3,933
<OTHER-INCOME> 6,274,491
<BENEFITS> 306,797
<UNDERWRITING-AMORTIZATION> 183,483
<UNDERWRITING-OTHER> 946,874
<INCOME-PRETAX> (335,422)
<INCOME-TAX> 112,330
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (447,752)
<CHANGES> 0
<NET-INCOME> (447,752)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
<RESERVE-OPEN> (91,674)
<PROVISION-CURRENT> 112,330
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
