10QSB/A 1 rushmore10qa63002.txt UNITED STATES -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB/A [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition Period from ________________ to ________________ Commission file number 000-24057 Rushmore Financial Group, Inc. ------------------------------ (Exact name of registrant as specified in its charter) Texas 75-2375969 ----- ---------- (State of Incorporation) (I. R. S. Employer Identification No.) 13355 Noel Road, Suite 300, Dallas, Texas 75240 ------------------------------------------------ 972-450-6000 ------------------------------------------------ (Issuer's telephone number, including area code) Check whether the issuer filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by the court. Yes ______ No ______ Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes XXX No ______ State the number of shares outstanding of each of the issuer's classes of common equity as of June 30, 2002: 7,901,684 shares of common stock, $0.01 par value. Transitional Small Business Disclosure Format; Yes ______ No XXX 1 PART I. FINANCIAL INFORMATION Item 1. Financial Statements 2
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, December 31, ASSETS 2002 2001 ------------ ------------ Cash and cash equivalents $ -- $ 261,761 Accounts receivable 170,737 338,747 Prepaid expenses and deposits 489,724 227,449 Developed software, at cost 2,076,417 1,739,257 Property and equipment, net of accumulated depreciation 317,368 413,598 Goodwill, net 211,905 1,253,932 Deferred financing fees 41,569 -- ------------ ------------ Total assets $ 3,307,720 $ 4,234,744 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities: Bank overdraft $ 3,857 $ -- Accounts payable 1,201,850 1,012,529 Notes payable 416,992 150,154 Liabilities acquired in 2001 acquisition 349,318 375,812 Accrued expenses and other liabilities 169,946 136,751 ------------ ------------ Total liabilities 2,141,963 1,675,246 ------------ ------------ Shareholders' equity: Preferred stock - cumulative; $10 par value; 14,063 shares issued and outstanding 140,630 140,630 Preferred stock - convertible cumulative; $10 par value; 86,480 shares issued and outstanding 864,800 864,800 Preferred stock issuances pending 100,000 -- Common stock - $0.01 par value; 10,000,000 shares authorized;8,588,562 shares issued at June 30, 2002; 7,229,633 shares issued at December 31, 2001 85,886 72,296 Common stock subscriptions receivable (3,277) (4,118) Additional paid in capital 12,644,684 12,154,388 Treasury stock, at cost - 686,878 shares (421,022) (421,022) Accumulated deficit (12,245,944) (10,247,476) ------------ ------------ Total shareholders' equity 1,165,757 2,559,498 ------------ ------------ Total liabilities and shareholders' equity $ 3,307,720 $ 4,234,744 ============ ============
See accompanying notes to consolidated financial statements 3
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the three and six months ended June 30, (unaudited) For the Three Months For the Six Months Ended June 30, Ended June 30, -------------------------- -------------------------- 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Revenue: Direct access brokerage services Commissions and fees $ 266,598 $ 72,040 $ 499,992 $ 124,674 Retail brokerage services Commissions and fees 1,337,510 2,308,034 2,737,480 3,693,446 Other revenue 6,614 14,211 19,276 37,062 ----------- ----------- ----------- ----------- Total revenue 1,610,722 2,394,285 3,256,748 3,855,182 ----------- ----------- ----------- ----------- Expenses: Direct access brokerage services Commission expense 211,006 1,009 394,651 2,769 Other direct access brokerage services expenses 155,620 145,028 300,972 249,716 Retail brokerage services Commission expense 927,941 1,714,783 1,989,978 2,664,895 Other retail brokerage services expenses 20,175 101,677 40,629 191,889 General and administrative 863,732 921,297 1,346,358 1,983,384 ----------- ----------- ----------- ----------- Total expenses 2,178,474 2,883,794 4,072,588 5,092,653 ----------- ----------- ----------- ----------- Operating loss (567,752) (489,509) (815,840) (1,237,471) Other expense: Write off of impaired goodwill 1,042,028 -- 1,042,028 -- Depreciation and amortization 58,553 44,284 117,130 96,250 Interest expense 15,593 12,403 23,470 19,833 ----------- ----------- ----------- ----------- Loss from continuing operations (1,683,926) (546,196) (956,441) (1,353,554) ----------- ----------- ----------- ----------- Loss from discontinued operations -- (41,469) -- (95,743) ----------- ----------- ----------- ----------- Net loss ($1,683,926) ($ 587,665) ($1,998,468) ($1,449,297) =========== =========== =========== =========== Basic and diluted loss per share of common stock, continuing operations ($ 0.21) ($ 0.10) ($ 0.27) ($ 0.25) =========== =========== =========== =========== Basic and diluted loss per share of common stock, discontinued operations $ 0.00 ($ 0.01) $ 0.00 ($ 0.02) =========== =========== =========== =========== Basic and diluted net loss per share of common stock ($ 0.21) ($ 0.11) ($ 0.27) ($ 0.27) =========== =========== =========== =========== Weighted average common shares outstanding 7,901,684 5,664,538 7,306,766 5,411,793 =========== =========== =========== ===========
See accompanying notes to consolidated financial statements 4
RUSHMORE FINANCIAL GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended June 30, (unaudited) 2002 2001 ----------- ----------- Cash flows from operating activities: Loss from continuing operations ($1,998,468) ($1,353,554) Adjustments to reconcile loss from continuing operations to net cash used in operating activities Common stock issued for compensation and expenses 31,335 -- Fair value of common stock options issued for services 167,491 -- Write off of impaired goodwill 1,042,028 -- Depreciation and amortization 117,130 96,250 Change in assets and liabilities, net of effect of the 2001 acquisition: (Increase) decrease in assets: Accounts receivable 168,009 (14,596) Prepaid expenses and deposits 39,853 (91,956) Increase (decrease) in liabilities: Accrued expenses and other liabilities 196,017 131,920 ----------- ----------- Net cash used in operating activities-continuing operations (236,605) (1,231,936) ----------- ----------- Cash flows from investing activities: Bank overdraft 3,857 -- Purchase of equipment (20,900) (60,594) Capitalization of software development costs (337,160) (626,174) Cash received on the 2001 acquisition -- 11,047 ----------- ----------- Net cash used in investing activities (354,203) (675,721) ----------- ----------- Cash flows from financing activities: Proceeds from sale of Common Stock 390 498,165 Proceeds from sale of Preferred Stock 100,000 355,929 Preferred Stock dividends paid (38,184) (21,538) Payments on notes payable (33,160) (60,543) Proceeds from notes payable 300,000 303,456 ----------- ----------- Net cash provided by financing activities 329,046 1,075,469 ----------- ----------- Net cash used in continuing operations (261,762) (832,188) Net cash provided by discontinued operations -- -- ----------- ----------- Net decrease in cash and cash equivalents (261,762) (832,188) Cash and cash equivalents at beginning of period 261,762 1,218,317 ----------- ----------- Cash and cash equivalents at end of period -- $ 386,129 =========== =========== Supplemental Disclosure of Cash Flow Information: Cash paid for interest ($ 6,645) ($ 19,833) Cash paid for income taxes $ -- $ -- Supplemental Disclosure of Non-Cash Information: Warrants issued in connection with obtaining debt financing $ 41,569 $ -- Common stock issued as dividends on preferred stock $ 2,126 $ -- Common stock issued in the 2001 acquisition $ -- $ -- Common stock issued in the OTA client acquisition $ 300,000 $ --
See accompanying notes to consolidated financial statements 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The financial statements included herein have been prepared by Rushmore Financial Group, Inc. ("Company" or "RFGI") without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures contained herein are adequate to make the information presented not misleading. In the opinion of management, the information furnished in the unaudited consolidated financial statements reflects all adjustments which are ordinary in nature and necessary to present fairly the Company's financial position, results of operations and changes in financial position for such interim period. These interim financial statements should be read in conjunction with the Company's financial statements and the notes thereto as of December 31, 2001, included in the Company's annual report on Form 10-KSB for the year ended December 31, 2001. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. At June 30, 2002, the Company had $2,141,963 in liabilities, no cash and accounts receivable of $170,737. Also, the Company had net losses from continuing operations of $1,057,635 in 2000, $2,203,896 in 2001, and $1,998,468 in the first six months of 2002. Although the Company believes that it will be able to continue to raise the necessary funds until it reaches a sustainable level of profitability, these matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has taken several steps to increase cash by the use of borrowings and equity. In the second quarter of 2002 the Company raised $100,000 through the sale of convertible debentures and $35,000 from the sale of preferred stock. The Company will attempt to raise additional capital through a Senior Secured Convertible Bond Offering whereby the bonds will be secured by a lien on RushTrade's proprietary software and other technology assets. The Company has also undergone an extensive internal reorganization and reduction of staff to adjust to the current level of activity and has implemented additional steps to more closely monitor expenses. Additional marketing efforts are being implemented to enhance revenue and take advantage of the RushTrade software products. The RushTrade products were released on July 1, 2002, and have so far generated only minimal revenue. Rushmore Insurance Services, Incorporated ("Rushmore Agency") is an insurance agency and an affiliate of the Company by means of service agreements. The Company has entered into an administrative services agreement whereby net revenues and expenses are charged via a management fee to the Company. Rushmore Agency has been consolidated in the Retail Brokerage segment of the accompanying consolidated financial statements. 2. Industry Segment Information The Company's assets, revenue, and expenses are attributable to three identifiable business segments: Direct Access Brokerage Services, Retail Brokerage Services, and Corporate. 6
The Direct Access Brokerage Services division, operating as "RushTrade(TM)", has been developed to meet the needs of the active on-line investor. RushTrade offers two products to meet the needs of the active online investor, RushTrade Direct, our Level I browser-based product, and RushTrade Direct Pro, our Level II software-based product. The RushTrade software and its associated Penson Back Office Administrative Tool will attempt to derive various additional revenue streams in the form of licensing fees and royalties from expected licensing arrangements. The Retail Brokerage Services division consists of retail 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 Management Corporation ("Rushmore Management") provides fee-based investment advisory services and portfolio management. The Company's insurance services business is conducted through its affiliated agency, Rushmore Insurance Services, Inc. ("Rushmore Agency"). The Corporate division includes all business assets and activities not directly related or allocated to the other two divisions. The following summarizes the Company's identifiable assets, capital expenditures, and depreciation and amoritization by industry segment as of the dates indicated: June 30, ----------------------- Identifiable Assets 2002 2001 ----------------------- ---------- ---------- Direct Access Brokerage $2,280,235 $1,034,442 Retail Brokerage 360,288 2,623,578 Corporate 667,197 822,322 ---------- ---------- Total $3,307,720 $4,480,342 ========== ========== June 30, ----------------------- Capital Expenditures 2002 2001 ----------------------- ---------- ---------- Direct Access Brokerage $ 350,901 $ 646,855 Retail Brokerage 4,772 20,681 Corporate 2,386 10,341 ---------- ---------- Total $ 358,060 $ 677,878 ========== ========== June 30, Depreciation and ----------------------- Amortization 2002 2001 ----------------------- ---------- ---------- Direct Access Brokerage $ 44,997 $ 17,256 Retail Brokerage 27,124 26,951 Corporate 97,382 76,117 ---------- ---------- Total $ 169,503 $ 120,324 ========== ========== The following summarizes the Company's industry segment operating data for the periods indicated: Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- Revenues 2002 2001 2002 2001 ----------------------- ------------ ------------ ------------ ------------ Direct Access Brokerage $ 266,598 $ 72,040 $ 499,992 $ 124,674 Retail Brokerage 1,344,124 2,308,034 2,737,748 3,693,446 Corporate -- 14,211 8 37,062 ------------ ------------ ------------ ------------ Total $ 1,610,722 $ 2,394,285 $ 3,256,748 $ 3,855,182 ============ ============ ============ ============ Three Months Ended June 30, Six Months Ended June 30, --------------------------- --------------------------- Expenses 2002 2001 2002 2001 ----------------------- ------------ ------------ ------------ ------------ Direct Access Brokerage $ 439,780 $ 253,034 $ 835,786 $ 465,235 Retail Brokerage 2,393,431 2,281,079 3,683,924 3,854,598 Corporate 461,437 406,368 735,506 888,903 ------------ ------------ ------------ ------------ Total $ 3,294,648 $ 2,940,481 $ 5,255,216 $ 5,208,736 ============ ============ ============ ============ 7 Three Months Ended June 30, Six Months Ended June 30, Income (Loss) from --------------------------- --------------------------- Continuing Operations 2002 2001 2002 2001 ----------------------- ------------ ------------ ------------ ------------ Direct Access Brokerage ($173,182) ($180,994) ($335,794) ($340,561) Retail Brokerage (1,050,307) 26,955 (927,176) (161,152) Corporate (461,437) (392,157) (735,498) (851,841) ------------ ------------ ------------ ------------ Total ($1,683,926) ($546,196) ($1,998,468) ($1,353,554) ============ ============ ============ ============
3. Capitalized Software Development Costs The Company capitalizes certain costs associated with the development of the RushTrade software products. During the first six months of 2002, the Company capitalized $337,160 in costs versus $626,174 for the same period in 2001. As of June 30, 2002, the total of all capitalized costs was $2,076,417. Upon release of each of the RushTrade products or modules, costs related to that product or module will be charged to operating expenses instead of being capitalized. Additionally, all presently capitalized costs relating to a released product or module will be amortized by the greater of the revenue method or the straight-line method over a three-year period. On July 1, 2002, the Company released its RushTrade Direct and RushTrade Direct Pro products and began amortizing the capitalized development cost associated with these products. 4. Recent Transactions In March 2002, the Company entered into an Agreement, as an amendment to an earlier revenue-sharing agreement, with NewportX.com, an affiliate of Online Trading Academy of Irvine, CA. ("OTA") to acquire a block of up to 150 active trader accounts which are to be referred or directed to RushTrade over the next six months in exchange for 1,200,000 shares of RFGI common stock. These shares were issued during March 2002 and the Company has recorded a prepaid asset of $300,000, the fair value of the stock on the date of issuance. As the active trader accounts are received and certified, the Company will reclassify these amounts to an intangible asset. As of June 30, 2002, no trader accounts have been certified. OTA is an education provider and conducts classroom training for those interested in day trading or other active investors who seek the latest investment tools and techniques in the active trader market. RushTrade has entered into a strategic relationship with OTA as an industry partner for training and education whereby OTA will conduct training classes using RushTrade's Direct Pro software trading platform. 5. Subsequent Events The Company and Empire Financial Holding Company, Inc. ("Empire") entered into an agreement in June 2002 where Empire would purchase certain assets of Rushmore Securities Corporation, a wholly owned subsidiary of the Company. This transaction was completed on August 9, 2002 with the transfer of $79,464 from Empire to the Company. The total consideration for the sale of these assets is 25% of the gross revenues generated by these assets for a 12-month period. This consideration, which is subject to adjustment, has been estimated to be $211,905 based on actual prior revenues from these assets. The Company expects to receive an additional $26,488 in cash within 90 days and the remainder, $105,953 in either cash or restricted stock of Empire within 180 days of the close. The purchase price of $211,905 is substantially less than the carrying value of the assets. As a result, during the second quarter of 2002, the Company wrote off $1,042,028 of goodwill to state it at its estimated net realizable value of $211,905 at June 30, 2002. 6. Discontinued Operations In September 2001 the Company entered into an agreement, with an effective date of August 1, 2001, to sell Rushmore Investment Advisors, Inc. ("Rushmore Advisors") to Mr. John Vann in exchange for the redemption and cancellation of 597,405 shares of the Company's common stock plus a note for $200,000. As part of the sale, Mr. Vann also retained the right to prepay his existing note of $280,319 to the Company at a discount. Both notes were subsequently discounted to a total of $250,000 and paid. The sale, including the discounted note payoffs, resulted in a one-time non-operating loss of approximately $2,900,000 in September 2001. The financial data relating to Rushmore Advisors is classified as discontinued operations for all periods presented. 8
7. Reclassification Certain 2001 balances have been reclassified to conform to the 2002 presentation. 8. Earnings (Loss) Per Share Earnings (loss) per share for the periods indicated are computed using the following information: Three months ended June 30, Six months ended June 30, Loss From Continuing ---------------------------- ---------------------------- Operations 2002 2001 2002 2001 ---------------------------- ------------ ------------ ------------ ------------ Loss from continuing operations ($ 1,683,926) ($ 546,196) ($ 1,998,468) ($ 1,353,554) Dividends on preferred stock (18,252) (10,769) (40,310) (21,538) ------------ ------------ ------------ ------------ Loss from continuing operations applicable to common shareholders ($ 1,702,178) ($ 556,965) ($ 2,036,652) ($ 1,375,092) ============ ============ ============ ============
9. Goodwill In July 2001 the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), Goodwill and Intangible Assets, which revises the accounting for purchased goodwill and intangible assets. Under SFAS 142, goodwill and intangible assets with indefinite lives will no longer be amortized, but will be tested for impairment annually, and also in the event of an impairment indicator. SFAS 142 is effective for fiscal years beginning after December 15, 2001. The elimination of the amortization of goodwill upon adoption of SFAS 142 is expected to reduce annual operating expenses by approximately $89,000. The Company adopted SFAS 142 on January 1, 2002. As discussed in Note 5, during the second quarter of 2002, the Company entered into an agreement to sell certain assets, which relate to the goodwill recorded on the Company's books. As a result the Company wrote off $1,042,028 of goodwill to state it at its estimated net realizable value of $211,905 the purchase price of the assets being sold. 10. Deferred Financing Fees During the second quarter of 2002, the Company recorded deferred financing fees of $41,569 that represent the fair value of warrants issued to an individual that assisted the Company in obtaining certain debt financing. The deferred financing fees are amortized on a straight-line basis over the term of the related notes, which is three years. 11. Convertible Notes Payable During the current quarter, the Company issued two convertible notes totaling $100,000. These notes bear interest at 9% per annum, principal and accrued interest payable in quarterly installments beginning October 15, 2002, mature April 1, 2005 and are convertible into shares of common stock at the lesser of $0.25 per share or the average closing price of the common stock on its principal trading market for the 30 trading days preceding the notice of conversion, but in no event less than $0.175 per share. 12. Stock Options and Warrants During the current quarter, the Company granted 1,031,000 stock options. 100,001 options were granted to employees for common stock as compensation, these options are exercisable at $0.16 per share; expire in five years and vest 50% in six months and 100% after one year. 930,000 options valued at $167,491 were granted to non-employees for services. The options have exercise prices ranging from $0.22-$0.26 per share, expire in five years and vest immediately. 9 Additionally, during the current quarter, the Company issued 200,000 warrants to purchase common stock valued at $41,569 to a non-employee as a finders fee in connection with the Company obtaining debt financing. These warrants have an exercise price of $0.25 per share and expire in five years. See additional discussion in Note 10. 13. Insurance Claims Payable During the second quarter of 2002, the plan administrator of our partial self-insured program notified the Company that the Company had outstanding claims due to health care providers totaling $168,093. The plan administrator has been unable to provide the Company with information documenting the period to which these claims relate. The Company had recorded an accrual of approximately $60,000 related to these claims. The additional liability related to these claims was recorded in the second quarter of 2002. As of June 30, 2002, the Company has accrued this liability in full along with an estimated accrual of $20,000 for future funds that will be required to cover additional claims. Insurance claims payable totaled $188,093 at June 30, 2002. The self-insured plan was terminated on May 31, 2002 and the Company's employees were enrolled under a fully insured plan on June 1, 2002. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 1. Recent Development In March 2002 the Company's technology development subsidiary, RushTrade Software Services, Inc. entered into a non-exclusive agreement with CentraTrade Services, Ltd. of Houston whereby CentraTrade would become a licensee and distributor of RushTrade's RushTrade Direct and RushTrade Direct Pro software platforms to other NASD member broker/dealers. The Company expects to begin to derive various revenue streams in the form of licensing fees and royalties from these expected licensing arrangements. 2. RushTrade(TM)Direct Access Online Services Software Development RushTrade Direct Access Online Services--RushTrade.com (http://www.rushtrade.com), a division of Rushmore Securities, has been developed to meet the needs of the active on-line investor. RushTrade offers its clients real-time Level I and Level II investment price quotes combined with direct access to Electronic Communications Networks ("ECN"s) and the major Exchanges. The RushTrade product was developed by RushTrade Software Services, Inc., and will be distributed through RushTrade.com, a division of Rushmore Securities. The RushTrade product was released on July 1, 2002 and is expected to provide various additional revenue streams in the form of licensing fees and royalties assuming these expected licensing arrangements materialize. RushTrade offers two distinct products to meet the needs of the active online investor, RushTrade Direct, our Level I browser-based product, and RushTrade Direct Pro, our Level II software-based product. RushTrade Direct attempts to meet the needs of the online investor by delivering real-time quotes and information, RushTrade's Direct Access Routing Technology (DART(TM)), and customer service provided by experienced registered representatives. This product is delivered to investors via the Internet, and therefore is able to be accessed from virtually any computer with a web browser. RushTrade Direct Pro, RushTrade's proprietary software-based Level II product, attempts to meet the more sophisticated on-line investors' demands by providing the latest trading technologies and tools available in an easy-to-use trading system. Significant features of the Level II product include streaming, real-time Level II securities quotes, news, charts, research, and RushTrades' proprietary Direct Access Routing Technology (DART(TM)). DART(TM) enables investors to route their orders directly to the specific ECN or Exchange with the best market price, thus saving the investor time and money by providing improved trade execution quality. RushTrade Direct Pro clients have access to the same customer service support that all RushTrade Direct users receive. The RushTrade products were released into various stages of testing during 2001-2002. Beta testing began for RushTrade Direct in July 2001. Beta testing for RushTrade Direct Pro began in November 2001, and again with additional features in February 2002. Both products were released on July 1, 2002. RushTrade's Penson Back Office Administrative tool, a module necessary for licensing the software to other broker/dealers who have clearing arrangements with Penson Financial, is currently under development, and is expected to be ready for beta testing in late 2002. Final release of the module is expected to occur no sooner than December 2002. 10 2. Results of Continuing Operations Three Months Ended June 30, 2002 and 2001 Revenues The following table sets forth the components of the Company's revenues for the periods indicated: Three Months Ended June 30, --------------------------- Revenues 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage $ 266,598 $ 72,040 Retail Brokerage 1,344,124 2,308,034 Corporate -- 14,211 ------------ ------------ Total $ 1,610,722 $ 2,394,285 ============ ============ Total revenue for the second quarter decreased $783,563, or 33%, from 2001 to 2002. This decrease was comprised primarily of decreases of $963,910 from Retail Brokerage operations and $14,211 from corporate revenues, offset by an increase of $194,558 in Direct Access Brokerage revenue. Direct Access Brokerage revenue increased $194,558, or 270%, from 2001 to 2002. This increase was primarily the result of adding a new trading firm customer licensed in late December 2001. The agreement with this trading firm was terminated in July 2002 and thus we expect Direct Access Brokerage revenue to decrease in the third quarter of 2002. Retail Brokerage revenue decreased $963,910, or 42%, from 2001 to 2002. The decrease in revenue is primarily due to management's decision to reposition its retail securities brokerage and insurance marketing resources and efforts to concentrate on the development and launch of its RushTrade direct access on-line trading system. Overall market conditions also contributed to the overall decline in the Retail Brokerage revenue. Corporate revenue decreased primarily due to the decrease in interest income from 2001 to 2002, as interest-earning assets such as investments and notes receivable decreased. Expenses The following table sets forth the components of the Company's expenses for the periods indicated: Three Months Ended June 30, --------------------------- Expenses 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage $ 439,780 $ 253,034 Retail Brokerage 2,393,431 2,281,079 Corporate 461,437 406,368 ------------ ------------ Total $ 3,294,648 $ 2,940,481 ============ ============ Total expenses increased $354,167 or 12%, from 2001 to 2002. Direct Access Brokerage expenses increased $186,746, Retail Brokerage expenses increased $112,352 and corporate expenses increased $55,069. Direct Access Brokerage expenses increased $186,746, or 74%, from 2001 to 2002. This increase is primarily due to commissions of $183,645 paid to the new trading firm licensed in December 2001. The agreement with this trading firm was terminated in July 2002 and thus we expect Direct Access Brokerage expenses to decrease in the third quarter of 2002. 11 Retail Brokerage expenses increased $112,352, or 5%, from 2001 to 2002. This increase is the result of a write off of impaired goodwill related to the Retail Brokerage assets of $1,042,028 offset by a decrease in expenses due to Management's decision to reposition its insurance marketing resources and efforts to concentrate on the development and launch of its RushTrade direct access on-line trading system. Corporate expenses increased $55,069, or 14%, from 2001 to 2002. The Company instituted cost reduction policies after the Northstar acquisition in 2001 and continues to reduce cost. In the second quarter of 2002 Corporate expenses were increased due to a non-cash charge for consulting fees of $167,491. Operating income (loss) from continuing operations The following table sets forth the components of the Company's income (loss) for the periods indicated: Three Months Ended June 30, Income (Loss) from --------------------------- Continuing Operations 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage ($173,182) ($180,994) Retail Brokerage (1,050,307) 26,955 Corporate (461,437) (392,157) ------------ ------------ Total ($1,683,926) ($546,196) ============ ============ Operating losses increased $1,137,730, or 208%, from 2001 to 2002. Direct Access Brokerage operating losses decreased by $7,812 or 4% from 2001 to 2002. Retail Brokerage recorded operating losses of ($1,050,307) in 2002 versus operating income of $26,955 in 2001. The change was primarily a result of the write off of goodwill of $1,042,028. Corporate operating losses increased $69,280 or 18%, from 2001 to 2002. Corporate operating losses increased in spite of the continued cost cutting. This was primarily due to the non-cash consulting fees. Six Months Ended June 30, 2002 and 2001 Revenues The following table sets forth the components of the Company's revenues for the periods indicated: Six Months Ended June 30, --------------------------- Revenues 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage $ 499,992 $ 124,674 Retail Brokerage 2,756,748 3,693,446 Corporate 8 37,062 ------------ ------------ Total $ 3,256,748 $ 3,855,182 ============ ============ Total revenue for the six months ended June 30, 2002 decreased $598,434, or 16%, from 2001 to 2002. This decrease was comprised primarily of decreases of $936,698 from Retail Brokerage operations and $37,054 from corporate revenues, offset by an increase of $375,318 in Direct Access Brokerage revenue. Direct Access Brokerage revenue increased $375,318, or 300%, from 2001 to 2002. This increase was primarily the result of adding a new trading firm customer licensed in late December 2001. The agreement with this trading firm was terminated in July 2002 and thus we expect Direct Access Brokerage revenue to decrease in the third quarter of 2002. Retail Brokerage revenue decreased $936,698, or 25%, from 2001 to 2002. The decrease is primarily due to management's decision to reposition its retail brokerage and insurance marketing resources and efforts to concentrate on the development and launch of its RushTrade direct access on-line trading system. Overall market conditions also contributed to the overall decline in the Retail Brokerage revenue. 12 Corporate revenue decreased primarily due to the decrease in interest income from 2001 to 2002, as interest-earning assets such as investments and notes receivable decreased. Expenses The following table sets forth the components of the Company's expenses for the periods indicated: Six Months Ended June 30, --------------------------- Expenses 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage $ 835,786 $ 465,235 Retail Brokerage 3,683,924 3,854,598 Corporate 735,506 888,903 ------------ ------------ Total $ 5,255,216 $ 5,208,736 ============ ============ Total expenses increased $46,480 or 1%, from 2001 to 2002. Direct Access Brokerage expenses increased $370,551, Retail Brokerage expenses decreased $170,674 and Corporate expenses decreased $153,397. Direct Access Brokerage expenses increased $370,551, or 80%, from 2001 to 2002. This increase is primarily due to commissions paid to the new trading firm licensed in December 2001. The agreement with this trading firm was terminated in July 2002 and thus we expect Direct Access Brokerage expenses to decrease in the third quarter of 2002. Retail Brokerage expenses decreased $170,674, or 4%, from 2001 to 2002. This decrease is the result of a write off of impaired goodwill related to the Retail Brokerage assets of $1,042,028 offset by a decrease in expenses due to Managements decision to reposition its insurance marketing resources and efforts to concentrate on the development and launch of its RushTrade direct access on-line trading system. Corporate expenses decreased $153,397, or 17%, from 2001 to 2002. The Company instituted cost reduction policies after the Northstar acquisition in 2001 and continues to reduce cost. In the second quarter of 2002 Corporate expenses are increased due to a non-cash charge for consulting fees of $167,491. Operating income (loss) from continuing operations The following table sets forth the components of the Company's income (loss) for the periods indicated: Six Months Ended June 30, Income (Loss) from --------------------------- Continuing Operations 2002 2001 ----------------------- ------------ ------------ Direct Access Brokerage ($335,794) ($340,561) Retail Brokerage (927,176) (161,152) Corporate (735,498) (851,841) ------------ ------------ Total ($1,998,468) ($1,353,554) ============ ============ Operating losses increased $644,914, or 48%, from 2001 to 2002. Direct Access Brokerage operating losses decreased by $4,767 or 1% from 2001 to 2002. Retail Brokerage operating losses increased $766,024 in 2002 versus 2001 or 475%. Retail Brokerage losses were caused primarily by the write-off of goodwill of $1,042,028. Corporate operating losses decreased $116,343 or 14%, from 2001 to 2002. Corporate operating losses increased in spite of the continued cost cutting. This was primarily due to the non-cash consulting fees. Liquidity Cash Flows from Operating Activities - The Company had a loss from continuing operations of $1,998,463 for the six months ended June 30, 2002. This amount was adjusted for non-cash expenses totaling $1,190,493. Cash flows from operating activities were increased by a decrease in receivables of $168,009 and by various other cash flow adjustments aggregating a net source of cash of $235,865; thus yielding a net cash flow used by operating activities of $236,605. 13 Cash Flows From Investing Activities - Cash flow used by investing activities during the six months ended June 30, 2002 was $354,203, due to capitalizing $337,160 in development costs related to the RushTrade direct access software and purchasing various fixed assets for $20,900. Cash Flows from Financing Activities - During the six months ended June 30, 2002, the Company raised $100,390 from the sale of common and preferred stock and $300,000 from borrowings. The Company paid $33,160 as payments on notes payable and $38,184 as preferred stock dividends. The Company's cash and cash equivalents available for operations at June 30, 2002 were zero, and the Company's liabilities exceeded its cash and receivables by $1,971,226. The Company's requirements for normal cash expenditures, as well as costs for the further development and launch of the proprietary on-line RushTrade software, have historically been supplemented with borrowings and equity capital raised through the private placement of securities; however, there can be no assurance that these sources of cash will be available in the future. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. At June 30, 2002, the Company had $2,141,963 in liabilities, and cash and accounts receivable of $170,737. Also, the Company had net losses from continuing operations of $1,057,635 in 2000, $2,203,896 in 2001, and $1,998,468 for the six months ended June 30, 2002. Although the Company believes that it will be able to continue to raise the necessary funds until it reaches a sustainable level of profitability, these matters raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company has taken several steps to increase cash by the use of borrowings and equity. In the second quarter of 2002 the Company raised $100,000 through the sale of convertible debentures and $35,000 from the sale of preferred stock. The Company will attempt to raise additional capital through a Senior Secured Convertible Bond Offering whereby the bonds will be secured by a lien on RushTrade's proprietary software and other technology assets. The Company has also undergone an extensive internal reorganization and reduction of staff to adjust to the current level of activity and has implemented additional steps to more closely monitor expenses. Additional marketing efforts are being implemented to enhance revenue and take advantage of the release of the RushTrade software products. The RushTrade products were released on July 1, 2002, and have so far generated only minimal revenue. Forward-looking statements This document includes statements that may constitute "forward-looking" statements, usually containing the words "believe", "estimate", "project", "expect", or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products in the marketplace, competitive factors, changes in regulatory environments, and other risks detailed in the Company's periodic report filings with the Securities and Exchange Commission. By making these forward-looking statements, the Company undertakes no obligation to update these statements for revisions or changes after the date of this filing. PART II. OTHER INFORMATION Item 2. Changes in securities and use of proceeds Recent Sales of Unregistered Securities On May 21, 2002 the Company issued two convertible notes totaling $100,000. These notes bear interest at 9% per annum, principal and accrued interest payable in quarterly installments beginning October 15, 2002, mature April 1, 2005 and are convertible into shares of common stock at the lesser of $0.25 per share or the average closing price of the common stock on its principal trading market for the 30 trading days preceding the notice of conversion, but in no event less than $0.175 per share. 14 During the current quarter the Company sold 3,500 shares of series 2002A convertible preferred, $10 par value, convertible into the Company's common shares at $0.25 per share and pays a 9% cumulative dividend in common shares payable quarterly. During the current quarter, the Company issued 200,000 warrants to purchase common stock valued at $41,569 to a non-employee as a finders fee in connection with the Company obtaining debt financing. As discussed in Note 10 these warrants have an exercise price of $0.25 per share and expire in five years. During the current quarter, the Company granted 1,031,000 stock options. 100,001 options were granted to employees for common stock exercisable at $0.16 per share that expire in five years as compensation. 930,000 options valued at $167,491 were granted to non-employees for services. The options have exercise prices ranging from $0.22-$0.26 per share that expire in five years. Item 5. Other Information The Nasdaq Stock Market notified the Company that it had until August 13, 2002 to comply with its minimum continued listing requirement by maintaining a minimum closing bid price of $1.00 for at least 10 consecutive trading days. The Company failed to maintain a minimum closing bid price of $1.00. The Company has also been reminded by the Nasdaq Stock Market that, to comply with its minimum continued listing requirements, it must maintain a minimum balance of $2,500,000 in Shareholder's Equity and a minimum of $1,000,000 in market value in the public float. On August 5, 2002 the Nasdaq Stock Market notified The Company that its common stock had failed to maintain a minimum market value of publicly held shares ("MVPHS") of $1,000,000 as required. The Nasdaq Stock Market has given the company 90 days, or until November 4, 2002 to comply. With the filing of this report The Company has failed to maintain a minimum balance of $2,500,000 in Shareholder's Equity and expects to receive a letter from the Nasdaq Stock Market to that effect. At some point in the last half of the year the Company expects to be delisted from the exchange. The Company expects to move to the OTC market and will apply when available for listing on the OTC Bulletin Board Exchange. Item 6. Exhibits and Reports on Form 8-K a) Exhibits 99.1 Certification pursuant of 18 U.S.C. Section 1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification pursuant to 18 U.S.C. Section 1350, as adapted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.3 OTA Agreements 99.4 CentraTrade Agreement 99.5 Common Stock Issued & Outstanding b) Reports on Form 8-K None 15 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. Rushmore Financial Group, Inc. Dated: August 21, 2002 By /s/ Dewey M. Moore, Jr. ------------------------------------ Dewey M. Moore, Jr. Chief Executive Officer Dated: August 21, 2002 By /s/ Randy Rutledge ------------------------------------ Randy Rutledge Chief Financial Officer 16