<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
----- of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1995
----- Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from to
----- -----
Commission File No. 0-19614
H.D. VEST, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2154244
------------------------------- -------------------
(State or other jurisdiction of (IRS Employer ID.)
incorporation or organization)
433 E. Las Colinas Blvd., Third Floor, Irving, Texas 75039
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (214)556-1651
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Exchange on which registered
------------------------------ ------------------------------
Common stock, $.05 par value NASDAQ National Market System
Underwriter's warrants NASDAQ National Market System
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such requirements for the past
90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stocks (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of November 28, 1995,
as computed by reference to the closing sale price of the registrant's Common
Stock on the NASDAQ National Market System on such date: $ 3,781,321.
Number of shares of the registrant's Common Stock outstanding as of September
30, 1995: 5,423,341
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
NONE
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PART I
Item 1. Business
- -----------------
(a) General Development of Business
-------------------------------
H.D. Vest, Inc. (the "Company"), founded by Herb D. Vest, was formed on December
17, 1986, as a Texas corporation. The Company is a financial services company,
organized for the purpose of investing in financial service companies and
providing management services to such companies as well as other entities. The
Company also conducts operations under the corporate assumed name of H.D. Vest
Financial Services. Effective February 15, 1987, the Company issued four shares
of its Common Stock in exchange for each of the then outstanding shares of H.D.
Vest Investment Securities, Inc. ("HDVIS"), a Texas corporation formed in 1983.
The Company also owns all the outstanding shares of H.D. Vest Business Valuation
Services, Inc. ("HDVBVS"), H.D. Vest Collateral Management Company ("HDVCMC"),
H.D. Vest Advisory Services, Inc. ("HDVAS"), H.D. Vest Corporate Finance, Inc.
("HDVCF") and H.D. Vest Mortgage Services, Inc. ("HDVMS"). The Company has
Facilities and Service Agreements with all of its subsidiaries and H.D. Vest
Insurance Services ("HDVIns"), a sole proprietorship owned by Herb D. Vest,
Chairman of the Board and majority shareholder.
The Company's primary asset is its investment in HDVIS. HDVIS is a securities
broker-dealer, registered with the Securities and Exchange Commission ("SEC")
and securities regulatory commissions in all fifty (50) states, the District of
Columbia and the Puerto Rico territory. HDVIS is a member of the National
Association of Securities Dealers ("NASD"), Securities Investors Protection
Corporation ("SIPC") and the Securities Industry Association ("SIA"). HDVIS had
approximately 4,485 fully licensed Representatives and approximately 928 at
various stages of the licensing process as of September 30, 1995. The
Representatives are primarily tax professionals located throughout the United
States who provide their clients with a wide range of financial services
consisting of such investments as mutual funds, unit investment trusts, limited
partnership interests, stocks and bonds. The Company utilizes the Representative
base of HDVIS to market other services provided by the Company through its
subsidiaries and an affiliated entity, which include insurance, business
valuation services, financial planning, investment planning, and other services.
In May 1987, the Company completed a private placement of 39,500 shares (79,000
after adjusting for a two-for-one stock split in July 1987) pursuant to
Regulation D of the Securities Act of 1933.
Under a public stock offering that closed July 15, 1988, the Company issued
214,787 shares of common stock at $6.00 per share.
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The proceeds were used primarily to retire short-term obligations of the
Company.
In September 1991, the Company issued 166,667 shares of non-voting Series A
Convertible Preferred Stock at a price of $6.00 in exchange for $1,000,002 in
principal amount on a note payable to a financial services company. The Company
issued an additional 83,400 shares of non-voting Series A Preferred Stock at a
price of $6.00 in exchange for $500,400 in cash to a second financial services
company. The preferred stock pays a dividend at an annual rate of 8.5 percent
and is payable quarterly. The Series A Preferred Stock is redeemable by the
Company upon certain conditions as discussed in the Second Amendment to the
Articles of Incorporation.
On November 21, 1991, the Company completed a stock offering consisting of
700,000 units at a price per unit of $5.50. Each unit contained one share of
common stock and one A warrant and one B warrant. In April 1992, 25,000 of the
A warrants were exercised by investors resulting in additional capital of
$151,250. The remaining A warrants and B warrants expired unexercised in May
1993 and November 1994, respectively.
In connection with the offering discussed above, the Company sold 70,000
warrants (net of now expired A and B warrants) to the Underwriter for $100. The
exercise price for the warrants is $6.60 per share and the warrants will be
exercisable at any time during the four-year period commencing October 4, 1992.
The warrants contain certain demand and piggyback registration rights as
defined. The warrants are protected against dilution upon the occurrence of
certain events. The warrants issued to the Underwriter may not be transferred
or assigned except to officers or shareholders of the Underwriter. These
warrants were registered pursuant to the Underwriter's agreement in amendment
number two to Form S-1 filed in May, 1995.
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(b) Financial Information About Industry Segments
---------------------------------------------
The Company and its subsidiaries operate primarily in a single industry segment:
securities brokerage and related financial services. The following table sets
forth the Company's total revenues by major source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
<TABLE>
<CAPTION>
Year ending September 30,
------------------------------
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Mutual Fund and UIT's $35,537,273 $36,789,952 $30,611,062
Partnership Interests 323,807 280,053 198,910
Stocks, Bonds and Options 1,988,466 2,276,175 1,930,867
Insurance Products 2,747,322 3,912,106 4,286,916
Marketing and Education Fees 2,696,847 3,280,146 2,933,055
Portfolio Management Fees 791,764 1,680,889 3,219,574
Facility and Service Fee
from Affiliate 316,289 314,196 551,379
All Other 1,606,049 1,753,679 938,288
----------- ----------- -----------
$46,007,817 $50,287,196 $44,670,051
=========== =========== ===========
</TABLE>
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
(c) Narrative Description of Business
---------------------------------
The Registrant and Its Subsidiaries
The Company conducts its business under its corporate name and under the assumed
name of H.D. Vest Financial Services. Through its business divisions and
nationwide network of Representatives, the Company provides a comprehensive
package of financial services and products.
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The various services of the Company are provided by the Company and/or its
subsidiaries as follows and are discussed in more detail on the pages that
follow:
H.D. Vest, Inc. (the "Company") --
Technical and Sales Support Services
Regional Support System
Educational Services
Representative Recruiting
Representative Development
Representative Systems
Insurance Agency Management Services
H.D. Vest Investment Securities, Inc. ("HDVIS") --
Investment Services
Trading and Customer Service
Representative Licensing
Compliance and Due Diligence Services
H.D. Vest Advisory Services, Inc. ("HDVAS") --
Professional Investment Advisory Services
H.D. Vest Mortgage Services, Inc. ("HDVMS") --
Inactive Subsidiary
H.D. Vest Collateral Management Company ("HDVCMC") --
Inactive Subsidiary
H.D. Vest Business Valuation Services, Inc. ("HDVBVS") --
Inactive Subsidiary
The financial services industry is subject to extensive regulation on both the
federal and state level, with which the Company and its subsidiaries must comply
(see "Government Regulation"). HDVIS and HDVAS must maintain current
registration with the applicable regulatory bodies.
At September 30, 1995, the Company's distribution network consists of
approximately 4,485 fully licensed Representatives and approximately 928
Representatives in various stages of licensing.
5
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Technical and Sales Support Services
The Company has assembled staff experts in areas of individual and business
financial planning, including Certified Public Accountants, Certified Financial
Planners, Chartered Financial Analysts, Chartered Life Underwriters, Certified
Investment Management Analysts, Chartered Financial Consultants, Certified
Employee Benefits Specialists, Chartered Pension Consultants, Enrolled Agents,
Certified Management Accountants, American Institute of Certified Public
Accountants-Accredited Personal Financial Specialists, Lawyers, and Pension and
Executive Compensation Certificate recipients. Through their capacity as
consultants and instructors, these financial professionals are dedicated to
provide financial planning and product information to H.D. Vest
Representatives.
The Company has developed financial planning services needed by American
families and businesses in these areas:
o Investment Planning and Product Selection -- Assistance in the selection
of the types of investments suitable to meet the objectives of the client.
o Retirement Planning -- Assistance in determining objectives to meet future
retirement needs of clients.
o Education Planning -- Assistance in determining objectives to ensure
adequate funding will be available for the education of clients' children.
o Employee Benefits -- Assistance to businesses in developing Employee
Benefits programs.
o Tax Planning -- Assistance in reducing tax liabilities through proper
investment and risk management.
o Portfolio Management -- Assistance in the selection of money managers and
the allocation of assets for optimal portfolio results.
o Risk Management -- Assistance in determining insurance needs.
o Qualified Plans -- Assistance to businesses in establishing, funding and
maintaining Qualified Retirement Plans.
o Business Plans -- Assistance to businesses in the areas of financing, cash
management and risk management and Buy-Sell agreements.
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o Estate Planning -- Assistance in planning for the eventual distribution of
a client's estate, focusing on reducing tax liabilities at the time of
distribution.
Regional Support System
The Company has developed a local support system designed to provide
Representatives assistance in all aspects of financial planning including sales
and marketing training, time management, practice management, financial
products, and case studies. The Regional Support System (RSS) also provides a
network for Representatives to consult with each other and analyze actual client
situations. This system operates on the philosophy that the Representatives
will learn from other Representatives who have successfully added financial
planning services to their practice.
Each RSS group is led by a successful H.D. Vest Representative. This
Representative has met specific criteria and attended extensive training before
assuming this important role in the training of fellow H.D. Vest
Representatives. The Regional Support System is made up of Foundations,
Chapters and Summit teams.
Foundations - Foundations teams are designed for Representatives who are
willing to commit to a 12 month individualized intensive training program.
The Foundation teams were created for those Representatives who want to
integrate financial planning into their practice with the goal and commitment
of achieving $25,000 in their 12-month rolling gross revenues. Foundation
teams are made up of 10-15 participants and have monthly meetings.
Individual training is offered based on needs.
Chapters - All Representatives whose 12-month rolling gross revenues are
under $25,000, who are not a Foundation participant, are eligible to attend
Chapter workshops in their area. Chapters provide local H.D. Vest
Representatives six monthly standardized workshop programs between the months
of June and December. Each Chapter is made up of approximately thirty
Representatives.
Summit - All Representatives with 12-month rolling gross revenues greater
than $25,000 are members of a Summit team. Monthly Summit meetings give
Representatives the opportunity to network and share ideas with each other.
In addition, all Summit members will have the opportunity to attend regional
conferences designed specifically for the more advanced technical needs of
higher producing Representatives.
7
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Educational Services
The Company's educational staff develops educational programs and seminars to
enhance the technical skills and knowledge necessary for each successful
Representative. Self-study courses, marketing materials, newsletters,
promotional pieces, and software are a few of the tools used to train and
educate the Company's Representatives and their clients.
Representative Recruiting
The Company recruits Representatives for its wholly-owned subsidiaries HDVIS and
HDVAS. Since its inception, the Company has developed a recruiting process
which the Company believes results in a larger network for distribution of
financial products. Based on its experience in this area, the Company plans to
use the methods that have been proven to be the most effective in the past in
order to gain market share. These methods include the following:
1. Direct Mail. The Company has developed a database with over 300,000 tax
and accounting professionals. Specially designed marketing letters are
more successful from each mailing when strategically and consistently used.
Each respondent receives an H.D. Vest information package ("Opportunity
Package"), follow-up calls, and invitations to recruiting seminars and H.D.
Vest conferences.
2. Recruiting Seminars. The Company holds seminars (qualified for CPE)
designed to promote the benefits of adding financial planning services to
the tax professional's practice. These seminars also teach the tax
professional how to select a financial services support firm.
3. Telemarketing. Once contact has been made with an interested professional
via the Company's direct mail efforts, the recruiting staff follows up by
phone. The recruiting staff has been very effective in its follow up
efforts utilizing its proprietary follow up system.
4. Trade Shows. The Company regularly exhibits at numerous national seminars
and training events held for tax professionals.
5. Referral Incentive Programs. The Company offers its current
Representatives, who refer their colleagues to the Company, override
compensation for their efforts in this area.
8
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6. Trade Publication Advertising. The Company periodically places
advertisements to industry publications and other publications read by tax
professionals.
7. Educational Events. Accounting and tax professionals are continually
invited to attend the Company's comprehensive financial planning seminars.
Participants receive continuing education credit, which provides the tax
professional additional incentive to attend.
8. Regional Offices. The Company intends to open local support offices on a
regional basis as the size of the Representative base and the number of
Regional Support System Representatives increases. To date the
effectiveness of local support offices has not been proven.
Representative Development
The Representative Development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional available.
The Company has made a significant investment in the development of programs to
ensure that new recruits and veteran Representatives of the Company are provided
with a high level of training to keep them apprised of financial opportunities
for their clients.
The Company requires its Representatives to obtain specific licenses, complete
training programs, and follow prescribed procedures in adding financial planning
and implementation services to their practice.
The Company offers the following training and marketing support to assist its
Representatives:
1. Software Support. The Company provides its Representatives with computer
software programs to assist them in the financial planning and
implementation process. These currently include an asset allocation
program based on the Company's study of how asset classes historically
perform under varying economic scenarios and a tax analysis program which
recommends specific areas that need review based on the client's Internal
Revenue Service Form 1040. Each program is designed to help the
Representative with the implementation of financial planning products.
2. Educational Events. The Educational Services Division of the Company
continually improves and develops new training and educational materials to
keep up with the industry and to meet the needs of its Representatives.
The educational events developed by the Company are as follows:
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RSS meetings - During the educational season (from June through December),
------------
monthly, hands-on training sessions are held in major metropolitan cities.
These meetings provide Representatives with training in technical issues,
products, and sales ideas. A total of 600 RSS group meetings were held in
110 cities throughout the United States in fiscal 1995, with 1,100 RSS
group meetings planned for fiscal 1996.
Summit meetings - Held regionally, these two-day events cover in-depth
---------------
financial planning topics that train the Representative to identify
financial planning problems, develop financial planning solutions, and
implement products.
National Conferences - H.D. Vest holds two major training conferences per
--------------------
year. The Vest Fest is held in the spring and the Annual National
Conference is held in the winter.
3. Marketing System. Based on research results, the Company has developed a
step-by-step marketing system which provides new Representatives with the
tools necessary to increase their product sales to clients. The Company
has developed a marketing system for Representative development which
consists of the following:
Technical and Operational Support. Each Representative is provided
----------------------------------
extensive technical and operational support in the following areas from the
Company's home office personnel:
- Technical Specialists
- Educational Services
- Order Processing and Trading
- Compliance
- Customer Service
- Client Seminars
- Product Due Diligence
Personal Assistance. Each Representative is provided with timely and
--------------------
comprehensive personal assistance. Technical consultants pro-actively
assist each Representative in goal setting, in monitoring the educational
process, and in providing technical advice.
Self-study Programs. Representatives are provided modular educational
--------------------
kits (designed by the Company's personnel) on financial planning topics,
which include technical, product, and practice development areas.
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Newsletters. Representative newsletters are provided monthly.
------------
Representatives may also subscribe to a syndicated column service.
Regional Support System. Experienced Representatives assist new
------------------------
Representatives in the educational and developmental process on a local
level to increase product sales.
Sponsor Support. Key sponsors provide local and regional support to
----------------
Representatives, as well as supporting the Company's educational events.
Partners for Success. The Partners for Success program links the Company's
---------------------
most successful Representatives with their peers who are unable to market
investment services. This provides a new source of prospective clients for
the most proactive and successful Representatives and enables the Company
to capitalize on the opportunity represented by clients whose needs are
currently untapped by their primary Representatives.
Representative Systems
The Information Services Division provides computer systems for both the Company
and its Representatives. The division is responsible for developing and writing
all of the programs and hardware that supports the Company's operations.
Information Services is developing a Representative Desktop which is intended to
provide H.D. Vest Representatives with an integrated office management system.
Currently, the Company offers the Representatives computer software programs to
assist them with the implementation of financial planning products. The
Information Services Division intends to continue development of both the
Company's operating system and the Representative Desktop in fiscal 1996.
Insurance Agency Management Services
The Company provides management services to an affiliated insurance agency, H.D.
Vest Insurance Services ("HDVIns"). HDVIns represents a diversified spectrum of
national insurance companies offering life, health, disability, long-term care,
and variable and fixed annuity products for both individuals and businesses.
Representatives of the Company are licensed through HDVIns to sell insurance
products. These Representatives are paid a commission on such sales by HDVIns.
The Company does not receive any portion of these commissions, however, a
facility and service fee is received for management and other services rendered
by the Company.
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Investment Services
H.D. Vest Investment Securities, Inc. ("HDVIS") is registered as a broker-dealer
in all 50 states, the District of Columbia and the Puerto Rico territory, and is
the investment products and trading subsidiary of the Company. HDVIS offers
more than 500 nonproprietary investment products including mutual funds, unit
investment trusts, direct investments, stocks, and bonds. It is a member of the
National Association of Securities Dealers ("NASD"), the Securities Investors
Protection Corporation ("SIPC"), and the Securities Industry Association
("SIA").
Trading and Customer Service
Trading and customer services are provided by the Company to its Representatives
on an ongoing basis. The Company's trading room processes thousands of
investment trades in mutual funds, direct investments, unit investment trusts,
and individual securities. In addition, the H.D. Vest Discount Brokerage
Service allows investors to buy and sell individual securities at discounted
commission rates. Through the Customer Service Department, regular statements
concerning investment balances and status are processed and distributed to allow
Representatives and their clients to monitor investments.
The following table summarizes the number of securities transactions processed
by the Company:
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C>
1,323,715 1,928,779 1,569,425
</TABLE>
Customer accounts for trading of stocks and bonds are cleared on a fully
disclosed basis through National Financial Services Corporation, 161 Devonshire
Street, Mail Stop D6, Boston, Massachusetts 02110. National Financial Services
Corporation as the clearing agent for HDVIS, reflects all stock, bond and option
transactions of HDVIS's customers on its own books. Mutual funds and direct
participation programs are handled directly with the product distributors.
Representative Licensing
The Company provides step-by-step assistance to Representatives in obtaining
both their securities, insurance and Registered Investment Advisor licenses,
including educational programs for exams and complete administrative processing
with the National Association of Securities Dealers ("NASD"), the securities
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licensing agent, and the state agencies that supervise insurance licensing.
Compliance and Due Diligence Services
The Company requires that all Representatives follow the Company's Professional
Code of Ethics and Compliance and Supervisory Procedures. To that end, the
Company's Compliance Department is responsible for Representatives' compliance
with rules of the regulatory bodies that supervise the financial services
industry. Due to the strict regulation of the financial services industry by
federal and state agencies, it is important that the Company keep abreast of the
activities of its Representatives and internal staff. The Company's Compliance
Department supervises the activities of all Representatives.
Professional Investment Advisory Services
H.D. Vest Advisory Services, Inc. ("HDVAS") conducts all of the investment
advisory activities of the Company. HDVAS, formed in 1987, as a Texas
corporation, is registered as an investment advisor with the Securities and
Exchange Commission and various state regulatory agencies as well as a member of
the Investment Company Institute. The Company's Representatives can register as
Investment Advisor Representatives under HDVAS, giving them the capability of
providing fee-based financial planning services to their clients. As of
September 30, 1995, there were approximately 1,517 Representatives registered
with HDVAS.
The VestPremiere Investment Program is a fee-based service of HDVAS. This
service, designed for clients with over $100,000 of current investable dollars,
allows individual investors, foundations, endowments, retirement plans, and
trusts to access comprehensive and independent consulting services that
historically were reserved for only large institutional investors. Through its
expert team of Certified Investment Management Analysts, Chartered Financial
Analysts, Certified Financial Planners, Chartered Financial Consultants, and
American Institute of Certified Public Accountants-Accredited Personal Financial
Specialists, this service helps investors in the asset allocation decision and
in choosing the proper money managers to manage various portions of their
investment portfolio. A quarterly report is provided to each client detailing
investment performance. As of September 30, 1995, there were approximately 604
client accounts utilizing the services of the VestPremiere Investment Program.
The VestFlex Investment Program is a service introduced by HDVAS during July
1993. The program is designed to provide clients with
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as little as $10,000 of investable assets with the rewards of asset allocation
and professional monitoring. Individual investment objectives and risk
tolerances are utilized to select the optimal portfolio in order to meet the
client's needs. Each portfolio is invested in a family of mutual funds and
diversified into different asset classes. A quarterly report is provided to each
client detailing investment performance. As of September 30, 1995, there were
approximately 1,759 client accounts in the VestFlex Investment Program.
In October 1995, the Company began its Vest Advisor program. This program will
accommodate clients with a minimum of $25,000 of current investment dollars.
These investments will be managed by the client's Representative according to
the portfolio goals established between the Representative and the client. Each
client's investment will be held in a single brokerage account. A quarterly
report will be provided to each client detailing investment performance.
Seasonality
As a result of the Company's Representatives consisting primarily of tax
professionals, a majority of the Company's revenues (approximately 51% in fiscal
1995) are generated during tax season (December through May). Tax season is the
time of year that the Company's Representatives have the most contact with the
greatest number of clients.
Government Regulation
H.D. Vest Investment Securities, Inc. ("HDVIS") - The securities industry in
- --------------------------------------------------
the United States is subject to extensive regulation under federal and state
laws. The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers such as HDVIS,
however, has been delegated to self-regulatory organizations such as the NASD.
The NASD conducts periodic examinations of member broker-dealers. Securities
firms are also subject to regulation by state securities commissions in the
states in which they are registered. HDVIS is currently registered as a broker-
dealer in all fifty states, the District of Columbia and the Puerto Rico
territory.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, representative supervision, trade
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. Additional
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legislation, changes in rules promulgated by the SEC and by self-regulatory
organizations, and changes in the interpretation of enforcement of existing laws
and rules often directly affect the method of operation and profitability of
broker-dealers. The SEC and the self-regulatory organizations may conduct
administrative proceedings which can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulations and discipline of broker-dealers is the protection of customers
and the securities markets rather than protection of creditors and stockholders
of broker-dealers. See "Item 3 Legal Proceedings".
HDVIS is a member of the Securities Investors Protection Corporation ("SIPC").
SIPC provides protection to customers (but not shareholders) if a SIPC member
fails financially. Customers (not including investors in the stock of the
Company) of HDVIS that have securities and/or cash on deposit with HDVIS, would
be protected up to a maximum of $500,000, including up to $100,000 on claims for
cash.
HDVIS is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. Minimum net capital can never be lower than $250,000 or 6 2/3% of Aggregate
Indebtedness, as defined, whichever is greater. In computing net capital under
the Uniform Net Capital Rule, various adjustments are made to net worth to
exclude assets which are not readily convertible into cash and to conservatively
state other assets, such as a firm's position in the securities that it holds in
its own account. To that end, a deduction is made against the market value of
such securities to reflect the possibility of a market decline prior to their
disposition. For each dollar that net capital is reduced, by means of such
deductions or otherwise (for example, through operating losses or capital rules,
which are unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed on corporations
engaged in certain other types of business (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources"). HDVIS had net capital, required net capital, and excess net
capital for the years ended September 30, 1993, 1994, and 1995, as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net capital $1,203,249 $1,299,003 $1,449,906
Required net capital 252,157 293,682 250,000
---------- ---------- ----------
Excess net capital $ 951,092 $1,005,321 $1,199,906
========== ========== ==========
</TABLE>
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H.D. Vest Advisory Services, Inc. ("HDVAS") - The financial planning industry
- ----------------------------------------------
is subject to federal regulation under the Investment Advisor Act of 1940,
requiring those providing fee-based investment advice to register with the SEC.
Most states also have registration and reporting requirements. HDVAS is
registered as an investment advisor with the SEC and 49 state regulatory
agencies.
H.D. Vest, Inc. (the "Company") - The Company and its subsidiaries' regulatory
- ----------------------------------
environment, which consists of various areas of securities, investment advisory,
and accountancy law, is extremely complex. In recognition of this reality, the
Company has found it prudent to open the channels of communication between
Company officials and the politicians and regulators who influence its business.
Several Company officers volunteer their personal time and money in connection
with their own political interests, and the Company occasionally contributes
funds to the administrative accounts of political parties. The Company
contributed such funds totaling approximately $103,321 for the year ended
September 30, 1995. All such activities and contributions are carefully
reviewed by the Company's legal counsel to ensure that they comply with the law.
Competition
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions, and other
organizations. Retail oriented financial service providers and other financial
institutions are employing substantial funds in advertising and direct
solicitation of customers to increase their market share, and in many cases the
Company is directly competing with such organizations for the same market share.
Uniqueness
The Company was established to meet the growing demand for professional
financial services. The Company's management believes that the tax professional
is uniquely qualified to give confidential, professional financial advice and
implement financial plans due to the tax professional's in depth knowledge of
his or her clients' financial situation. The Company offers the tax
professional the means to provide personalized financial services to the
consumer.
Tax professionals registered with the Company include CPAs, CFPs, Enrolled
Agents (EA), PhDs, CFAs, Registered Investment Advisors,
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tax attorneys, and other tax professionals. Many hold state or national offices
in CPA societies, EA organizations and public accounting societies.
Employees
At September 30, 1995, the Company employed 126 full-time employees who provide
support services to Representatives of the Company. The number of employees is
expected to increase in areas that provide Representative support during the
fiscal year ending September 30, 1996.
Employees by Department
As of September 30, 1995
<TABLE>
<S> <C>
Marketing and Technical Support 33
Administration and Other 19
Operations 59
Educational Services 15
---
126
===
</TABLE>
The majority of employees are college graduates and are securities licensed.
Item 2. Properties
- -------------------
The Company occupies approximately 30,000 square feet of office space in Irving,
Texas. During May 1993, the Company renegotiated its lease on the office space
replacing Herb Vest as the lessee and naming the Company as lessee. The
Company's lease expires in May 1998. The 30,000 square feet consists of the
third floor and portions of the first, second, eighth, and ninth floors of the
Waterway Tower, located at 433 East Las Colinas Blvd., Irving, Texas.
Item 3. Legal Proceedings
- --------------------------
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission (SEC) began an investigation of the Company's wholly-owned broker-
dealer subsidiary, H.D. Vest Investment Securities, Inc. (HDVIS), relating to
the activities of a former Representative. In July 1995, concurrent with an
administrative proceeding instituted against HDVIS, the SEC and HDVIS entered
into a settlement agreement. Pursuant to the settlement agreement, HDVIS
(i)paid a monetary sanction of $50,000 and (ii)agreed to modify its supervisory
and compliance procedures in accordance with the recommendations of an
independent consultant retained by the Company.
17
<PAGE>
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the Company paid
for the benefit of the plaintiffs, approximately $450,000 as reimbursement of
what the Company believes represents actual out-of-pocket losses plus interest.
The Company believes a fidelity bond issued in favor of HDVIS will cover actual
out-of-pocket losses, up to an aggregate of $250,000 incurred by the plaintiffs.
The plaintiffs seek an additional amount of actual and punitive damages, some of
which they allege are related to their actual economic losses. HDVIS is
vigorously contesting the plaintiffs' right to recover any of these additional
alleged damages. As of September 30, 1995, the Company has accrued approximately
$139,400, net of the fidelity bond, related to legal expenses and costs
associated with expert consultants.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
The annual meeting of shareholders of the Company was held on May 31, 1995, at
the Buena Vista Palace in Lake Buena Vista, Florida. Matters voted on and
approved by the Company's Shareholders at the meeting included the re-election
of Herb D. Vest as Chairman of the Board of Directors, the re-election of
Barbara Howard-Vest, Kenneth E. Reynolds, Jack B. Strong, Jerry M. Prater,
Phillip W. Mayer, and Lynn R. Niedermeier as Directors of the Company. Arthur
Andersen LLP was approved as the Company's independent public accountants for
the ensuing year.
18
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
As of September 30, 1995 the Company's stock was listed on the NASDAQ National
Market System. The total trading volume of the Company's stock for fiscal 1995
was 344,944. There can be no assurance that a more active market will develop.
The following table sets forth the range of high and low closing bid prices of
the Company's Common Stock as reported by NASDAQ-NMS during the period
indicated. The prices set forth below represent prices between dealers, do not
include retail markups, markdowns, or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C> <C>
Months Ended 9/30/95 $3.13 $2.75
6/30/95 3.38 2.50
3/31/95 3.38 2.50
12/31/94 3.88 2.25
-------- ----- -----
9/30/94 4.25 3.00
6/30/94 5.75 3.75
3/31/94 7.00 5.25
12/31/93 6.50 4.50
-------- ----- -----
9/30/93 4.50 4.50
6/30/93 3.75 3.75
3/31/93 4.00 3.81
12/31/92 3.00 2.63
-------- ----- -----
</TABLE>
As of September 30, 1995, there were 842 holders of record of the Company's
common stock.
The NASDAQ Qualifications Standards requires any company wishing to remain
listed to have net tangible assets of $2,000,000, capital and surplus of
$1,000,000, public float of shares of 100,000 (which are shares not held
directly or indirectly by any officer, director or beneficial owner of more than
10% of the total shares outstanding), market value of public float of $200,000,
minimum bid for outstanding shares of $1.67, 300 shareholders, and 2 market
makers.
If the Company was subsequently delisted from the NASDAQ National Market System,
such delisting would materially limit the public market for the Company's common
stock through loss of news coverage, possible decline in share price and
possible difficulty in obtaining subsequent financing. In such event, a
stockholder might encounter difficulty in selling his or her common stock.
19
<PAGE>
The Company has paid no dividends on its common stock since incorporation and
does not anticipate paying dividends on its common stock in the foreseeable
future. The Company intends to continue to devote its earnings, if any, to
the growth and development of the Company. Any dividends in the future will
depend upon substantial earnings, the Company's financial requirements and other
factors.
Potential Future Sales Pursuant to the SEC's Rule 144 -
Of the 5,423,341 shares of common stock currently outstanding, 4,152,754 shares
of common stock are "restricted securities," as that term is defined in Rule
144. A person (or persons whose shares are aggregated) not affiliated with the
issuer who has satisfied a two-year holding period may, under certain
circumstances, sell within a three-month period a number of shares which does
not exceed the greater of 1% of the shares outstanding or the average weekly
trading volume during the four calendar weeks prior to such sale. Rule 144 also
permits, under certain circumstances, the sale of shares without any quantity
limitation by a person who is not an affiliate of the Company and who has
satisfied a three-year holding period. After a three-year holding period, if a
person is not an affiliate and has not been an affiliate for the last three
months, then the person can sell his or her shares without any restrictions
applicable to Rule 144. Herb D. Vest, the Chairman of the Board owns 2,544,255
shares of which 2,478,092 shares are restricted and Barbara Howard-Vest, a
Director of the Company owns 1,519,746 shares of which 1,487,808 are restricted.
Mr. Vest acquired the majority of his shares in February 1987. Ms. Howard-Vest
acquired the majority of her shares pursuant to a divorce agreement with Mr.
Vest in June, 1991. Future sales under Rule 144 may have a depressive effect on
the price of the Company's common stock.
20
<PAGE>
Item 6. Selected Financial Data
- --------------------------------
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1995, has been derived from the audited
financial statements of the Company. Such information should be read in
conjunction with the Consolidated Financial Statements and the report thereon of
Arthur Andersen LLP, independent public accountants located elsewhere in this
document.
Summary of Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended September 30,
- --------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $20,105,157 $35,532,056 $46,007,817 $50,287,196 $44,670,051
Net Income (Loss) $ 921,941 $(3,187,347) $ 2,934,722 $ (369,901) $ 1,329,001
Net Income (Loss)
per common share $ .20 $ (.63) $ .52 $ (.09) $ 0.22
</TABLE>
<TABLE>
<CAPTION>
Summary of Consolidated Statements
of Financial Position
As of September 30,
------------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 900,994 $ 294,033 $2,533,029 $ 1,012,016 $ 1,293,871
Total Assets $5,323,486 $8,690,589 $9,857,018 $12,336,852 $11,666,371
Notes Payable
and Obligations
under Capital
Leases (net of
current
maturities) $ 862,025 $ 620,900 $ 187,858 $ 543,848 $ 430,739
Total
Liabilities $4,899,598 $8,361,445 $6,720,687 $ 9,697,957 $ 7,726,010
Shareholders'
Investment $ 423,888 $ 329,144 $3,136,331 $ 2,638,895 $ 3,940,361
</TABLE>
21
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Liquidity and Capital Resources
At September 30, 1995, the Company had working capital of $1,293,871, an
increase of $281,855 from the $1,012,016 of working capital at September 30,
1994.
The Company's cash flows provided by operations decreased by $755,018 to
$1,019,917 for the year ended September 30, 1995 compared to the year ended
September 30, 1994. The decrease in cash provided by operations is primarily
due to: (i) a decrease in amounts due on clearing transactions resulting from
regulatory changes that reduced from five days to three days the time that funds
may be remitted on investment trades and (ii) continuing payments on severance
agreements with former officers.
Cash used for investing activities of $485,804 and $934,010 for the years ended
September 30, 1995 and 1994, respectively, includes costs of $95,145 and
$407,299 incurred for furniture, fixtures and computer equipment for those same
years, respectively. The $390,659 of funds used for investing activities for
the purchase of other assets during the year ended September 30, 1995 includes
costs incurred for software development, designed to improve the productivity of
the Company's Representatives, and costs related to the formation of the
Deferred Compensation Plan.
Cash used for financing activities of $1,344,293 during the fiscal year ended
September 30, 1995 included net advances on the lines of credit with Mr. Vest of
$879,290 in principal and $163,145 of accrued and unpaid interest, net payments
from Ms. Howard-Vest of $53,884 in principal and $1,754 of accrued and unpaid
interest, and payments for capital lease obligations and preferred stock
dividends. Cash used for financing activities of $1,872,119 during the fiscal
year ended September 30, 1994 include net advances on the lines of credit with
Mr. Vest of $1,120,710 in principal and $23,210 of accrued and unpaid interest
and with Mrs. Howard-Vest of $350,000 in principal and $9,561 of accrued and
unpaid interest, payments for capital lease obligations and preferred stock
dividends.
The Company's historical growth has been financed from inception via loans,
private placements of preferred and common stock, public offerings of common
stock and cash flows from operations. For the period from inception through
September 30, 1995, amounts from
22
<PAGE>
these sources have been approximately $2.5 million, $2.6 million, $5.1 million
and $3.1 million, respectively.
In July 1995, the Company began accepting contributions for the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution, as defined in the Plan. As
of September 30, 1995 approximately $73,000 had been deferred under the Plan.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash. The
Company accrued matching contributions of approximately $1,000 for the fiscal
year ended 1995.
The Company continually monitors the capital markets for opportunities to obtain
financing to meet its growth needs. Historically, the Company has significantly
increased its recruiting and development activities upon obtaining such
financing. The Company must expense all costs related to these activities.
Additionally, in periods of extensive recruiting and development activities, the
Company has experienced higher general and administrative costs as overhead has
increased to support the recruiting and development activities. Consequently,
the Company has generated substantial net losses subsequent to obtaining
financing needed to fund further growth. Should the Company obtain future
financing to fund its growth plans, it is likely the Company would generate net
losses in the period subsequent to obtaining such financing.
Results of Operations
Revenues
The Company's revenues for the year ended September 30, 1995, were $44,670,051,
a 11% decrease over the year ended September 30, 1994. Management believes that
revenues were negatively impacted by
23
<PAGE>
interest rates which made interest-bearing investments attractive to investors.
Additionally, the Company has begun to place increased emphasis on its
fee-based business. As Representatives switch their investment strategies for
their clients from front-end sales charge investments (i.e. mutual funds) to
fee-based investments, commission revenue will be replaced by portfolio
management fees. In the short term, the decrease in commission revenue will be
greater than the increase in portfolio management fees. However, portfolio
management fees will be earned annually on client funds that remain invested in
fee-based programs, compared to a one-time front- end sales charge on mutual
fund investments. The Company's revenues for the years ended September 30,
1994 and 1993, were $50,287,196 and $46,007,817, respectively, a 9% and 30%
increase over the years ended September 30, 1993 and 1992, respectively.
Commission revenue as a percentage of gross product sales have declined from
approximately 4% in 1986 to approximately 3% in 1995. This decline is due to an
industry-wide reduction in commissions on mutual funds and unit investment
trusts. These products comprise a majority of the revenues generated by HDVIS,
the Company's main operating subsidiary. To the extent that these commissions
continue to decline, HDVIS must increase the volume of products sold to maintain
historical commission revenue levels.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company has devoted significant resources to further
development of its fee-based programs. Portfolio management fees from these
programs were $3,219,574 for the year ended September 30, 1995, a 92% increase
over the year ended September 30, 1994. Portfolio fee revenues for the years
ended September 30, 1994 and 1993, were $1,680,889 and $791,764, respectively, a
112% increase and 2% decrease over the years ended September 30, 1993 and 1992,
respectively.
24
<PAGE>
The reasons for changes in the Company's revenues in the years ended September
30, 1993, 1994, and 1995 are summarized in the following table:
<TABLE>
<CAPTION>
% Change for the Years Ended September 30,
as compared to Previous Years
-----------------------------------------
Source of Revenue 1993 1994 1995
- ------------------------- -------- -------- --------
<S> <C> <C> <C>
Mutual Fund and UIT's (1) +29% +4% -17%
Variable Insurance
Products (2) +43% +42% +10%
Limited Partnership
Interests (3) -56% -14% -29%
Stocks, Bonds and
Options (4) +56% +33% -15%
Investment Advisory
and Portfolio
Management Fees (5) -2% +112% +92%
Facility and Service
Fees (6) +43% -1% +75%
Marketing and
Educational
Fees (7) +62% +22% -11%
Other (8) +26% -2% -47%
</TABLE>
(1) Revenues have increased in 1993 and 1994 due to increases in product sales
resulting from the growth in the number of Representatives and the training
programs provided by the Company. Revenues in 1995 have decreased due to
rising interest rates which have made interest-bearing investments
attractive to investors.
(2) Revenues have increased due to the increase in the number of
Representatives licensed to offer this product and market conditions which
have made this product a better investment.
(3) Revenues decreased due to a decline in demand for this type of product due
to changes in tax laws and the economic viability of these products.
(4) Revenues have increased in 1993 and 1994 due to increases in product sales
resulting from the growth in the number of Representatives and the training
programs provided by the Company. Revenues in 1995 have decreased due to
rising interest rates which have made interest-bearing investments
attractive to investors.
(5) Revenues increased during 1994 and 1995 due in part to the an increase in
the number of Representatives licensed to offer
25
<PAGE>
this product and the development of additional fee-based services. During
1993 several accounts were transferred to a competing investment company
started by a former officer of the Company. The division has continued to
grow with the addition of new accounts and a new service, VestFlex
Investment Program. During 1994 and 1995, the Company has devoted
significant resources to further develop fee-based programs.
(6) Facility and Service Fees decreased in 1994 due to a decrease in the
resources available to support this product line. Fees in 1993 and 1995
increased due to the allocation of more resources used to support this
product line.
(7) Revenues in 1993 and 1994 increased due to increases in sales and the
expansion of the educational programs and seminars provided by the Company.
Product sponsors assist in the funding of our educational services.
Revenues in 1995 decreased as a direct result of a sluggish market, which
reduced the receipts from sponsors.
(8) Effective November 15, 1989, the Company began charging a transaction fee
of $10.50 for each transaction processed by the Company, subject to certain
limitations. This policy was discontinued in the first quarter of fiscal
year 1995. Transaction fees for the years ended September 30, 1993, 1994,
and 1995 were $775,735, $845,436, and $64,586 respectively.
During 1995, the Company developed programs designed to increase future
revenues. Each of these programs is discussed in summary below.
Regional Support System (RSS)
- -----------------------------
The RSS program is designed to provide Representatives with local support in all
aspects of financial planning including sales and marketing training, and time
and practice management. Each RSS group is led by an H.D. Vest Representative.
The RSS program is built around Foundation Teams (for Representatives seeking to
achieve $25,000 in rolling 12-month gross revenues), Chapters (which are similar
to the Foundation Teams except that they are held in larger workshop formats)
and Summit Teams (for Representatives above the $25,000 rolling 12-month gross
revenue threshold). Each month 110 Chapter and 52 Foundation team meetings are
held nationwide.
Total Client Commitment (TCC)
- -----------------------------
The TCC program reflects the Company's belief that H.D. Vest Representatives
have a continuing obligation to provide comprehensive, knowledge-based services
to their clients in a professional and ethical manner. To support the
Representatives in
26
<PAGE>
fulfilling this obligation, the Company is providing a wide range of educational
tools including newsletters, audiotapes, direct marketing programs and success
training. Additional programs include Client Appreciation Week, Client Service
Awards, and the H.D. Vest Merit Scholarship program for children of H.D. Vest
investment clients.
Partners for Success (PfS)
- --------------------------
The PfS program offers successful H.D. Vest Representatives the opportunity to
work with low-producing Representatives to generate a new source of revenue,
while providing the low-producing Representatives the opportunity to increase
their revenue stream with little effort, time or money.
The Rep Desktop
- ---------------
The Rep Desktop program is designed to provide H.D. Vest Representatives with an
innovative and integrated office management system. Key components of the
program rolled out through September 30, 1995 include an automated contact
management system and new Representative communication system which will be the
cornerstones of the new Rep Desktop.
Net Income (Loss)
Net income for the year ended September 30, 1995 was $1,329,001 compared to a
net loss of $(369,901) and net income of $2,934,722 for the years ended
September 30, 1994 and 1993, respectively.
General and administrative expenses for the year ended September 30, 1995, were
$10,810,892, a decrease of $2,893,060 from the prior year total of $13,703,952.
General and administrative expenses for the year ended September 30, 1994
increased by $2,857,819 from the $10,846,133 reported at September 30, 1993. A
substantial amount of the Company's expenses are variable and controllable.
Consequently, as revenues decline during the year, the Company was able to
reduce certain expenses to maintain profitability. Additionally, the reduction
for fiscal 1995, is partially a result of a credit to expense of $381,331
related to the cancellation of an officer's severance agreement. The increase in
fiscal 1994 was primarily the result of severance agreements with former
officers, professional fees, settlement charges related to litigation with two
former officers and accrued expenses related to a case involving questionable
trading practices of a former Representative (see Note 4 "Commitments and
Contingencies" to the consolidated financial statements).
27
<PAGE>
Representative development costs for the year ended September 30, 1995, were
$4,526,637, a decrease of $411,490 over the prior year. Representative
development costs for the year ended September 30, 1994 were $4,938,127, a
$1,648,299 increase over the $3,289,828 for the year ended September 30, 1993.
The decrease in development costs for 1995 is generally due to reduced levels of
variable and controllable expenses consistent with the current year revenue
decrease. However, Representative development costs have not decreased at the
same rate as other expense categories, because continued training and
development of Representatives must continue to be emphasized (i) even in down
markets to mitigate the revenue impact of the down market and (ii) to ensure
that appropriate training and educational materials are made available to
Representatives as financial planning techniques and investment products
proliferate and become more complicated.
Representative recruiting costs for the year ended September 30, 1995, were
$398,837, a decrease of $120,339 over the prior year. Representative recruiting
costs for the year ended September 30, 1994, were $519,176, an increase of
$204,771 from the expense of $314,405 for the year ended September 30, 1993. The
decrease in recruiting costs for fiscal 1995 is related to the curtailment of
the direct mailing activities of the Company. Recruiting activities for fiscal
1995 and 1994 focused on the use of a referral program through which existing
Representatives received incentives for recruiting new Representatives and the
newly implemented RSS program. The increase in fiscal 1994 is the result of an
increased use of direct mail to find prospective Representatives. To the extent
that the Company decides in the future to devote significant resources to
rapidly expand its Representative base through aggressive recruiting activities,
future profitability would likely be negatively impacted.
Currently, most state boards have regulations prohibiting CPAs from receiving
commissions for the sale or referral of products or services to their clients.
Since 1990, twelve states have changed their rules to allow commission income by
CPAs and several other states have proposed rule changes. In California,
Mississippi and Louisiana, where commissions are prohibited, CPA Representatives
have been challenged by their state regulatory boards. The Company has chosen
to vigorously support these Representatives. In Louisiana and Mississippi a
lower court found in favor of the Representative and these cases are on appeal.
The California litigation has not reached trial. The Company incurred legal
costs of approximately $464,000, $573,000 and $156,000 for the years ended
September 30, 1993, 1994 and 1995, respectively, to support
28
<PAGE>
these Representatives. Mississippi's board has changed its rule to allow
commissions effective January 1, 1996.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index
Page
----
Report of Arthur Andersen LLP, Independent F-1
Public Accountants
Consolidated Statements of Financial
Position - September 30, 1994 and 1995 F-2 & F-3
Consolidated Statements of Operations -
Three years ended September 30, 1995 F-4
Consolidated Statements of Shareholders'
Investment - Three years
ended September 30, 1995 F-5
Consolidated Statements of Cash Flows -
Three years ended September 30, 1995 F-6
Notes to Consolidated Financial Statements F-7 - F-17
30
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial
position of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 1994 and
1995, and the related consolidated statements of operations, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of H.D. Vest,
Inc. as of September 30, 1994 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 29, 1995
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
-------------------------
1994 1995
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,193,240 $ 3,383,060
Commissions and accounts
receivable 3,680,679 3,329,869
Current portion - notes receivable
- related parties 214,783 522,178
Receivable from affiliate 152,540 98,929
Prepaid expenses 251,165 56,773
----------- -----------
Total current assets 8,492,407 7,390,809
----------- -----------
Property and equipment, net of
accumulated depreciation
of $1,409,087 at 1994, and
$1,924,547 at 1995 1,602,573 1,289,111
Notes receivable - related parties,
net of current portion 1,288,698 1,978,099
Other assets 953,174 1,008,352
----------- -----------
Total assets $12,336,852 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements
F-2
<PAGE>
Page 2 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
September 30,
-----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 3,010,321 $ 3,005,316
Amounts due on clearing transactions 1,673,531 669,187
Commissions payable 2,391,139 2,222,435
Payable to officer and directors 405,400 200,000
----------- -----------
Total current liabilities 7,480,391 6,096,938
----------- -----------
Obligations under capital leases,
excluding current installments 543,848 430,739
Other noncurrent liabilities 483,331 157,331
Unearned revenue 1,190,387 1,041,002
Commitments and contingencies (Note 4)
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1994 and 1995 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,392,287 outstanding at September 30,
1994 and 5,423,341 outstanding at
September 30, 1995 269,614 271,167
Additional paid-in capital 4,982,387 5,080,834
Deficit (4,113,508) (2,912,042)
----------- -----------
Total shareholders'
investment 2,638,895 3,940,361
----------- -----------
Total liabilities and
shareholders' investment $12,336,852 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------
1993 1994 1995
------------ ------------- ------------
<S> <C> <C> <C>
Revenues:
Commissions $40,596,868 $43,258,286 $37,027,755
Marketing and education fees 2,696,847 3,280,146 2,933,055
Portfolio management fees 791,764 1,680,889 3,219,574
Facility and service fee
from affiliate 316,289 314,196 551,379
Other 1,606,049 1,753,679 938,288
----------- ----------- -----------
Total revenues 46,007,817 50,287,196 44,670,051
----------- ----------- -----------
Expenses:
Commissions 28,315,039 31,332,505 27,322,184
General and administrative 10,846,133 13,703,952 10,810,892
Representative development 3,289,828 4,938,127 4,526,637
Representative recruiting 314,405 519,176 398,837
Interest 99,690 62,603 100,280
----------- ----------- -----------
Total expenses 42,865,095 50,556,363 43,158,830
----------- ----------- -----------
Net income (loss) before state
and federal income tax 3,142,722 (269,167) 1,511,221
Provision for state and federal
income tax 208,000 100,734 182,220
----------- ----------- -----------
Net income (loss) $ 2,934,722 $ (369,901) $ 1,329,001
=========== =========== ===========
Net income (loss)
per common share $0.52 $(0.09) $0.22
=========== =========== ===========
Weighted average number of
common shares outstanding 5,392,287 5,392,287 5,406,337
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
Shares of Stock
Outstanding Additional
--------------------- Preferred Common Paid-in
Preferred Common Stock Stock Capital Deficit Total
--------- ---------- --------- --------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1992 250,067 5,392,287 $ 1,500,402 $269,614 $4,982,387 $(6,423,259) $ 329,144
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 2,934,722 2,934,722
--------- ---------- --------- --------- ----------- ----------- ----------
Balance at
September 30, 1993 250,067 5,392,287 1,500,402 269,614 4,982,387 (3,616,072) 3,136,331
Preferred Dividends - - - - - (127,535) (127,535)
Net Loss - - - - - (369,901) (369,901)
--------- ---------- --------- --------- ----------- ----------- ----------
Balance at
September 30, 1994 250,067 5,392,287 1,500,402 269 614 4,982,387 (4,113,508) 2,638,895
Issuance of Common
Stock as Compensation - 31,054 - 1,553 98,447 - 100,000
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,329,001 1,329,001
--------- ---------- --------- --------- ----------- ----------- ----------
Balance at
September 30, 1995 250,067 5,423,341 $1,500,402 $271,167 $5,080,834 $(2,912,042) $ 3,940,361
========= ========== ========== ======== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-5
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------
1993 1994 1995
------------- -------------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,934,722 $ (369,901) $ 1,329,001
Reconciliation of net income (loss) to
net cash provided by operating activities
Depreciation and Amortization 416,294 668,489 850,941
Common stock issued as compensation - - 100,000
Writedown of non-current assets to
net realizable value - 276,153 -
Changes in assets and liabilities
Commissions and accounts receivable (468,573) (1,461,157) 350,810
Receivable from affiliate (231,766) 133,245 53,611
Prepaid expenses (122,762) (93,174) 194,392
Receivable from (payable to)
officers and directors 83,697 255,950 (205,400)
Accounts payable and accrued expenses (73,798) 1,616,162 (331,005)
Commissions payable 113,387 999,367 (168,704)
Amounts due on clearing transactions (1,034,697) (262,460) (1,004,344)
Unearned revenue 191,428 12,261 (149,385)
----------- ----------- -----------
Net cash provided by operating
activities 1,807,932 1,774,935 1,019,917
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) reductions to other assets (484,545) (526,711) (390,659)
Purchases of property and equipment (258,326) (407,299) (95,145)
----------- ----------- -----------
Net cash used for
investing activities (742,871) (934,010) (485,804)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,535) (127,535) (127,535)
Advances on notes receivable -
related parties - (1,503,481) (2,315,308)
Payments on notes receivable -
related parties - - 1,318,512
Payments on notes payable and
capital lease obligations (920,775) (241,103) (219,962)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,048,310) (1,872,119) (1,344,293)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,751 (1,031,194) (810,180)
CASH AND CASH EQUIVALENTS,
beginning of year 5,207,683 5,224,434 4,193,240
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 5,224,434 $ 4,193,240 $ 3,383,060
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Organization and Summary of Significant Accounting Policies
(a) Organization - H.D. Vest, Inc. (the "Company") is a Texas corporation
formed in December, 1986 to manage the various financial services arms of the
H.D. Vest Financial Services group. Through its wholly-owned subsidiaries, the
Company provides financial services through tax and accounting professionals.
The Company's services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(b) Cash and Cash Equivalents - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three months
or less.
(c) Property and Equipment - Property and equipment is stated at cost and is
depreciated by the straight-line method using estimated useful lives ranging
from five to six years. At September 30, 1994 and 1995, property and equipment
consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Leasehold improvements $ 124,530 $ 127,073
Computer equipment 1,473,912 1,593,035
Furniture and fixtures 1,084,414 1,154,412
Telephone equipment 293,524 303,858
Other 35,280 35,280
Less accumulated depreciation
and amortization (1,409,087) (1,924,547)
----------- -----------
Total property and equipment, net $ 1,602,573 $ 1,289,111
=========== ===========
</TABLE>
(d) Amounts Due on Clearing Transactions - The Company remits customer funds
on certain clearing transactions on a settlement date basis rather than on a
trade date basis. Under the settlement date basis of remittance, the Company
holds customer funds from the trade date until the time at which the trades are
cleared by the product sponsor (not to exceed three business days). During
fiscal 1995, an industry wide regulatory action changed the clearing time from
five days to three days.
F-7
<PAGE>
(e) Revenue Recognition - Commission revenue and related commission expense are
recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees. These fees are unearned until the first
quarter of each fiscal year. Marketing and education fees are charged to various
product wholesalers, the Company's Registered Representatives, and new licensees
for Company-sponsored educational seminars and materials. Portfolio management
fees represent fee-based revenues and are recognized based on the value of
client investment balances during the period.
(f) Representative Development - Representative development expenses consist
of incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(g) Representative Recruiting - Representative recruiting expenses represent
the incremental costs incurred by the Company to recruit potential Registered
Representatives. Recruiting expenses include certain salaries, office expenses,
referral incentive programs, advertising, direct mail and telemarketing costs.
(h) Income Taxes - Deferred income taxes are provided for temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Deferred taxes are recorded based upon enacted tax rates anticipated
to be in effect when the temporary differences are expected to reverse.
(i) Net Income (Loss) per Common Share - Net income (loss) per common share is
based on the weighted average number of shares issued and outstanding during
each period presented.
(j) Supplemental Cash Flow Information - Cash interest payments for the years
ended September 30, 1993, 1994 and 1995 were $106,205, $62,603 and $100,280
respectively. During the fiscal years ended September 30, 1993, 1994 and 1995
the Company acquired assets through capital leases amounting to $6,171,
$597,093, and $106,853 respectively.
F-8
<PAGE>
2) 401(k) Retirement Plan
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20%, up to an
annual limit of $1,848 per employee. Company contributions to the plan for
the fiscal years ended September 30, 1993, 1994 and 1995 were $16,628, $29,077
and $46,568 respectively.
3) Notes Payable
In July 1995, the Company entered into a line of credit with a bank under which
the Company may borrow up to a maximum of $500,000. The line bears interest,
payable monthly, at prime plus 1% (9.50% as of September 30, 1995). The line is
secured by a $250,000 Certificate of Deposit held by H.D. Vest Investment
Securities, Inc. ("HDVIS"). Additionally, the Company's two largest
shareholders have pledged a portion of their holdings as collateral for the
line. The line of credit is intended for working capital purposes and expires
February 1, 1996. At September 30, 1995, no amount had been drawn against the
line.
4) Commitments and Contingencies
(a) Leases - The Company leases its office space and certain office equipment
under lease agreements which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements which qualify as
capital leases. At September 30, 1994 and 1995 the capitalized basis of the
leases included in property and equipment was approximately $1,071,586 and
$1,162,857 and accumulated amortization applicable to the leased equipment was
approximately $306,533 and $525,975 respectively. Future minimum lease
payments under operating lease commitments with initial or noncancellable terms
in excess of one year and under capital lease obligations as of September 30,
1995, are as follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
Year ended September 30:
1996 $268,362 $ 793,427
1997 222,352 789,560
1998 172,625 558,433
1999 107,181 31,893
2000 1,150 12,446
-------- ----------
Total minimum lease payments 771,670 $2,185,759
==========
Less amount representing interest 135,669
--------
Present value of net minimum
capital lease payments 636,001
Less current installments
included in payable 205,262
--------
Obligations under capital
leases, excluding current
installments $430,739
=========
</TABLE>
Rent expense for the years ended September 30, 1993, 1994 and 1995 was
approximately $583,325, $552,463 and $594,756 respectively. The future minimum
rental payments under the current leases are as follows: 1996 - $684,081; 1997
- - $696,966; and 1998 - $481,824.
(b) Litigation and Contingencies - During the fiscal year ended September 30,
1994, the Securities and Exchange Commission (SEC) began an investigation of the
Company's wholly-owned broker-dealer subsidiary, H.D. Vest Investment
Securities, Inc. (HDVIS), relating to the activities of a former Representative.
In July 1995, concurrent with an administrative proceeding instituted against
HDVIS, the SEC and HDVIS entered into a settlement agreement. Pursuant to the
settlement agreement, HDVIS (i)paid a monetary sanction of $50,000 and
(ii)agreed to modify its supervisory and compliance procedures in accordance
with the recommendations of an independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the
F-10
<PAGE>
Company paid for the benefit of the plaintiffs, approximately $450,000 as
reimbursement of what the Company believes represents actual out-of-pocket
losses, plus interest. The Company believes a fidelity bond issued in favor of
HDVIS will cover actual out-of-pocket losses, up to an aggregate of $250,000
incurred by the plaintiffs. The plaintiffs seek an additional amount of actual
and punitive damages, some of which they allege are related to their actual
economic losses. HDVIS is vigorously contesting the plaintiffs' right to recover
any of these additional alleged damages. As of September 30, 1995, the Company
has accrued approximately $139,400, net of the fidelity bond, related to legal
expenses and costs associated with expert consultants.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not, in
the opinion of management, have a material adverse effect upon the financial
position of the Company.
5) Severance Agreements
In April 1994, an Executive Vice President resigned her position with the
Company. The Company and the officer entered into a severance agreement that
provided for the payment of severance of $16,667 per month commencing on May 1,
1994 and continuing for 30 months, in exchange for an agreement restricting the
use of Company materials and information for a period of 48 months. Subsequent
to September 30, 1994, the former officer rejoined the Company as President. In
connection with the officer's return, the Company and the officer agreed to
terminate the severance agreement. In December 1994, the Company credited the
remaining amount of $381,331 to general and administrative expenses. In October
1995, the Company granted the officer a medical leave of absence, discontinued
monthly payments and monthly stock awards under her existing employment
agreement, and agreed to pay her $16,600 per month until the earlier of
October 1, 1996 or when the officer resumes her normal duties with the Company.
Upon her return, compensation to the officer would resume under her existing
employment agreement.
In June 1994, an Executive Vice President resigned his position with the
Company. The Company and the former officer entered into a severance agreement
that provided for the payment of severance of $16,667 per month commencing on
September 15, 1994 and continuing for 30 months, in exchange for an agreement
restricting the use of Company materials and information for a period of 48
months.
F-11
<PAGE>
In connection with these agreements the Company charged $1,000,000 to general
and administrative expense during the fiscal year ended September 30, 1994. The
related liabilities at September 30, 1994 and 1995 were $883,331 and $283,329,
respectively.
6) Shareholders' Investment
In September 1991, the Company issued 166,667 shares of non-voting Series A
Convertible Preferred Stock at a price of $6.00 in exchange for $1,000,002 in
principal amount on a note payable to a financial services company. The Company
issued an additional 83,400 shares on non-voting Series A Preferred Stock at a
price of $6.00 in exchange for $500,400 in cash to a second financial services
company. The Company's preferred stock pays a dividend at an annual rate of 8.5%
and is payable quarterly. The preferred stock is callable by the Company and
convertible by the preferred stockholder based on terms detailed in the offering
agreement. During each of fiscal 1993, 1994, and 1995, dividends of $127,535
($0.51 per share) were declared and paid.
The Company sold 70,000 warrants (net of now expired A and B warrants) to the
Underwriter for $100. The exercise price for the warrants is $6.60 per share
and the warrants will be exercisable at any time during the four-year period
commencing October 4, 1992. The warrants contain certain demand and piggyback
registration rights as defined. The warrants are protected against dilution
upon the occurrence of certain events. The warrants issued to the Underwriter
may not be transferred or assigned except to officers or shareholders of the
Underwriter. These warrants were registered pursuant to the Underwriter's
agreement in amendment number two to Form S-1 filed in May, 1995.
7) Net Capital Requirements
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc.
("HDVIS") is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. Minimum net capital can never be
lower than $250,000 or 6 2/3% of aggregate indebtedness, whichever is greater.
F-12
<PAGE>
HDVIS had net capital, required net capital, and excess net capital for the
years ended September 30, 1993, 1994, and 1995, as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net capital $1,203,249 $1,299,003 $ 1,449,906
Required net capital 252,157 293,682 250,000
---------- ---------- -----------
Excess net capital $ 951,092 $1,005,321 $ 1,199,906
========== ========== ===========
</TABLE>
8) Related-Party Transactions
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. During April 1994, the Company amended the
agreement with Herb D. Vest and provided for a management fee of $500,000 per
year plus an annual bonus based on the Company's performance related to revenue
and net income goals established by the Board of Directors. The annual bonus
for fiscal 1995, ranged from $0 to $500,000. No bonus was accrued or paid under
the amended plan for the fiscal year ended September 30, 1994 or 1995. A bonus
of $88,778 was paid during fiscal 1994 related to a previous plan. Management
fees under these agreements were $830,000, $632,528 and $500,000 for the years
ended September 30, 1993, 1994 and 1995, respectively.
During April 1994, the Company entered into an agreement to provide Herb Vest an
unsecured revolving line of credit in an amount not to exceed $1,000,000. The
terms of the agreement require an annual payment to be made on November 30, of
each year equal to one-seventh of the then outstanding principle plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. The agreement bore
interest on unpaid principal balances at the margin interest rate as of August
31, 1994(6.5%), as quoted by National Financial Services Corporation, the
Company's clearing firm, on the first day of the month and interest on matured
unpaid amounts at an annual rate of 10%. Effective September 1, 1994, the
Company amended the agreement to provide Mr. Vest with a revolving line of
credit not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The effective interest
rate of the amended agreement is 11%. At September 30, 1995, Mr. Vest had drawn
$2,000,000 in principal against the line of credit. The Company has recorded
$186,355 of accrued interest on this line.
F-13
<PAGE>
During fiscal 1994, the Company modified Ms. Howard-Vest's consultant contract
to receive $16,667 per month pursuant to the agreement. For the years ended
September 30, 1994 and 1995, fees under this agreement totaled $200,000 each.
During May 1994, the Company entered into an agreement to provide Barbara
Howard-Vest a revolving line of credit in an amount not to exceed $350,000,
collateralized by 100,000 shares of Ms. Howard-Vest's unrestricted Company
stock. The terms of the agreement require an annual payment be made on November
30 of each year equal to one-seventh of the then outstanding principal balance
plus accrued interest. The final payment of all outstanding principal; and
accrued interest shall be due and payable on or before November 30, 2001. The
agreement bore interest on unpaid principal balances at the margin interest rate
as of August 31, 1994(6.5%), as quoted by National Financial Services
Corporation, the Company's clearing firm, on the first day of the month and
interest on matured unpaid amounts at an annual rate of 10%. Effective September
1, 1994, the Company amended the agreement to provide Ms. Howard-Vest with a
revolving line of credit not to exceed $700,000, collateralized by Ms. Howard-
Vest's unrestricted Company stock in an amount equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The
effective interest rate of the amended agreement is 11%. At September 30, 1995,
Ms. Howard-Vest had drawn $296,116 in principal against the line of credit. The
Company has recorded $7,807 of accrued interest on this line.
The Company entered into a Facilities and Services Agreement, effective January
1, 1987, with H.D. Vest Insurance Services ("HDVIns"), a sole proprietorship
operated by Mr. Vest. Under the terms of this agreement, the Company provides
HDVIns certain management and other services. The Company has charged HDVIns
$316,289, $314,196, and $551,379, for the years ended September 30, 1993, 1994,
and 1995, respectively. As of September 30, 1995, the Company had a receivable
of approximately $98,929 from HDVIns.
9) State and Federal Income Taxes
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109
requires an asset and liability approach for financial accounting and reporting
for income taxes. This standard requires that the financial impact of changes in
the tax laws on deferred tax assets be recorded as an
F-14
<PAGE>
adjustment to current period earnings in the period when adopted. The cumulative
effect of adopting SFAS No. 109 at October 1, 1993 was not material.
Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
September 30,
-------------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 54,500 $ 2,914 $ 14,220
State 153,500 97,820 168,000
Deferred:
Federal - - -
State - - -
--------- --------- ---------
$ 208,000 $ 100,734 $ 182,220
========= ========= =========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
-----------------------
1993 1994 1995
------ ------- ------
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
State taxes, net of
Federal 4.9 36.4 11.1
Fines and penalties 0.0 25.3 (3.4)
Other 1.1 14.9 (3.5)
Alternative minimum
taxes 1.7 1.1 0.9
Nondeductible net
operating loss 0.0 0.0 0.0
Utilization of net
operating loss
carryforward (35.1) (6.3) (27.0)
----- ---- -----
Effective rate 6.6% 37.4% 12.1%
===== ==== =====
</TABLE>
F-15
<PAGE>
The following table presents the components of the net deferred tax asset:
<TABLE>
<CAPTION>
October 1, Deferred Expense September 30,
1994 (Benefit) 1995
----------- ----------------- --------------
<S> <C> <C> <C>
Accrued severance $ 272,000 $ 175,668 $ 96,332
Depreciation (90,693) 13,708 (104,401)
Unearned Revenue 153,481 66,300 87,181
Other 49,739 (40,979) 90,718
Alternative minimum tax credit carryforward 83,462 (17,025) 100,487
Net operating loss carryforward 642,590 394,054 248,536
----------- --------- ---------
1,110,579 591,726 518,853
Valuation allowance (1,110,579) (591,726) (518,853)
----------- --------- ---------
Net deferred tax asset $ - $ - $ -
=========== ========= =========
</TABLE>
The Company's tax effected net temporary differences result in a deferred tax
asset reflecting a benefit expected to be utilized in the future. However, the
Company has recorded a 100% valuation allowance against this asset. Management
currently estimates that it is more likely than not that no future benefit will
be received from this asset due to historical fluctuations in net income.
As of September 30, 1995, the Company had net operating loss carryforwards of
approximately $731,000, which will begin to expire in 2007 if not utilized
earlier. As of September 30, 1995, the Company has alternative minimum tax
credit carryforwards available of approximately $100,487, which are available as
a credit against future regular income taxes payable.
10) Stock Option Plans
The Company has a nonqualified stock option plan for all employees. The
Company has reserved 800,000 shares of common stock for the plan. The option
price at the date of grant cannot be less than the fair market value of the
common stock at that date. As of September 30, 1995, 142,257 options had been
granted under the plan at an exercise price of $8.50 per share. No stock
options were exercisable at September 30, 1995, nor were any exercised
during the year ended September 30, 1995.
F-16
<PAGE>
During the fiscal year ended September 30, 1992, the Company issued 460,000
stock options to certain officers and advisors to the board of directors.
380,000 of these options remain outstanding as of September 30, 1995. The
exercise price on the majority of the options is $5.00 (which was the fair
market value of the Company stock at the date of grant). At September 30, 1995,
no options had been exercised.
In November 1992, the Company resolved that each independent director would
receive stock options of 2,000 shares of common stock to be exercisable at the
price of the common stock on the date of issuance and to be issued quarterly to
the independent directors. At September 30, 1995, 22,000 options have been
issued and remain outstanding.
11) Deferred Compensation Plan
In July 1995 the Company began accepting contributions for the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution as defined in the Plan.
Amounts deferred as of September 30, 1995 were approximately $73,000.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash.
Matching contributions accrued for the fiscal year ended 1995 approximated
$1,000.
F-17
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosures
- ----------------------
None.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The following table provides certain information about each of the Company's and
its subsidiaries' current members of the board of directors and officers.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ------------------ --- ------------------------------
<S> <C> <C>
Herb D. Vest 51 Chairman of the Board of
Directors and Chief Executive
Officer
Barbara Howard-Vest 49 Board of Directors
Kenneth E. Reynolds 67 Board of Directors
Jack B. Strong 65 Board of Directors
Jerry M. Prater 53 Board of Directors
Phillip W. Mayer 54 Board of Directors
Lynn R. Niedermeier 42 Board of Directors/President
Shannon A. Soefje 36 Senior Vice President/Corporate
Secretary
W. Ted Sinclair 31 Vice President/CFO
</TABLE>
32
<PAGE>
Key Employees
Herb D. Vest, Chairman of the Board of Directors and Chief Executive Officer.
Prior to assuming his present position with the Company and HDVIS in June 1983,
Mr. Vest practiced public accounting and financial planning for ten (10) years
as the sole proprietor of Herb D. Vest, CPA. Prior to June 1983, Mr. Vest was
also registered with a National Association of Securities Dealers firm. He was
a principal with that firm and managed a branch office. Mr. Vest is a Certified
Public Accountant, Certified Financial Planner, Chartered Financial Analyst,
Certified Fund Specialist, Chartered Life Underwriter, Registered Health
Underwriter, Chartered Financial Consultant, Accredited Personal Financial
Specialist and Certified Employee Benefit Specialist. He holds certificates in
Management Accounting and Estate Planning & Taxation. He holds a Masters of
Science Degree in Taxation from Texas Tech University. He is a National
Association of Securities Dealers General Securities Principal, Registered
Options Principal, Municipal Securities Principal, and Financial and Operations
Principal. He is a licensed real estate broker and licensed life, health and
accident insurance agent as well as a master fellow of the International Society
for Philosophical Inquiry. Mr. Vest is also a registered representative of
Hartford Equity Sales which is located in Dallas, Texas. Following graduation
from college in 1966, Mr. Vest served as an infantry officer in the U.S. Army,
including two (2) tours of duty in Vietnam. He has served as a lecturer at
local colleges and universities including the University of Texas at Arlington
and the Seminar for Financial Analysts held at the University of Windsor,
Ontario. He is also a member of the American Institute of Certified Public
Accountants and the Texas Society of CPAs. Additionally, Mr. Vest has written on
international trade, taxation, portfolio management and the financial services
profession for such publications as Global Custodian, Business Mexico, Personal
---------------- --------------- --------
Financial Planning, Accounting Today, CFP Today, Real Estate Securities &
- ------------------ ---------------- --------- ------------------------
Capital Markets, and the Dallas Business Journal.
- --------------- -----------------------
Barbara Howard-Vest, Board of Directors and co-founder of the Company. She has
been involved in every phase of developing the Company. Her responsibilities
include expanding the Company's Representative force and developing
Representative services. Ms. Howard-Vest was integrally involved in Herb Vest's
private CPA practice for ten years in Irving, Texas and now is an independent
consultant to the Company. She is qualified to speak on many facets of practice
development for the tax and financial professional. Image building, goal
setting, referral development
33
<PAGE>
and employee training are just a few of the topics in Ms. Howard-Vest's speaking
repertoire. She is also a featured columnist for Accounting Today. Ms.
----------------
Howard-Vest is active in many national and local professional organizations and
is a dedicated Company Representative for the community and political affairs.
She holds a master's degree from Texas Tech University and is a member of Mensa.
She holds a real estate license, a Group I Life Insurance license, and is an
NASD General Securities Principal. Ms. Howard-Vest is also a member of the Texas
Womans Alliance and Sales and Marketing Executives associations.
Kenneth E. Reynolds, Board of Directors. He started his Norman, Oklahoma-based
Certified Public Accounting practice in 1965. He is past Chairman of the
Personal Financial Planning Committee of the Oklahoma Society of CPA's and past
President of the Norman Chapter of the Oklahoma Society of CPA's. Also, Mr.
Reynolds serves on the Arthur Andersen LLP A-plus Tax User Advisory Committee.
He became a registered Representative of the Company in 1987 and became a
Director of the Company in fiscal year 1993.
Jack B. Strong, Board of Directors. He was elected to the Texas State Senate in
1962, where he served until his retirement in 1971. After leaving the Senate, he
has served on various state committees, boards and commissions, including
chairing Lt. Governor Hobby's Blue Ribbon Committee on Ethics Reform, the
Regional Medical Program of Texas, and the Texas State Board of Education, and
currently serves on the Interstate Oil Compact Commission. Mr. Strong serves as
President of Texas-based General Equities, Inc. and Strongworth, Inc. From
January 1992 to January 1993, Mr. Strong served as an advisor to the Company's
Board. He has been a Director of the Company since fiscal year 1993.
Jerry M. Prater, Board of Directors. He has been a practicing Certified Public
Accountant since 1983. He has held positions with agencies of the U.S.
Department of Defense, Continental Electronics Mfg.Co., Hill & Wilkinson and
Quazon Corporation, prior to founding his own Dallas, Texas-based public
accounting practice in 1983. Mr Prater was elected to the Board of Directors of
the Company in 1994.
Phillip W. Mayer, Board of Directors. He has held a variety of command and
staff positions as an Infantry Officer in the United States Army prior to his
retirement in 1982. Mr. Mayer holds two master's degrees and was designated a
Certified Public Manager by the Arizona State University Advanced Public
Executive Program in 1990. Since 1985, he has worked in the corrections
profession as a Program Manager and Director of Staff Training. He currently
34
<PAGE>
serves as a Staff Training Manager for the Santa Clara County Department of
Correction, San Jose, California. Mr. Mayer was elected to the Board of
Directors of the Company in 1994.
Lynn R. Niedermeier, Board of Directors/President. As of November 1994, Ms.
Niedermeier rejoined the Company as President. She held the position of
Executive Vice President of H.D. Vest, Inc. from February 1993 until her
resignation in April 1994. From 1987 - 1993, she was the Company's Vice
President of Marketing responsible for managing sales, marketing, recruiting and
educational programs. In October 1995, the Company granted Ms. Niedermeier a
medical leave of absence. Ms. Niedermeier is a Certified Public Accountant and
was a Manager of Arthur Andersen LLP prior to joining H.D. Vest. Ms.
Niedermeier is a former City Councilwoman for Grapevine, Texas. She was elected
to the Board of Directors of the Company in 1994.
Shannon A. Soefje, Senior Vice President/Corporate Secretary. Ms. Soefje was
employed by the Company in 1990. In fiscal 1995, she was promoted to Senior
Vice President and is responsible for the management of corporate resources
which includes the strategic design and implementation of promotional campaigns
and the development of corporate and Representative marketing materials. She has
held other management positions in the Company including the following
departments: Operations, Compliance, Licensing, Recruiting and Research
departments. Since 1977, Ms. Soefje has worked for various investment firms.
She is a Certified Funds Specialist, General Securities Principal, Registered
Options Principal, Municipal Securities Principal, and Financial and Operations
Principal.
W. Ted Sinclair, Vice President/Chief Financial Officer. Mr. Sinclair was
employed by the Company in fiscal 1987 and was promoted to Vice President in
fiscal 1993. He is responsible for the management of the Company and financial,
tax and management reporting and budgeting. Mr. Sinclair previously served as
Controller and was responsible for coordinating and controlling all financial
reporting and tax activities. He graduated from the University of North Texas
with a bachelor of science degree in Accounting. He is a Certified Public
Accountant, Certified Management Accountant, Certified Financial Planner, and a
Certified Fund Specialist. He is a General Securities Representative, General
Securities Principal, Registered Options Principal, Municipal Securities
Principal, and Financial and Operations Principal.
35
<PAGE>
Item 11. Executive Compensation
- --------------------------------
The following table sets forth all remuneration earned in salary and bonus in
the current year to the Chief Executive Officer, the highest paid members of
the Board of Directors, Officers and Senior Managers each receiving in excess of
$100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
- ---------------------------------------------------------------------------------------------------------------
Name & Principal Fiscal Restricted Stocks Other
Position Year Salary Bonus Stock Awards Options(1) Compensation
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest 1995 $500,000 - - - $ 20,766
Chairman of the 1994 543,750 $88,778 - - 7,200
Board of Directors 1993 830,000 - - - 7,200
and Chief Executive
Officer(2)(4)
Barbara Howard-Vest 1995 - - - - $218,937
Director and 1994 - - - - 207,200
Consultant 1993 - - - - 175,800
Lynn R. Niedermeier 1995 $245,834 - $100,000 - $ 86,004
Director/President(3) 1994 224,361 - - - 6,668
1993 176,667 - - - -
Roger Ochs (5) 1995 $107,000 - - - -
Director of Marketing 1994 - - - - -
1993 - - - - -
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
1) All key employees are covered under a stock option plan (See "Management
Stock Options" and "Certain Transactions - Stock Options").
2) See Management Agreements for a description of the terms of Mr. Vest's
current management agreement.
3) Resigned as officer in April, 1994. Presently is a member of the
Board of Directors and President of the Company. In October 1995, the
Company granted Ms. Niedermeier a medical leave of absence.
4) Paid pursuant to management agreement in effect prior to April 1994
amended agreement.
5) Compensation below disclosure requirement in prior years.
36
<PAGE>
Executive Officer Compensation Plan
During April 1994, the Board of Directors of the Company adopted an Executive
Officers Compensation Plan. The purpose of the Executive Officers Compensation
Plan is to provide additional compensation to a select group of management
employees of the Company in order to motivate and retain them, as well as to
provide them an incentive to guide the Company in attaining higher revenue
goals. The Company will provide this additional compensation under the
Executive Officers Compensation Plan in the form of salary, restricted stock,
incentive cash, and restricted stock bonuses, as well as severance and change-
in-control benefits.
As an unfunded plan of deferred compensation, it is administered by the Chief
Executive Officer of the Company, who is presently Herb D. Vest. Eligibility to
participate in the Executive Officers Compensation Plan is determined in the
sole and absolute discretion of the Company, which establishes eligibility
provisions of the officers Plan which it may change at any time in its sole and
absolute discretion.
Currently, to be eligible to participate in the Executive Officers Compensation
Plan, the individual must be an executive employee of the Company, have
completed at least two (2) full years of service with the Company, and be part
of a select group of management employees as designated by the Board of
Directors of the Company. The individual employee must also sign an Officers
Deferred Compensation Agreement and an Officer Agreement as a condition
precedent to becoming a participant in the Executive Officers Compensation Plan.
Under the Restricted Stock portion of the Executive Officers Compensation Plan,
a number of shares of restricted stock is determined by the Chief Executive
Officer of the Company as allocable to a particular participant. This
restricted stock is credited to the participant's account and will be vested and
distributable upon the first to occur of the following events: (1) Long term
disability, death of the participant or attaining the preselected Deferral Date;
or (2) The date of a "change-in-control" of the Company (as that term is defined
in the officers Plan). No stock was earned under the Executive Officers
Compensation Plan for the fiscal year ended September 30, 1995. Under the
Executive Officers Compensation Plan, the Board of Directors also annually sets
three revenue goals - a threshold, target, and maximum goal. If attained, the
revenue goals will
37
<PAGE>
generate a set cash bonus for the participant, payable unless certain losses are
also incurred.
In addition, bonus stock will be credited to participants' accounts in the form
of restricted stock on the basis of the Company's attaining three year
cumulative revenue goals. Each year these goals are set by the Board of
Directors for the upcoming three years and are based in part on the previous
years goals that consist of a threshold, a target, and a maximum cumulative
revenue goal. Upon attaining one of these goals, bonus stock credited in the
form of restricted stock to the participant's plan vests and will become
distributable only upon retirement, long term disability, or death of the
participant, or the date of a "change-in-control" of the Company (as that term
is defined in the Executive Officers Compensation Plan). No awards were earned
under the officers plan in 1994 or 1995.
Stock Options
The Board of Directors of the Company adopted a Stock Option Plan as of October
1, 1987, in order to attract, retain, motivate, and encourage stock ownership by
employees, officers and directors of the Company and its subsidiaries.
The Stock Option Plan is administered by a stock option committee
("Committee"), appointed by the Chief Executive Officer, consisting of one to
three members. The members of the Committee shall be eligible to receive
options under the Stock Option Plan.
The Committee currently consists of one member, Herb D. Vest. Options granted
under the Stock Option Plan are not intended to qualify as Incentive Stock
Options under Section 422a of the Internal Revenue Code of 1986, as amended from
time to time. The Company has reserved up to 800,000 shares of its common stock
for options under the Stock Option Plan. The options must be paid in cash,
unless otherwise permitted by the Committee. The exercise price of any options
granted in the future will not be less than 100% of the fair market value of the
common stock on the date of grant.
The Committee, at the direction of the Chief Executive Officer, may amend,
modify or terminate the Stock Option Plan provided; however, no action of the
Committee, without approval of the Chief Executive Officer and the shareholders
of the Company may:
38
<PAGE>
(a) Increase the total number of shares covered by the Stock Option Plan.
(b) Change the manner for determining the option price.
(c) Shorten the period which must lapse before options are eligible to be
exercised.
(d) Permit options to be granted which expire beyond the period provided in the
Stock Option Plan.
(e) Withdraw administration of the Stock Option Plan from the Committee.
(f) Permit granting of options at less than the option price.
Anti-dilution provisions in the Stock Option Plan provide for adjustment of the
Option exercise price and the number of shares of common stock issuable upon
exercise to prevent dilution of their value upon the occurrence of certain
events.
Options covering 191,497 shares were granted at an option price of $8.50 per
share as of October 1, 1987 to employees; 142,257 of these options remain
outstanding as of September 30, 1995.
During 1992, options covering 460,000 shares were granted at an option price of
$5.00 per share to employees and certain advisors to the Company's Board of
Directors. 380,000 of these options remain outstanding as of September 30,
1995.
In November 1992, the Company resolved that the independent directors receive
stock options for 2,000 shares of common stock to be exercisable at the price of
the common stock on the date of issuance and to be issued quarterly to the
independent directors. At September 30, 1995, 22,000 options have been issued
and remain outstanding.
As a result of the foregoing, options covering 270,748 shares of common stock,
with exercise price ranging from $5.00 to $8.50 per share have been issued to
officers of the Company. The following table provides information with respect
to the named officers concerning the exercise of options during the last fiscal
year ending September 30, 1995:
39
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Value of Unexercised,
Acquired Number of Unexercised Options Held In-The-Money Options Fiscal
Through At Fiscal Year End Year End (1,2)
Name Options Value ---------------------------------- ------------------------------
Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest - - 100,000 45,148 - -
Barbara Howard-Vest - - - 45,148 - -
Lynn R. Niedermeier - - 75,000 3,996 - -
Wesley T. Sinclair - - - 1,456 - -
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on September 30, 1995 and the exercise price of the options.
(2) The current fair market value of the stock at September 30, 1995 was
below the option exercise price.
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following information is furnished as of September 30, 1995, to indicate
beneficial ownership by each director, certain executive, individually and
directors of the Company, as a group, of shares of the Company's Common stock.
<TABLE>
<CAPTION>
OWNER # OF SHARES OWNED % OF SHARES
- --------- ----------------- -----------
<S> <C> <C>
Herb D. Vest (1) 2,544,255 47%
Barbara Howard-Vest (1) 1,519,746 28%
Lynn R. Niedermeier 41,087 *
Jerry Prater 2,000 *
Kenneth E. Reynolds 550 *
Shannon A. Soefje 336 *
Jack B. Strong 100 *
W. Ted Sinclair 25 *
</TABLE>
* Less than one percent.
40
<PAGE>
(1) Herb D. Vest and Barbara Howard-Vest have escrowed substantially all of
their stock, including shares pledged on outstanding lines of credit, with
an independent escrow agent in order to meet certain conditions required by
the State of Texas under a previous Form S-18 registration statement. The
escrowed shares will be eligible for release provided certain specified
conditions, regarding net income requirements, are met. If no stock has
been released pursuant to the net income requirements, then commencing in
1994, 20% of the escrowed shares shall be released each subsequent year.
Based upon the Company's review of Forms 3, 4 and 5 and any amendments thereto
furnished to the Company pursuant to Section 16 of the Securities Exchange Act
of 1934, all of such forms were filed on a timely basis by reporting persons.
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
Management Agreements
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. During April 1994, the Company amended the
agreement with Herb D. Vest and provided for a management fee of $500,000 per
year plus an annual bonus based on the Company's performance related to revenue
and net income goals established by the Board of Directors. The annual bonus
for fiscal 1995, ranged from $0 to $500,000. No bonus was accrued or paid under
the amended plan for the fiscal year ended September 30, 1994 or 1995. A bonus
of $88,778 was paid during fiscal 1994 related to a previous plan. Management
fees under these agreements were $830,000, $632,528 and $500,000 for the years
ended September 30, 1993, 1994 and 1995, respectively.
During fiscal 1994, the Company modified Ms. Howard-Vest's consultant contract
to receive $16,667 per month pursuant to the agreement. For the years ended
September 30, 1994 and 1995, fees under this agreement totaled $200,000 each.
H.D. Vest Insurance Services
H.D. Vest Insurance Services ("HDVIns") is a sole proprietorship owned by Herb
D. Vest. HDVIns general insurance agency appoints Representatives with various
insurance companies to enable them to
41
<PAGE>
sell insurance products to their clients. The Company, in accordance with the
terms of a facilities and services agreement, provides certain management and
other services to HDVIns and is paid a fee for these services. The value of
these services, for fiscal year ended 1995, has been determined based on the
prorata portion of certain relevant expenses as a percentage of HDVIns revenues
to total consolidated revenues. To the extent the Company renders services to
HDVIns for which it is not compensated; such action could constitute a conflict
of interest since Mr. Vest is both the majority shareholder and Chairman of the
Board of Directors of the Company.
The services provided are as follows:
Management, accounting, referral data base, client tracking services,
solicitation, tracking of renewal policies of insurance, collection of premiums
and commissions, processing of insurance transactions, payment of salaries and
other expenses, cost of recruiting, training and reporting to agents and other
services as deemed appropriate by the Company. In accordance with this
agreement the Company has charged HDVIns $316,289, $314,196 and $551,379 for the
years ended September 30, 1993, 1994, and 1995 respectively, for management
services rendered.
Lines of Credit
During April 1994, the Company entered into an agreement to provide Herb Vest
an unsecured revolving line of credit in an amount not to exceed $1,000,000.
The terms of the agreement require an annual payment to be made on November 30,
of each year equal to one-seventh of the then outstanding principal balance plus
accrued interest. The final payment of all outstanding principal and accrued
interest shall be due and payable on or before November 30, 2001. The agreement
bore interest on unpaid principal balances at the margin interest rate as of
August 31, 1994 (6.5%), as quoted by National Financial Services Corporation,
the Company's clearing firm, on the first day of the month and interest on
matured unpaid amounts at an annual rate of 10%. Effective September 1, 1994,
the Company amended the agreement to provide Mr. Vest with a revolving line of
credit not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock equal to the unadjusted current balance of the line of
credit based on the stock's current ask price. The effective interest rate of
the amended agreement is 11%. At September 30, 1995, Mr. Vest had drawn
$2,000,000 in principal against the line
42
<PAGE>
of credit. The Company has recorded $186,355 of accrued interest on this line.
During May 1994, the Company entered into an agreement to provide Barbara
Howard-Vest a revolving line of credit in an amount not to exceed $350,000,
collateralized by 100,000 shares of Ms. Howard-Vest's unrestricted Company
common stock. The terms of the agreement require an annual payment be made on
November 30 of each year equal to one-seventh of the then outstanding principal
balance plus accrued interest. The final payment of all outstanding principal
and accrued interest shall be due and payable on or before November 30, 2001.
The agreement bore interest on unpaid principal balances at the margin interest
rate as of August 31, 1994 (6.5%), as quoted by National Financial Services
Corporation, the Company's clearing firm, on the first day of the month and
interest on matured unpaid amounts at an annual rate of 10%. Effective
September 1, 1994, the Company amended the agreement to provide Ms. Howard-Vest
with a revolving line of credit not to exceed $700,000, collateralized by Ms.
Howard-Vest's unrestricted Company common stock equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The
effective interest rate of the amended agreement is 11%. At September 30, 1995,
Ms. Howard-Vest had drawn $296,116 in principal against the line of credit. The
Company has recorded $7,807 of accrued interest on this line.
Severance Agreements
In April 1994, an Executive Vice President resigned her position with the
Company. The Company and the officer entered into a severance agreement that
provided for the payment of severance of $16,667 per month commencing on May 1,
1994, and continuing for 30 months, in exchange for an agreement restricting the
use of Company materials and information for a period of 48 months. In November
1994, the officer rejoined the Company as President. In connection with the
officer's return, the Company and the officer agreed to terminate the severance
agreement. In December 1994, the Company credited the remaining amount of
$381,331 to general and administrative expenses. In October 1995, the Company
granted the officer a medical leave of absence, discontinued monthly payments
and monthly stock awards under her existing employment agreement, and agreed to
pay her $16,600 per month until the earlier of October 1, 1996 or when the
officer resumes her normal duties with the Company. Upon her return,
compensation to the officer would resume under her existing employment
agreement.
In June 1994, an Executive Vice President resigned his position with the
Company. The Company and the former officer entered into a severance agreement
that provided for the payment of severance of $16,667 per month commencing on
September 15, 1994 and continuing for 30 months, in exchange for an agreement
restricting
43
<PAGE>
the use of Company materials and information for a period of 48 months.
In connection with these agreements the Company charged $1,000,000 to general
and administrative expense during the quarter ended June 30, 1994. The related
liabilities at September 30, 1994 and 1995 were $883,331 and $283,329,
respectively.
Education Costs
The Company maintains a formal policy for reimbursement of continuing education
expenses incurred by officers and employees. Employees are generally reimbursed
for expenses incurred in the pursuit of professional designations, undergraduate
degrees, graduate degrees or specialized training. The Company promotes
personal and professional growth of its employees in order to provide a
qualified staff to its Representatives.
401(k) Retirement Plan
In March 1993, the Company implemented a 401(k) retirement plan for employees.
To be eligible for the plan an employee must be employed on a continuous full
time basis for one year and work a minimum of 40 hours per week. The Company
matches contributions made by employees at a rate of 20%, up to an annual limit
of $1,848 per employee, paid at the time the employee makes the deferral.
44
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
a) 1. Index to Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule I - Amounts Receivable from Related Parties
3. Exhibits
Exhibit
--------
Number Exhibit
------ -----------------------------------------------
3.1 Articles of Incorporation and Bylaws *
3.2 Second Articles of Amendment to Articles
of Incorporation +
10.1 Non-Qualified Stock Option Plan *
10.2 Facilities and Service Agreement with H.D. Vest
Insurance Services *
10.3 Registered Representative Sales Agreement +
10.4 Management Agreement with Herb D. Vest +
10.5 Management Agreement with Barbara H. Vest *
10.6 Termination Agreement with Barbara Howard-Vest +
10.7 Severance Agreement with Lynn R. Niedermeier o
45
<PAGE>
10.8 Severance Agreement with Steven C. Hastings o
10.9 Line of Credit Agreement with Herb D. Vest o
10.10 Line of Credit Agreement with Barbara Howard-Vest o
22 Subsidiaries of the Registrant
* Incorporated by reference from the annual report filed on Form 10-K for
the fiscal year ended September 30, 1988.
+ Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1991.
o Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1994.
b) Reports on Form 8K (None).
46
<PAGE>
SIGNATURES
Pursuant to the requirements of 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.
H.D. VEST, INC.
------------------
(Registrant)
Date: November 30, 1995 By:s/ Herb D.Vest
----------------------------
Herb D. Vest
Chairman of the Board and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By:s/ Herb Vest By:s/ Barbara Howard-Vest
--------------------------- ----------------------------
Herb Vest Barbara Howard-Vest
Chairman of the Board and Chief Director
Executive Officer
By:s/ Phillip W. Mayer By:s/ Lynn R. Niedermeier
---------------------------- --------------------------
Phillip W. Mayer Lynn R. Niedermeier
Director Director/President
By:s/ Wesley Ted Sinclair By:s/ Jerry M. Prater
--------------------------- ----------------------------
Wesley Ted Sinclair Jerry M. Prater
CFO and Vice President Director
(Principal Financial and
Accounting Officer)
By:s/ Kenneth E. Reynolds By:s/ Jack B. Strong
--------------------------- ----------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
47
<PAGE>
EXHIBIT 22
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
<TABLE>
<CAPTION>
Year Incorporated
Subsidiaries Texas Services
------------ ----------------- --------
<S> <C> <C>
H.D. Vest Investment Securites, Inc. 1983 o Registered Securities Broker
(HDVIS) dealer
o Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 o Registered Investment Advisor
(HDVAS) Licensing Assistance
o Money Management Services
o Financial Planning Software
for Fee-Based Planning
H.D. Vest Mortgage Services, Inc. 1989 o Inactive Subsidiary
(HDVMS)
H.D. Vest Collateral Management Co. 1988 o Inactive Subsidiary
(HDVCM)
H.D. Vest Business Valuation 1987 o Inactive Subsidiary
Services, Inc.
(HDVBVS)
H.D. Vest Corporate Finance, Inc. 1990 o Inactive Subsidiary
(HDVCF)
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1995
<PERIOD-START> OCT-01-1994
<PERIOD-END> SEP-30-1995
<CASH> 3,383,060
<RECEIVABLES> 5,929,075
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,297,463
<TOTAL-ASSETS> 11,666,371
<SHORT-TERM> 0
<PAYABLES> 6,096,938
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 588,070
<COMMON> 271,167
0
1,500,402
<OTHER-SE> 2,168,792
<TOTAL-LIABILITY-AND-EQUITY> 11,666,371
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 371,864
<COMMISSIONS> 37,027,755
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 3,219,574
<INTEREST-EXPENSE> 100,280
<COMPENSATION> 27,322,184
<INCOME-PRETAX> 1,511,221
<INCOME-PRE-EXTRAORDINARY> 1,329,001
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329,001
<EPS-PRIMARY> .22
<EPS-DILUTED> .22
</TABLE>
