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UNITED STATES
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, 1996
_____ 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)863-6000
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 September 30, 1996,
as computed by reference to the closing sale price of the registrant's Common
Stock on the NASDAQ National Market System on such date: $ 5,949,594.
Number of shares of the registrant's Common Stock outstanding as of September
30, 1996: 5,423,341
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
NONE
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PART I
Item 1. Business
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(a) General Development of Business
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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. The Company subsequently issued four shares of Common Stock
in exchange for each outstanding share of H.D. Vest Investment Securities, Inc.,
which is now the primary asset of the Company. The Company owns all the
outstanding shares of the following subsidiaries.
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
Incorporated
Subsidiaries (TEXAS) Services
- ------------ ------ --------
H.D. Vest Investment Securities, Inc. 1983 Registered Securities
"HDVIS" Broker-dealer
Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment
"HDVAS" Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management Company 1988 Inactive Subsidiary
"HDVCMC"
H.D. Vest Business Valuation Services, 1987 Inactive Subsidiary
Inc. "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary
"HDVCF"
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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.
Representatives registered with the Company include CPAs, CFPs, Enrolled Agents
(EA), PhDs, CFAs, Registered Investment Advisors, tax attorneys, and other tax
professionals. Many hold state or national offices in CPA societies, EA
organizations and public accounting societies.
The Company's subsidiary 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
Commonwealth of Puerto Rico. HDVIS is a member of the National Association of
Securities Dealers ("NASD"), Securities Investors Protection Corporation
("SIPC") and the Securities Industry Association ("SIA"). HDVIS'
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.
The Company's subsidiary HDVAS was formed in response to the Company's belief
that fee-based financial planning services offered benefits to the Company, its
Representatives and their clients. HDVAS is an investment advisor registered
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.
HDVAS has developed proprietary fee-based services, which gives its
Representatives the capability of providing fee-based financial planning
services to their clients.
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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,
-------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Mutual Fund and UIT's $36,789,952 $30,611,062 $44,960,556
Partnership Interests 280,053 198,910 126,945
Stocks, Bonds and Options 2,276,175 1,930,867 2,752,832
Insurance Products 3,912,106 4,286,916 7,753,815
Marketing and Education Fees 3,280,146 2,933,055 4,212,064
Portfolio Management Fees 1,680,889 3,219,574 6,480,537
Facility and Service Fees
from Affiliate 314,196 551,379 416,298
All Other 1,753,679 938,288 806,175
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$50,287,196 $44,670,051 $67,509,222
=========== =========== ===========
</TABLE>
The Company had assets of $12,336,852, $11,666,371 and $16,950,759, for the
years ended September 30, 1994, 1995 and 1996, respectively. The Company had
net income (loss) after tax of ($369,901), $1,329,001 and $1,188,707 for the
years ended September 30, 1994, 1995 and 1996, respectively.
(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.
The various services of the Company, provided by the Company and/or its
subsidiaries, are as follows and are discussed in more detail on the pages that
follow:
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H.D. Vest, Inc. --
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. --
Investment Services
Trading and Customer Service
Representative Licensing
Compliance and Due Diligence Services
H.D. Vest Advisory Services, Inc. --
Professional Investment Advisory Services
H.D. Vest Mortgage Services, Inc. --
Inactive Subsidiary
H.D. Vest Collateral Management Company --
Inactive Subsidiary
H.D. Vest Business Valuation Services, Inc. --
Inactive Subsidiary
The financial services industry is subject to extensive regulation on both the
federal and state levels, 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, 1996, the Company's distribution network consisted of
approximately 4,601 fully licensed Representatives and approximately 399
Representatives in various stages of licensing.
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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 to meet the needs of
American families and businesses. These services are provided to the Company's
Representatives, who in turn assist their clients with their financial planning
needs. These services are discussed in the following paragraphs.
INVESTMENT PLANNING AND PRODUCT SELECTION - The Company provides assistance in
the selection of investments suitable to meet the clients objectives. This
process reviews the clients' risk tolerance, investment objectives, existing
investments, and desired return to select the most suitable investment type and
product. The investment planning services include retirement, education,
insurance and tax planning.
PORTFOLIO MANAGEMENT - The Company provides assistance in the development of
investment portfolios for clients. This process includes the development of risk
profiles, selection of money managers and the allocation of assets for optimal
portfolio results.
EMPLOYEE BENEFITS - The Company provides assistance to businesses in
establishing employee benefit plans. These plans include funding and
maintaining Qualified Retirement Plans.
BUSINESS PLANS - The Company provides assistance to businesses in the
development of certain operating plans. The plans relate to areas of financing,
cash management, risk management and buy-sell agreements.
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ESTATE PLANNING - The Company provides assistance in planning for the eventual
distribution of a client's estate. The focus centers 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 practices.
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. These support groups are discussed in the following
paragraphs.
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 practices 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 Foundation participants, are eligible to attend Chapter
workshops in their areas. 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.
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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 have the opportunity to attend regional conferences
designed specifically for the more advanced technical needs of higher producing
Representatives.
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 and services. 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 are discussed in the
following paragraphs.
DIRECT MAIL. The Company has developed a direct mail database with over 400,000
tax and accounting professionals. Each respondent receives an H.D. Vest
information package ("Opportunity Package"), follow-up calls, and invitations to
recruiting seminars and H.D. Vest conferences.
RECRUITING SEMINARS. The Company holds seminars which qualify for Continuing
Professional Education credits ("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 that best meets their needs.
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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.
TRADE SHOWS. The Company regularly exhibits at numerous national seminars and
training events.
REFERRAL INCENTIVE PROGRAMS. The Company offers its current Representatives who
refer their colleagues to the Company override compensation for their efforts in
this area.
TRADE PUBLICATION ADVERTISING. The Company periodically places advertisements
to industry publications and other publications read by tax professionals.
EDUCATIONAL EVENTS. Accounting and tax professionals are continually invited to
attend the Company's comprehensive financial planning seminars. Participants
receive CPE credit, which provides the tax professional additional incentive to
attend.
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, however, 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
Representative 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 practices.
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The training and marketing support programs offered by the Company to its
Representatives are discussed in the following paragraphs.
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.
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:
RSS Chapter 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 650 RSS Chapter
meetings were held in 100 cities throughout the United States in fiscal
1996, with 550 RSS Chapter meetings planned for fiscal 1997.
RSS 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. Vest Fest is held in the spring and the Annual National Conference is
held in the winter.
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:
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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 proactively 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.
Newsletters. Representative newsletters are provided semi-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 less successful at
marketing 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 investment needs are
currently untapped by their primary Representatives.
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REPRESENTATIVE SYSTEMS
The Information Services Division ("Division") provides computer systems for
both the Company and its Representatives. The Division is responsible for
developing and writing all of the programs and maintaining the hardware that
support the Company's operations. During fiscal 1996 the Division upgraded the
Company's computer equipment, phone system and the advisory operating system.
The Division plans to continue monitoring and improving the operating systems of
the Company during fiscal year 1997.
The Division introduced two new Representative programs, PC Invest for the
Professional and Portfolio Analyst Plus. PC Invest for the Professional
provides Representatives the ability to access clients that have accounts at the
Company's clearing firm in order to view client account information, receive
real-time quotes, and electronically send orders to the Company's trading room.
Portfolio Analyst Plus is an asset allocation program that provides
Representatives with the ability to illustrate the efficient frontier and
compare current versus recommended portfolio holdings, and can be used as a tool
while working with the client. The Information Services division plans to
continue the development of the Representative Desktop which will provide the
Representative with an integrated office management system, as well as other
Representative programs during fiscal year 1997.
INSURANCE AGENCY MANAGEMENT SERVICES
The Company provides management services to an affiliated insurance agency, H.D.
Vest Insurance Services. 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. The Company has charged HDVIns $314,196, $551,379 and $416,298
for the years ended September 30, 1994, 1995 and 1996, respectively. As of
September 30, 1996, the Company had a receivable of approximately $130,280 from
HDVIns.
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INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc. is registered as a broker-dealer in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico, 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. HDVIS is a member of
the National Association of Securities Dealers, the Securities Investors
Protection Corporation, and the Securities Industry Association.
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 monthly 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.
The following table summarizes the number of securities transactions processed
by the Company:
Years Ended September 30,
-------------------------
1994 1995 1996
---- ---- ----
1,928,779 1,569,425 2,422,705
Customer accounts for trading of stocks and bonds and certain mutual fund and
direct participation programs 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 firm for HDVIS, reflects all stock, bond and option transactions of
HDVIS' customers on its own books. The majority of transactions involving
mutual funds and direct participation programs are handled directly with the
product distributors.
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REPRESENTATIVE LICENSING
The Company provides step-by-step assistance to Representatives in obtaining
their securities, insurance and Registered Investment Advisor licenses,
including educational programs for exams and complete administrative processing
with the National Association of Securities Dealers, the securities licensing
agent and the state agencies that supervise insurance licensing.
COMPLIANCE AND SUPERVISION
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 investing activities of all Representatives.
PROFESSIONAL INVESTMENT ADVISORY SERVICES
H.D. Vest Advisory Services, Inc. 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 and is 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, 1996, there
were approximately 1,779 Representatives registered with HDVAS.
VESTPREMIERE - The VestPremiere Investment Program is a fee-based service of
HDVAS. This service, designed for clients with over $100,000 of current
investable assets, 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
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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
determining the appropriate asset allocation 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, 1996, there were approximately 1,054 client accounts utilizing the
services of the VestPremiere Investment Program.
VESTFLEX - The VestFlex Investment Program is a service introduced by HDVAS
during July 1993. The program is designed to provide clients with 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, 1996, there were
approximately 2,491 client accounts in the VestFlex Investment Program.
VEST ADVISOR - The Company introduced its Vest Advisor program in October 1995.
This program accommodates clients with a minimum of $25,000 of current
investable assets. These investments are managed by the client's Representative
according to the portfolio goals established between the Representative and the
client. Each client's investment is held in a single brokerage account. A
quarterly report is provided to each client detailing investment performance.
As of September 30, 1996, there were approximately 565 client accounts in the
Vest Advisor Investment Program.
GOVERNMENT REGULATION
H.D. VEST INVESTMENT SECURITIES, INC. - 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
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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 Commonwealth of Puerto Rico.
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
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
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
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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, 1994, 1995 and 1996 as
follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net capital $1,299,003 $1,449,906 $1,409,407
Required net capital 293,682 250,000 392,490
---------- ---------- ----------
Excess net capital $1,005,321 $1,199,906 $1,016,917
========== ========== ==========
</TABLE>
H.D. VEST ADVISORY SERVICES, INC. - 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 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 $150,000 for the year ended
September 30, 1996. All such activities and contributions are carefully
reviewed by the Company's legal counsel to ensure that they comply with the law.
SEASONALITY
Because the Company's Representatives consisted primarily of tax professionals,
a majority of the Company's revenues (approximately 52% in fiscal 1996) 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 their clients.
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DEPENDENCE ON A SINGLE CUSTOMER
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
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 investing 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.
EMPLOYEES
At September 30, 1996, the Company employed 189 full-time employees who provide
support services to Representatives of the Company. To the extent that the
Company recruits additional Representatives, the number of employees would be
expected to increase proportionately during the fiscal year ending September
30, 1997.
<TABLE>
<CAPTION>
Employees by Department
As of September 30, 1996
<S> <C>
Marketing and Technical Support 58
Administration and Other 27
Operations 88
Educational Services 16
---
189
===
</TABLE>
The majority of employees are college graduates and are securities licensed.
Item 2. Properties
- -------------------
The Company occupies approximately 34,000 square feet of office space in Irving,
Texas, located at 433 East Las Colinas Blvd.
18
<PAGE>
Item 3. Legal Proceedings
- --------------------------
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission began an investigation of H.D. Vest Investment Securities, Inc.,
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 Company paid
for the benefit of the plaintiffs, approximately $450,000 as reimbursement of
what the Company believed to represent actual out-of-pocket losses plus
interest. This legal action was submitted to binding arbitration before the
NASD.
In September 1996, the arbitration panel awarded the plaintiffs approximately
$1.7 million of which approximately $475,000 represented recovery of alleged
economic losses. HDVIS intends to appeal the award but has nevertheless accrued
and set aside sufficient net capital to pay the $1.7 million award following the
exhaustion of all appeals. In this regard, the Company made a non-refundable
contribution of $1 million to increase the net capital of HDVIS pursuant to a
previously executed Facility and Services Agreement between the Company and
HDVIS. The Company believes a fidelity bond issued in favor of HDVIS will cover
approximately $250,000 of the total award. To the extent the bond does not
cover $250,000 of the award, the Company would have to record additional
expenses related to the award and may be required to make additional capital
contributions to HDVIS.
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.
19
<PAGE>
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, 1996, at
the Hyatt Regency in San Diego, California. 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 Vest, Kenneth
E. Reynolds, Jack B. Strong, Jerry M. Prater, Phillip W. Mayer, and Lynn R.
Niedermeier as Directors of the Company. Other matters brought to a vote at this
meeting were the approval of Arthur Andersen LLP as the Company's independent
public accountants for the ensuing year, the approval of the Company's Executive
Officer Compensation Plan, as well as the Company's Vice President Compensation
Plan. Below is a list of the items voted on at the annual shareholder meeting
and the distributions of votes.
<TABLE>
<CAPTION>
Matter Voted Voted For Voted Against Abstained Non-vote
- ------------ --------- ------------- --------- --------
<S> <C> <C> <C> <C>
Directors
Herb D Vest 5,025,636 - 64,233 -
Barbara Vest 5,025,436 - 64,433 -
Jack B Strong 5,025,636 - 64,233 -
Kenneth E. Reynolds 5,025,636 - 64,233 -
Jerry M. Prater 5,025,636 - 64,233 -
Phillip W. Mayer 5,025,636 - 64,233 -
Lynn R. Niedermeier 5,023,526 - 66,343 -
Independent Auditors 5,054,691 28,735 6,443 -
Executive Officer
Compensation Plan 4,928,034 121,724 35,561 4,550
Vice President 4,927,122 121,124 37,073 4,550
Compensation Plan
</TABLE>
20
<PAGE>
Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
As of September 30, 1996 the Company's stock was listed on the NASDAQ National
Market System. The total trading volume of the Company's stock for fiscal 1996
was 567,747. 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 periods
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 9/30/96 $5.50 $2.63
6/30/96 3.88 2.75
3/31/96 3.00 1.88
12/31/95 3.00 1.88
------------------------------
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
------------------------------
</TABLE>
As of September 30, 1996, there were 760 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 $1,000,000, public float of shares of
200,000 (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 $1,000,000, $1 minimum bid for outstanding
shares , 400 shareholders and 2 market makers.
21
<PAGE>
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.
The Company has paid no dividends on its common stock since incorporation. 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 the
development of retained earnings, the Company's financial requirements and other
factors.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144 -
Of the 5,423,341 shares of common stock outstanding as of September 30, 1996,
4,115,754 shares of common stock are "restricted securities," as that term is
defined in Rule 144 under the Securities Act of 1933, as amended. Under this
rule, 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 shares without any restrictions applicable
to Rule 144. Herb D. Vest, the Chairman of the Board and Chief Executive Officer
of the Company, owns 2,478,092 shares which are subject to Rule 144. Mr. Vest
acquired the majority of his shares in February 1987. Also, Barbara Vest, a
Director of the Company owns 1,519,646 shares of which 1,487,808 are restricted.
Future sales under Rule 144 may have a depressive effect on the price of the
Company's common stock. Herb D. Vest and Barbara 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 S-18 registration statement.
The escrowed shares began to release from escrow in 1994 at a rate of 20% per
year.
22
<PAGE>
Item 6. Selected Financial Data
--------------------------------
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1996, 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.
<TABLE>
<CAPTION>
Summary of Consolidated Statements of Operations
Years Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total Revenues $35,532,056 $46,007,817 $50,287,196 $44,670,051 $67,509,222
Net Income (Loss) $(3,187,347) $ 2,934,722 $ (369,901) $ 1,329,001 $ 1,188,707
Net Income (Loss)Common share $ (.63) $ .52 $ (.09) $ .22 $ .20
Cash Dividends Declared per common share $ - $ - $ - $ - $ -
</TABLE>
<TABLE>
<CAPTION>
Summary of Consolidated Statements
of Financial Position
As of September 30,
- -------------------------------------------------------------------------------------------------------------------------------
1992 1993 1994 1995 1996
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 294,033 $2,533,029 $ 1,012,016 $ 1,293,871 $ 2,821,115
Total Assets $8,690,589 $9,857,018 $12,336,852 $11,666,371 $16,950,759
Notes Payable and Obligations
under Capital Leases (net of
current maturities) $ 620,900 $ 187,858 $ 543,848 $ 430,739 $ 676,844
Total
Liabilities $8,361,445 $6,720,687 $ 9,697,957 $ 7,726,010 $11,949,226
Shareholders'
Investment $ 329,144 $3,136,331 $ 2,638,895 $ 3,940,361 $ 5,001,533
</TABLE>
23
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
- ------------------------------------------------------------------------
Results of Operations
- ---------------------
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1996, the Company had working capital of $2,821,115, an
increase of $1,527,244 from the $1,293,871 of working capital at September 30,
1995. The increase in working capital is primarily the result of a 51% increase
in total revenues for the year ended September 30, 1996.
Cash provided by operating activities increased by $2,995,116 to $3,780,785 for
the year ended September 30, 1996 compared to the year ended September 30, 1995.
The increase in cash provided by operations is primarily due to the increase in
revenues for the year ended September 30, 1996.
Cash used for investing activities declined by $111,253 to $374,551 for the year
ended September 30, 1996. The decrease is primarily due to a reduced level of
software development costs in 1996 as compare to 1995. Cash used for investing
activities of $485,804 and $934,010 for the years ended September 30, 1995 and
1994 included costs incurred for software development, designed to improve the
productivity of the Company and its Representatives, and costs related to the
formation of the Deferred Compensation Plan. The Company incurred expenditures
of $315,179, $95,145 and $407,299 for furniture, fixtures and computer equipment
for the years ended September 30, 1996, 1995 and 1994.
Cash used for financing activities of $54,448 during the fiscal year ended
September 30, 1996 included net advances on the lines of credit with Mr. Vest
and Ms. Vest, payments for capital lease obligations and preferred stock
dividends. Net advances on lines of credit consist of advances to Mr. Vest of
$285,714, payments from Mr. Vest of $285,714, advances to Ms. Vest of $178,000
and payments from Ms. Vest of $42,302. Cash provided by financing activities
during the fiscal year ended September 30, 1996 included amounts deferred by
Representatives under the Deferred Compensation Plan. Cash used for financing
activities of $1,110,045 during the fiscal year ended September 30, 1995 include
net advances on the lines of credit with Mr. Vest of $879,290 and with Ms. Vest
of $53,884, payments for capital lease obligations and preferred stock
dividends, offset by amounts deferred by Representatives under the Deferred
Compensation Plan.
24
<PAGE>
Additionally, during 1996, the Company acquired, under various capital lease
agreements, telephone equipment and other property necessary to support the
current and projected operating levels of the Company.
The Company's historical growth has been financed through 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,
1996, amounts from these sources have been approximately $2.5 million, $2.6
million, $5.1 million and $6.9 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, 1996 and 1995, approximately $591,000 and $73,000, respectively,
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. As
of September 30, 1996 and 1995, the Company had accrued matching contributions
of approximately $45,000 and $1,000, respectively.
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 increased recruiting and development activities, the
Company has experienced higher general and administrative costs as overhead
increased to support the recruiting and development activities. Consequently,
the Company has generated substantial net losses subsequent to obtaining
25
<PAGE>
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, 1996, were $67,509,222,
a 51% increase over the year ended September 30, 1995. Management believes that
the increase in revenues is due in part, to continued strength in overall
financial markets and to the development of training and educational programs.
The Company's revenues for the year ended September 30, 1995 were $44,670,051,
an 11% decrease from the year ended September 30, 1994. Management believes that
revenues in 1995 were negatively impacted by rising interest rates which made
interest-bearing investments attractive to investors. Additionally, the Company
placed increased emphasis on its fee-based business. As Representatives switch
their investment strategies from front-end sales charge investments (i.e. mutual
funds) to fee-based investments, commission revenue will be replaced by on-going
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.
Commission revenue as a percentage of gross product sales has gradually declined
since the Company's formation. This decline is primarily 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 continues to devote significant resources to further
develop its fee-based programs. Portfolio management fees from these programs
were $6,480,537 for the year ended September 30, 1996, a 101% increase over the
year ended September 30, 1995. Portfolio fee revenues for the years
26
<PAGE>
ended September 30, 1995 and 1994, were $3,219,574 and $1,680,889, respectively,
a 92% and 112% increase over the years ended September 30, 1994 and 1993,
respectively.
The reasons for changes in the Company's revenues in the years ended September
30, 1994, 1995, and 1996 are summarized in the following table:
<TABLE>
<CAPTION>
% Change for the Years Ended September 30,
as compared to Previous Years
----------------------------------------
Source of Revenue 1994 1995 1996
------------------------- -------- -------- -------
<S> <C> <C> <C>
Mutual Fund and UIT's (1) +4% -17% +47%
Variable Insurance
Products (2) +42% +10% +81%
Limited Partnership
Interests (3) -14% -29% -36%
Stocks, Bonds and
Options (1) +33% -15% +43%
Investment Advisory
and Portfolio
Management Fees (4) +112% +92% +101%
Facility and Service
Fees (5) -1% +75% -24%
Marketing and
Educational
Fees (6) +22% -11% +44%
Other (7) -2% -47% -14%
</TABLE>
(1) Revenues increased in 1994 and 1996 due to increases in product sales
resulting in part from the growth in the number of Representatives and the
training programs provided by the Company, and in part due to stable or
declining interest rates. Revenues in 1995 decreased due to rising interest
rates which made interest-bearing investments attractive to investors.
(2) Revenues increased due to the increase in the number of Representatives
licensed to offer this product and market conditions which 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 increased in part to an increase in the number of Representatives
licensed to offer this product and the development of additional fee-based
services. The division has continued to grow with the addition of new
accounts and
27
<PAGE>
new services, VestFlex and VestAdvisor Investment Programs. During 1994,
1995 and 1996, the Company has devoted significant resources to further
develop fee-based programs.
(5) Facility and Service Fees decreased in 1994 and 1996 due to a decrease in
the resources available to support this product line. Fees in 1995
increased due to the allocation of more resources to support this product
line.
(6) Revenues in 1994 and 1996 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.
(7) 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, 1994, and
1995 were $845,436, and $64,586 respectively.
During 1996, the Company continued development of programs designed to increase
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).
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 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
28
<PAGE>
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.
NET INCOME (LOSS)
Net income for the year ended September 30, 1996 was $1,188,707 compared to net
income of $1,329,001 and a net loss of $(369,901) for the years ended September
30, 1995 and 1994, respectively.
General and administrative expenses for the year ended September 30, 1996 were
$14,968,196, an increase of $4,157,304 from the prior year total of $10,810,892.
Included in the increased expenses are amounts related to incentive compensation
plans for executive officers, senior managers and employees, and additional
administrative and operational staff to support current and projected operating
levels. Also included in general and administrative expense are costs related to
an arbitration award to a group of clients of a former Representative. The
following table summarizes the related charges to general and administrative
expense related to this matter. For a more detailed discussion see "Item 3.
Legal Proceedings."
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Professional fees and other
expenses $ 350,245 $ 42,312 $ 665,937
SEC sanction 200,000 (150,000) -
Receivable from bonding
Company - (250,000)
Payments and arbitration
awards to plaintiffs - 452,292 1,700,000
----------- ----------- ------------
$ 550,245 $ 344,604 $ 2,115,937
=========== =========== ============
</TABLE>
29
<PAGE>
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.
A substantial amount of the Company's expenses are variable and controllable.
Consequently, as revenues declined during 1995, 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.
Representative development costs for the year ended September 30, 1996 were
$6,506,014, an increase of $1,979,377 over the prior year. The increase in
development costs is due to programs designed to increase revenues. These
programs include Partners for Success, Total Client Commitment and the Regional
Support System. Representative development costs for the year ended September
30, 1995 were $4,526,637, a decrease of $411,490 from the prior year. The
decrease in development costs for 1995 is generally due to reduced levels of
variable and controllable expenses.
Representative recruiting costs for the year ended September 30, 1996, were
$773,909, an increase of $375,072 over the prior year. Representative recruiting
costs for the year ended September 30, 1995, were $398,837, a decrease of
$120,339 from the expense of $519,176 for the year ended September 30, 1994. The
increase in fiscal 1996 is the result of an increased use of direct mail to find
prospective Representatives. 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. 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 will likely be negatively impacted.
The Company's Representatives include Certified Public Accountants. Currently,
however, most state boards have regulations prohibiting CPAs from receiving
commissions for the sale or referral of products or services to their clients.
Since 1990, seventeen 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
30
<PAGE>
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 $573,000, $156,000 and $242,000 for the years ended September 30,
1994, 1995 and 1996, respectively, to support these Representatives.
Mississippi's board changed its rule to allow commissions effective January 1,
1996.
31
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Report of Independent Public Accountants F-1
Consolidated Statements of Financial
Position - September 30, 1995 and 1996 F-2 & F-3
Consolidated Statements of Operations -
Three years ended September 30, 1996 F-4
Consolidated Statements of Shareholders'
Investment - Three years
ended September 30, 1996 F-5
Consolidated Statements of Cash Flows -
Three years ended September 30, 1996 F-6
Notes to Consolidated Financial Statements F-7 - F-19
</TABLE>
32
<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, 1995 and
1996, and the related consolidated statements of operations, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1996. 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, 1995 and 1996, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1996 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 5, 1996
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
-------------------------
1995 1996
----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 3,383,060 $ 6,734,846
Commissions and accounts
receivable 3,329,869 4,509,419
Current portion - notes receivable
related parties 522,178 579,660
Deferred taxes - 480,370
Receivable from affiliate 98,929 130,280
Prepaid expenses 56,773 91,377
----------- -----------
Total current assets 7,390,809 12,525,952
----------- -----------
Property and equipment, net of
accumulated depreciation
of $1,924,547 at 1995, and
$2,255,821 at 1996 1,289,111 1,673,472
Notes receivable - related parties,
net of current portion 1,978,099 2,084,411
Intangible and other assets, net of
accumulated amortization 1,008,352 666,924
----------- -----------
Total assets $11,666,371 $16,950,759
=========== ===========
</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,
----------------------------
1995 1996
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 3,005,316 $ 5,583,156
Amounts due on clearing transactions 669,187 729,591
Commissions payable 2,222,435 3,317,096
Payable to officer and directors 200,000 74,994
----------- -----------
Total current liabilities 6,096,938 9,704,837
----------- -----------
Obligations under capital leases,
excluding current installments 430,739 676,844
Other noncurrent liabilities 157,331 636,435
Unearned revenue 1,041,002 931,110
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1995 and 1996 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,423,341 outstanding at September 30,
1995 and 1996 271,167 271,167
Additional paid-in capital 5,080,834 5,080,834
Deficit (2,912,042) (1,850,870)
----------- -----------
Total shareholders'
investment 3,940,361 5,001,533
----------- -----------
Total liabilities and
shareholders' investment $11,666,371 $16,950,759
=========== ===========
</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,
-----------------------------------------
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Commissions $43,258,286 $37,027,755 $55,594,148
Marketing and education fees 3,280,146 2,933,055 4,212,064
Portfolio management fees 1,680,889 3,219,574 6,480,537
Facility and service fee
from affiliate 314,196 551,379 416,298
Other 1,753,679 938,288 806,175
----------- ----------- -----------
Total revenues 50,287,196 44,670,051 67,509,222
----------- ----------- -----------
Expenses:
Commissions 31,332,505 27,322,184 43,468,352
General and administrative 13,703,952 10,810,892 14,968,196
Representative development 4,938,127 4,526,637 6,506,014
Representative recruiting 519,176 398,837 773,909
Interest 62,603 100,280 96,161
----------- ----------- -----------
Total expenses 50,556,363 43,158,830 65,812,632
----------- ----------- -----------
Net income (loss) before state
and federal income tax (269,167) 1,511,221 1,696,590
Provision for state and federal
income tax 100,734 182,220 507,883
----------- ----------- -----------
Net income (loss) $ (369,901) $ 1,329,001 $ 1,188,707
=========== =========== ===========
Net income (loss)
per common share $(0.09) $0.22 $0.20
=========== =========== ===========
Weighted average number of
common shares outstanding 5,392,287 5,406,337 5,423,341
=========== =========== ===========
</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, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
Shares of Stock Additional
Outstanding Preferred Common Paid-in
-------------------------
Preferred Common Stock Stock Capital Deficit Total
----------- ------------ ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
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 5,432,341 1,500,402 271,167 5,080,834 (2,912,042) 3,940,361
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,188,707 1,188,707
----------- ------------ ----------- ---------- ----------- ----------- ----------
Balance at
September 30, 1996 250,067 5,432,341 $1,500,402 $271,167 5,080,834 ($1,850,870) $5,001,533
=========== ============ =========== ========== =========== =========== ==========
</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,
--------------------------------
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (369,901) $ 1,329,001 $ 1,188,707
Reconciliation of net income (loss) to
net cash provided by operating activities
Depreciation and Amortization 668,489 850,941 901,093
Loss on Sale of Assets - - 120,716
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 (1,461,157) 350,810 (1,179,550)
Deferred tax - - (480,370)
Receivable from affiliate 133,245 53,611 (31,351)
Prepaids and other assets (125,945) 33,001 (72,702)
Receivable from (payable to)
officers and directors 255,950 (205,400) (125,006)
Accounts payable and accrued expenses 1,616,162 (403,862) 2,414,075
Commissions payable 999,367 (168,704) 1,094,661
Amounts due on clearing transactions (262,460) (1,004,344) 60,404
Unearned revenue 12,261 (149,385) (109,892)
----------- ----------- -----------
Net cash provided by operating
activities 1,742,164 785,669 3,780,785
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other assets (526,711) (390,659) (69,372)
Purchases of property and equipment (407,299) (95,145) (315,179)
Proceeds from sale of assets - - 10,000
----------- ----------- -----------
Net cash used for
investing activities (934,010) (485,804) (374,551)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,535) (127,535) (127,535)
Advances from deferred compensation plan - 72,857 518,286
Advances on notes receivable -
related parties (1,470,710) (2,073,497) (463,713)
Payments on notes receivable -
related parties - 1,238,092 338,017
Payment on notes payable and
capital lease obligations (241,103) (219,962) (319,503)
----------- ----------- -----------
Net cash used for
financing activities (1,839,348) (1,110,045) (54,448)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (1,031,194) (810,180) 3,351,786
CASH AND CASH EQUIVALENTS,
beginning of year 5,224,434 4,193,240 3,383,060
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 4,193,240 $ 3,383,060 $ 6,734,846
=========== =========== ===========
</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 divisions 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) COMMISSIONS AND ACCOUNTS RECEIVABLE - Commissions and Accounts Receivable
is stated net of certain allowances for doubtful accounts. The allowances
at September 30, 1995 and 1996 were $528,597 and $738,227.
(D) PROPERTY AND EQUIPMENT AND OTHER ASSETS - 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, 1995 and 1996, property
and equipment consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Leasehold improvements $ 127,073 $ 128,198
Computer equipment 1,593,035 1,960,099
Furniture and fixtures 1,154,412 1,225,781
Telephone equipment 303,858 579,935
Other 35,280 35,280
Less accumulated depreciation
and amortization (1,924,547) (2,255,821)
----------- -----------
Total property and equipment, net $ 1,289,111 $ 1,673,472
=========== ===========
</TABLE>
F-7
<PAGE>
Other assets consist primarily of capitalized software development costs and
training materials, as well as security deposits. Depreciable assets are stated
at cost and are amortized by the straight-line method using an estimated useful
life of five years. At September 30, 1995 and 1996, other assets and accumulated
amortization are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
Other assets $1,798,688 $1,322,466
Accumulated amortization (790,336) (655,542)
---------- -----------
Total other assets, net $1,008,352 $ 666,924
========== ===========
</TABLE>
(E) 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 to three business days.
(F) 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.
(G) REPRESENTATIVE DEVELOPMENT - Representative development expenses consist
of incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(H) 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.
F-8
<PAGE>
(I) 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.
(J) 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.
(K) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1994, 1995 and 1996 were $62,603, $100,280 and $96,161
respectively. Cash payments for federal income taxes for the year ended
September 30, 1996 was $8,328. During the fiscal years ended September 30, 1994,
1995 and 1996 the Company acquired assets through capital leases amounting to
$597,093, $106,853, and $690,191 respectively.
(L) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(M) PRIOR YEARS' STATEMENTS - Certain reclassifications have been made to
prior years' statements in order to for the amounts to be comparable with the
current year presentation.
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, 1994, 1995 and 1996 were $29,077, $46,568
and $55,077, respectively.
F-9
<PAGE>
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% (9.25% as of September 30, 1996). 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. In
September 1996, the bank increased the maximum amount available under the line
to $1,000,000. The line of credit is intended for working capital purposes and
expires February 1, 1997. At September 30, 1996, 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, 1995 and 1996 the capitalized basis of the
leases included in property and equipment was approximately $1,162,857 and
$1,812,499 and accumulated amortization applicable to the leased equipment was
approximately $525,975 and $795,091, 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,
1996, are as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
Year ended September 30:
1997 $ 404,975 $1,086,844
1998 355,248 727,572
1999 234,913 49,072
2000 118,983 12,446
2001 29,458 -
---------- ----------
Total minimum lease payments 1,143,577 $1,875,934
==========
Less amount representing interest 136,888
----------
Present value of net minimum
capital lease payments 1,006,689
Less current installments
included in accounts payable 329,845
----------
Obligations under capital
leases, excluding current
installments $ 676,844
==========
</TABLE>
Rent expense for the years ended September 30, 1994, 1995 and 1996 was
approximately $552,463, $594,756 and $667,126, respectively. The future minimum
rental payments under the current leases are as follows: 1997 - $846,262; and
1998 - $568,225.
(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., 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
Company paid for the benefit of the plaintiffs approximately $450,000 as
reimbursement of what the Company believed to represent actual out-of-pocket
losses, plus interest. This legal action was submitted to binding arbitration
before the NASD.
F-11
<PAGE>
In September 1996, the arbitration panel awarded the plaintiffs approximately
$1.7 million of which approximately $475,000 represented recovery of alleged
economic losses. HDVIS intends to appeal the award, but has nevertheless
accrued and set aside sufficient net capital to pay the $1.7 million award
following the exhaustion of all appeals. In this regard, the Company made a
non-refundable contribution of $1 million to increase the net capital of HDVIS
pursuant to a previously executed Facility and Services Agreement between the
Company and HDVIS. The Company believes a fidelity bond issued in favor of
HDVIS will cover approximately $250,000 of the total award. To the extent the
bond does not cover $250,000 of the award, the Company would have to record
additional expenses related to the award and may be required to make additional
capital contributions to HDVIS.
The Company has incurred professional fees and other charges related to this
matter that have been included in general and administrative expenses as
follows:
<TABLE>
<CAPTION>
Year Ended September 30,
-----------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Professional fees and other
expenses $ 350,245 $ 42,312 $ 665,937
SEC sanction 200,000 (150,000) -
Receivable from bonding
Company - - (250,000)
Payments and arbitration
awards to plaintiffs - 452,292 1,700,000
--------- ---------- ----------
$ 550,245 $ 344,604 $2,115,937
========= ========== ==========
</TABLE>
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 of the Company.
F-12
<PAGE>
5) SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and the officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month 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 connection with
these agreements the Company charged $1,000,000 to general and administrative
expense during the fiscal year ended September 30, 1994.
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter of
fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the officer
resigned as President of the Company. Under the officer's existing employment
agreement, the Company agreed to pay the former officer $16,600 per month until
October 1, 1996, in exchange for the former officer agreeing, among other
things, to not solicit clients of the Company's Representatives and to not
compete with the Company through that date.
The Company had related severance payable liabilities at September 30, 1995 and
1996 of $283,329 and $74,994, 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 1994, 1995, and 1996, dividends of $127,535
($0.51 per share) were declared and paid.
F-13
<PAGE>
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. These warrants will expire on November 21, 1996.
7) NET CAPITAL REQUIREMENTS
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc.
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. HDVIS had
net capital, required net capital, and excess net capital for the years ended
September 30, 1994, 1995 and 1996 as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net capital $1,299,003 $1,449,906 $1,409,407
Required net capital 293,682 250,000 392,490
---------- ---------- ----------
Excess net capital $1,005,321 $1,199,906 $1,016,917
========== ========== ==========
</TABLE>
8) RELATED-PARTY TRANSACTIONS
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. The agreement with Herb D. Vest provides
for a management fee 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. Effective January 1, 1996, the Company increased the annual
management fee due to Mr. Vest to $750,000 from $500,000. The annual bonus for
fiscal 1996, ranged from $0 to $1,500,000. The 51% increase in the Company's
revenues combined with positive earnings after consideration of the bonus,
resulted in the payment of the maximum bonus under the plan. No bonus was
accrued or paid under the 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 $632,528, $500,000 and
$2,187,500 for the years ended September 30, 1994, 1995 and 1996, respectively.
F-14
<PAGE>
The Company has an agreement to provide Herb Vest a revolving line of credit
in an amount 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 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 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 accrues interest on unpaid
principal balances at a rate of 11%. At September 30, 1996, Mr. Vest had drawn
$2,000,000 in principal against the line of credit. The Company has recorded
$190,600 of accrued interest on this line.
During fiscal 1994, the Company modified Ms. Vest's consultant contract to
receive $16,667 per month pursuant to the agreement. For the years ended
September 30, 1994, 1995 and 1996, fees under this agreement totaled $200,000
each year.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by Ms. 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 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 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 accrues interest on
unpaid principal balances at a rate of 11%. At September 30, 1996, Ms. Vest had
drawn $431,813 in principal against the line of credit. The Company has
recorded $41,658 of accrued interest on this line.
The Company has a Facilities and Services Agreement 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 $314,196, $551,379 and
$416,298, for the years ended September 30, 1994, 1995, and 1996, respectively.
As of September 30, 1996, the Company had a receivable of approximately $130,280
from HDVIns.
F-15
<PAGE>
9) 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 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,
----------------------------------------
<S> <C> <C> <C>
Current:
Federal $ 2,914 $ 14,220 $ 692,741
State 97,820 168,000 295,512
Deferred:
Federal - - (411,458)
State - - (68,912)
---------- --------- ------------
$ 100,734 $ 182,220 $ 507,883
========== ========= ============
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
-------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate (34.0)% 34.0% 34.0%
State taxes, net of
Federal 36.4 11.1 13.4
Fines and penalties 25.3 (3.4) -
Other 14.9 (3.5) 10.2
Alternative minimum
taxes 1.1 0.9 (5.9)
Reversal of deferred
tax asset valuation
allowance - - (6.0)
Utilization of net
operating loss
carryforward (6.3) (27.0) (15.8)
-------------------------------------
Effective rate 37.4% 12.1% 29.9%
=====================================
</TABLE>
F-16
<PAGE>
The following table presents the components of the net deferred tax asset:
<TABLE>
<CAPTION>
Deferred September
October 1, Expense 30,
1995 (Benefit) 1996
---- --------- ----
<S> <C> <C> <C>
Accrued severance $ 96,332 $ 83,815 $ 12,517
Accrued judgment - (392,760) 392,760
Depreciation (104,401) (57,362) (47,039)
Unearned Revenue 87,181 47,747 39,434
Other 90,718 8,020 82,698
Alternative minimum
tax credit
carryforward 100,487 100,487 -
Net operating loss
carryforward 248,536 248,536 -
------------ ------------ ------------
518,853 38,483 480,370
Valuation allowance (518,853) 518,853 -
------------ ------------ ------------
Net deferred tax asset $ - $ (480,370) $ 480,370
============ ============ ============
</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. As a result
of (i) the Company fully utilizing its previously existing tax credit and loss
carryforward and (ii) its ability to carry back future losses, if any, against
fiscal year 1996 taxable income, the Company reversed its deferred tax asset
valuation allowance in fiscal year 1996.
F-17
<PAGE>
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, 1996, 95,454 options had been
granted under the plan at an exercise price of $8.50 per share. No stock
options were exercisable at September 30, 1996, nor were any exercised
during the year ended September 30, 1996.
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.
250,000 of these options remain outstanding as of September 30, 1996. 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, 1996,
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, 1996, 44,000 options have been
issued and remain outstanding.
11) DEFERRED COMPENSATION PLAN
In July 1995 the Company began accepting contributions to 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, 1996 and 1995 were $591,143 and $72,857,
respectively, and are included in other noncurrent liabilities.
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
F-18
<PAGE>
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 as of September 30, 1996 and 1995 approximated
$45,000 and $1,000, respectively, and are included in other noncurrent
liabilities.
F-19
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosures
- ----------------------
None.
33
<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, officers and
directors of certain divisions of the Company.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Herb D. Vest 52 Chairman of the Board of Directors, President
and Chief Executive Officer
Barbara Vest 50 Board of Directors
Kenneth E. Reynolds 67 Board of Directors
Jack B. Strong 66 Board of Directors
Jerry M. Prater 54 Board of Directors
Phillip W. Mayer 54 Board of Directors
Lynn R. Neidermeier 43 Board of Directors
Roger Ochs 35 Director of Marketing
Shannon A. Soefje 37 Senior Vice President and Corporate Secretary
W. Ted Sinclair 32 Vice President and Chief Financial Officer
</TABLE>
34
<PAGE>
KEY EMPLOYEES
HERB D. VEST, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT 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 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. 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
35
<PAGE>
professional. Image building, goal setting, referral development and employee
training are just a few of the topics in Ms. Vest's speaking repertoire. She is
also a featured columnist for Accounting Today. Ms. 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. 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. Since 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
36
<PAGE>
1990. Since 1985, he has worked in the corrections profession as a Program
Manager and Director of Staff Training. He currently 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. 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 through 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.
ROGER OCHS, DIRECTOR OF MARKETING. Mr. Ochs was employed by the Company in 1987
and was promoted to Director of Marketing in 1995. He is responsible for
directing the Company's Recruiting and Development, Field Support, Educational
Services, Marketing, Advisory Services and Financial Planning Support
Departments. Mr. Ochs previously served as Manager of the Technical Services
Division, which included Advisory Services, Retirement Services, Estate
Planning Services and the Banking Division. He graduated from Angelo State
University with a bachelor of business administration, a master of business
administration from Trinity University and a juris doctor degree from Southern
Methodist University School of Law. He is licensed to practice law in the
state of Texas. He is a General Securities Representative, General Securities
Principal, Registered Options Principal, Municipal Securities Principal,
General Life Insurance Agent, Certified Financial Planner and a Chartered Life
Underwriter.
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. She graduated from Oklahoma City University with a bachelor of
science degree in business
37
<PAGE>
administration. 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.
38
<PAGE>
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 key Senior Managers each
receiving in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
- -------------------------------------------------------------------------------------------------------
Restricted All
Name & Principal Fiscal Stock Stock Other
Position Year Salary Bonus Awards Options Compensa
(1) tion
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest 1996 $687,500 $1,500,000 - - $ 21,996
Chairman of the 1995 500,000 - - - 20,766
Board of Directors, 1994 543,750 $ 88,778 - - 7,200
President and Chief
Executive Officer(2)(4)
Barbara Vest 1996 - - - - $220,008
Director and 1995 - - - - 218,937
Consultant 1994 - - - - 207,200
Lynn R. Niedermeier 1996 - - - - $ 20,004
Director(3) 1995 245,834 - $100,000 - $ 86,004
1994 224,361 - - - 6,668
Roger Ochs(5) 1996 $136,045 $ 125,000 - - -
Director of Marketing 1995 $107,000 - - - -
1994 - - - - -
Shannon Soefje (5) 1996 $150,500 $ 62,500 - - -
Senior Vice President and 1995 - - - - -
Corporate Secretary 1994 - - - - -
W. Ted Sinclair (5) 1996 $130,625 $ 62,500
Vice President and Chief 1995 - - - - -
Financial Officer 1994 - - - - -
- ----------------------------------------------------------------------------------------------------------------------------
</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. Returned as President in November
1994. In October 1995, the Company granted Ms. Niedermeier a medical
leave of absence. In December
39
<PAGE>
1995, the officer resigned as President of the Company. Presently is a
member of the Board of Directors.
4) Paid pursuant to management agreement in effect prior to April 1994 amended
agreement.
5) Compensation below disclosure requirement in prior years.
EXECUTIVE OFFICER COMPENSATION PLAN
During April 1994, the Board of Directors of the Company adopted an Executive
Officer's 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 Officer's 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 Officer's 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 Officer's 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
40
<PAGE>
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 officer's Plan). No stock was earned under the Executive Officer's
Compensation Plan for the fiscal year ended September 30, 1996. Under the
Executive Officer's Compensation Plan, the Board of Directors also annually sets
three revenue goals - a threshold, target and maximum goal. If attained, the
revenue goals will 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
year's 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 Officer's Compensation Plan). No awards were
earned under the officer's plan in 1994, 1995 or 1996.
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 422(a) 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
41
<PAGE>
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:
(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; 95,454 of these options remain
outstanding as of September 30, 1996.
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. 250,000 of these options remain outstanding as of September 30,
1996.
In November 1992, the Company resolved that the independent directors are to
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, 1996, 44,000 options have been
issued and remain outstanding.
42
<PAGE>
As a result of the foregoing, options covering 191,752 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, 1996:
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Number of Unexercised Value of Unexercised,
Acquired Options Held At In-The-Money Options Fiscal
Through Fiscal Year End Year End (1,2)
---------------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest - - 100,000 45,148 - -
Barbara Vest - - - 45,148 - -
Wesley T. Sinclair - - - 1,456 - -
</TABLE>
(1) Represents the difference between the closing price of the Company's
common stock on September 30, 1996 and the exercise price of the
options.
(2) The current fair market value of the stock at September 30, 1996 was
below the option exercise price.
43
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
------------------------------------------------------------------------
The following information is furnished as of September 30, 1996, to indicate
beneficial ownership by each director and certain executives, 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) 2,606,612 48%
Barbara Vest (1) 1,519,646 28%
Lynn R. Niedermeier 41,087 *
Jerry Prater 2,000 *
Kenneth E. Reynolds 550 *
Shannon A. Soefje 775 *
Jack B. Strong 100 *
W. Ted Sinclair 25 *
Roger Ochs 1 *
Officer and Directors
as a Group 4,170,795 77%
</TABLE>
* Less than one percent.
(1) Herb D. Vest and Barbara 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.
44
<PAGE>
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. The agreement with Herb D. Vest provides
for a management fee 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. Effective January 1, 1996, the Company increased the annual
management fee due to Mr. Vest to $750,000 from $500,000. The 51% increase in
the Company's revenues combined with positive earnings after consideration of
the bonus, resulted in the payment of the maximum bonus under the plan in
fiscal 1996. No bonus was accrued or paid under the 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
$632,528, $500,000 and $2,187,500 for the years ended September 30, 1994, 1995
and 1996, respectively.
During fiscal 1994, the Company modified Ms. Vest's consultant contract to
receive $16,667 per month pursuant to the agreement. For the years ended
September 30, 1994, 1995 and 1996, fees under this agreement totaled $200,000
each year.
H.D. VEST INSURANCE SERVICES
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest.
HDVIns general insurance agency appoints Representatives with various insurance
companies to enable them to 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 1996 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.
45
<PAGE>
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 $314,196, $551,379 and $416,298 for
the years ended September 30, 1994, 1995, and 1996 respectively, for management
services rendered.
LINES OF CREDIT
The Company has an agreement to provide Herb Vest a revolving line of credit
in an amount 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 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 plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. Under the agreement
interest accrues on unpaid principal balances at a rate of 11%. At September
30, 1996, Mr. Vest had drawn $2,000,000 in principal against the line of
credit. The Company has recorded $190,600 of accrued interest on this line.
The Company has an agreement to provide Barbara Vest a revolving line of
credit in an amount not to exceed $700,000, collateralized by Ms. 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 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 plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. Under the agreement,
interest accrues on unpaid principal balances at a rate of 11%. At September
30, 1996, Ms. Vest had drawn $431,658 in principal against the line of credit.
The Company has recorded $41,658 of accrued interest on this line.
46
<PAGE>
SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and the officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month 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 connection
with these agreements the Company charged $1,000,000 to general and
administrative expense during the fiscal year ended September 30, 1994.
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter
of fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the officer
resigned as President of the Company. Under the officer's existing employment
agreement, the Company agreed to pay the former officer $16,600 per month until
October 1, 1996, in exchange for the former officer agreeing, among other
things, not to solicit clients of the Company's Representatives and not to
compete with the Company through that date.
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.
47
<PAGE>
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, 1994, 1995 and 1996 were $29,077,
$46,568 and $55,077 respectively.
48
<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 H. Vest +
10.7 Severance Agreement with Lynn R. Niedermeier o
49
<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 Vest o
22 Subsidiaries of the Registrant
27 Financial Data Schedule
* 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).
50
<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 15, 1996 By:s/ Herb D.Vest
------------------------------
Herb D. Vest
Chairman of the Board, President 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 Vest
--------------------------- ---------------------------
Herb Vest Barbara Vest
Chairman of the Board, President Director
and Chief Executive Officer
By:s/ Phillip W. Mayer By:s/ Lynn R. Niedermeier
---------------------------- ---------------------------
Phillip W. Mayer Lynn R. Niedermeier
Director Director
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
51
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM 10-K AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> SEP-30-1996
<CASH> 6,734,846
<RECEIVABLES> 7,303,770
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 2,340,396
<TOTAL-ASSETS> 16,950,759
<SHORT-TERM> 0
<PAYABLES> 9,704,837
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 1,313,279
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 3,229,964
<TOTAL-LIABILITY-AND-EQUITY> 16,950,759
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</TABLE>
