<PAGE>
Filed pursuant to Rule 424 (b) (3)
SEC File No. 33-74868
H.D. VEST, INC.
UNITS IN A NON-QUALIFIED DEFERRED COMPENSATION PLAN
EACH UNIT CONSISTS OF AN INTEREST IN A NON-QUALIFIED UNFUNDED DEFERRED
COMPENSATION PLAN.
DEFERRED COMPENSATION PLAN
- --------------------------
H.D. Vest, Inc., (the "Company") is offering Units in its non-qualified,
unfunded deferred compensation plan (the "Plan"). These Units are offered
solely to Representatives of the Company in conjunction with the Company's
Representative non-qualified, unfunded, deferred compensation plan (the "Plan".)
"Representative" is defined as an independent contractor associated with the
Company or any of its subsidiaries, who is neither an employee nor officer of
the Company or any Subsidiary. All of the Units offered hereby will be
distributed through H.D. Vest Investment Securities, Inc. ("HDVIS") a wholly-
owned Subsidiary of the Company. See "Plan of Distribution."
The Units consist of the amounts deferred by Representatives pursuant to
the Plan as Cash Equivalents.
FOR CALIFORNIA RESIDENTS
- ------------------------
For California residents only, the offering of Units in the Plan is limited
to those persons certifying that they have (1) net income of at least $65,000
per year combined with net assets of at least $250,000 exclusive of residence
and personal automobiles or (2) net assets of at least $500,000 exclusive of
--
residence and personal automobiles.
FOR WISCONSIN RESIDENTS
- -----------------------
This offering will not be sold in Wisconsin.
The Company's Common Stock is traded under the NASDAQ-NMS symbol "HDVS."
On June 30, 1996, the closing price for the Company's Common Stock on the NASDAQ
National Market System was $3.13. See "Market Information."
THE SECURITIES IN THIS OFFERING ARE SPECULATIVE, INVOLVE A HIGH DEGREE OF
RISK AND IMMEDIATE SUBSTANTIAL DILUTION (SEE "RISK FACTORS" AND "BUSINESS").
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
======================================================================================================
Price to Public Underwriting Discounts Proceeds to
and Commissions Company (3)(4)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Compensation Plan Units (1) 100% $ 0.00 (3) $7,000,000 (2)
- ------------------------------------------------------------------------------------------------------
Total:
Deferred Compensation Plan Units $7,000,000(2) $ 0.00 $7,000,000 (2)
======================================================================================================
</TABLE>
(1) Cash Equivalents as defined in Plan.
(2) The Company estimates the Representatives will defer Cash Equivalents
in an amount at least equal to $7,000,000.
(3) HDVIS, a subsidiary of the Company will participate in the offering as
sole selected dealer. As selected dealer, HDVIS will sell Units
solely to Representatives as defined in the first paragraph of this
cover page of this Prospectus pursuant to the Plan. The Company will
not be compensated for such sales. See "Plan of Distribution."
(4) Before deducting estimated offering expenses payable by the Company of
$210,500.
THE DATE OF THIS PROSPECTUS IS OCTOBER 8, 1996
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission, all of which
may be inspected and copied at the public reference facilities maintained by
the Securities and Exchange Commission at Room 1024, 450 5th Street, N.W.,
Washington, D.C. 20549 and at regional offices of the Securities and Exchange
Commission at Room 1204, 219 South Dearborn Street, Chicago, Illinois 60604,
and 75 Park Place, New York, New York 10007.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Items Page
- ----- ----
<S> <C>
Prospectus Summary...................... 4
Market Information...................... 7
Risk Factors............................ 8
Selected Financial
Information......................... 14
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations.......................... 14
Use of Proceeds......................... 22
Capitalization.......................... 23
Business................................ 24
Technical and Sales
Support Services................. 26
Regional Support System............. 27
Educational Services................ 27
Representative
Recruiting....................... 28
Representative
Development...................... 29
Representative Systems.............. 31
Insurance Agency
Management Services.............. 31
Investment Services................. 31
Trading and Customer
Services......................... 31
Representative
Licensing....................... 32
Compliance and Due
Diligence Services............... 32
Professional Investment
Advisory Services................ 32
Seasonality......................... 33
H.D. Vest
Representatives.................. 33
New Programs........................ 34
Operations and Sources of
Revenue............................. 39
Employees............................... 40
Property................................ 40
Regulation.............................. 40
Competition............................. 42
Management.............................. 43
Directors and Officers.............. 43
Remuneration of Directors
and Management...................... 46
Certain Transactions.................... 47
Issuance of Series A
Preferred Stock.................. 47
<CAPTION>
Items Page
- ----- ----
<S> <C>
Investment Banking
Agreement....................... 47
Transactions with
Management...................... 48
Security Ownership of Certain
Beneficial Owners and
Management........................ 55
Principal Shareholders................. 56
Shares Eligible for
Future Sale........................ 56
Description of
Securities......................... 57
Common Stock....................... 57
Warrants........................... 59
Plan of Distribution................... 59
Representatives Deferred
Compensation Plan............... 59
Transfer Agent &
Registrar.......................... 61
Legal Proceedings...................... 61
Legal Matters.......................... 62
Experts................................ 62
Additional Information................. 63
Report of Independent
Public Accountants................. F-1
Consolidated Financial
Statements......................... F-2
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of some of the pertinent information contained in
this Prospectus. This summary is qualified in its entirety by the more detailed
information, financial statements and notes to financial statements appearing
elsewhere in this Prospectus. Each prospective investor is urged to read this
Prospectus in its entirety.
THE COMPANY
H.D. Vest, Inc. (the "Company"), founded by Herb D. Vest, was formed on
December 17, 1986, as a Texas corporation and 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 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
<TABLE>
<CAPTION>
Year
Incorporated
SUBSIDIARIES (TEXAS) SERVICES
- ------------ ------- --------
<S> <C> <C>
H.D. Vest Investment Securities, Inc. 1983 o Registered Securities
"HDVIS" Broker-dealer
o Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 o Registered Investment Advisor
"HDVAS" Agent Licensing Assistance
o Money Management Services
o Financial Planning Software
for Fee-Based Planning
H.D. Vest Mortgage Services, Inc. 1989 o Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management Company 1988 o Inactive Subsidiary
"HDVCMC"
H.D. Vest Business Valuation Services, 1987 o Inactive Subsidiary
Inc. "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 o Inactive Subsidiary
"HDVCF"
</TABLE>
4
<PAGE>
The Company has a Facilities and Services Agreement with each of its
subsidiaries and H.D. Vest Insurance Services to provide technical and
administrative services. H.D. Vest Insurance Services ("HDVIns") is a sole
proprietorship owned by Herb D. Vest and was established to assist
Representatives in providing their clients with insurance products (see "Certain
Transactions -Transactions with Management").
See "Business" for a more detailed description of the business
activities of the Company and its subsidiaries.
The Company's primary asset is its subsidiary, HDVIS. HDVIS is a
securities broker-dealer firm registered with the Securities and Exchange
Commission ("SEC") and the securities regulatory commissions in all 50 states,
the District of Columbia and the Commonwealth of Puerto Rico. HDVIS is a member
of the National Association of Securities Dealers, Inc. ("NASD") and the
Securities Investors Protection Corporation ("SIPC"). HDVIS had approximately
4,884 Representatives consisting of approximately 4,569 fully licensed
Representatives, and approximately 315 at various stages of the licensing
process as of June 30, 1996. The Representatives are primarily tax
professionals located throughout the United States who provide their clients
with a wide range of financial services including investments such 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 affiliated entities, which include
insurance, business valuation services, financial planning, portfolio management
and other services (see "Business"). The Company's executive headquarters and
principal place of business is located at 433 E. Las Colinas Boulevard, Third
Floor, Irving, Texas 75039. Its telephone number is (214) 863-6000.
5
<PAGE>
THE OFFERING
DEFERRED COMPENSATION PLAN
- --------------------------
The Plan is an optional, non-qualified, unfunded, deferred
compensation plan which is available exclusively to the Company's
Representatives. (Capitalized terms used herein are defined under the Plan [see
"Plan of Distribution - Representatives Deferred Compensation Plan"].) The Plan
provides Representatives an opportunity to forego receipt of Compensation on a
pre-tax basis for selected periods, thus postponing recognition of income
otherwise currently taxable, and subsequently receiving the deferred
compensation plus a Matching Contribution. At the end of each Deferral Period,
the Deferral Amount and the related Matching Contribution will be paid to the
Participant.
Elections by Representatives under the Plan to defer portions of their
Compensation shall be made annually beginning with the Initial Enrollment Period
commencing the first of the month following the Effective Date. Compensation
shall be deferred in accordance with the Plan as earned. (See "Plan of
Distribution -Representatives Deferred Compensation Plan.")
SECURITIES OFFERED........... Units consisting of:
Cash equivalents as defined in the Plan. (See
"Plan of Distribution - Representatives
Deferred Compensation Plan.")
SHARES OF COMMON STOCK OUTSTANDING
AT JUNE 30, 1996............. 5,423,341 shares (See "Capitalization" and
"Description of Securities.")
SHARES OF COMMON STOCK OUTSTANDING
AFTER THIS OFFERING.......... 5,493,341 (1) (2) (3)
NASDAQ - NMS LISTING......... The Company's Common Stock is listed on the
NASDAQ - National Market System ("NASDAQ-
NMS"). The NASDAQ trading symbol for Common
Stock is HDVS. (See "Market Information.")
(1) Assumes that the outstanding stock options, covering 239,454 shares, are not
exercised (see "Management - Stock Options").
(2) Assumes that 70,000 outstanding Underwriter's Warrants are exercised.
(3) Assumes that the outstanding 250,067 shares of Series A Preferred Stock are
not converted into Common Shares (see "Certain Transactions - Issuance of
Series A Preferred Stock.")
6
<PAGE>
USE OF PROCEEDS
The Company intends to use the proceeds of this offering for certain new
programs in the following areas: Operating Improvements, Marketing Initiatives
and Representative Development Activities (see "Use of Proceeds" and "Business -
New Programs").
RISK FACTORS
An investment in the Company's securities is highly speculative due to the
absence of profitable operations in each of the years ended September 30, 1984,
1986, 1987, 1988, 1989, 1992 and 1994. Since the Company plans to use all
amounts deferred by Representatives pursuant to the Plan (including the proceeds
of this offering) for certain programs (see "Use of Proceeds," "Risk Factors,"
and "Business - New Programs"), the Company may incur losses due to these
expenditures. Also see "Risk Factors" for additional risk factors associated
with an investment in this offering.
MARKET INFORMATION
The Company's Common Stock began trading on the National Market System of
the National Association of Securities Dealers Automated Quotation System
(NASDAQ/NMS) on November 21, 1991 under the symbol HDVS. Prior to November 21,
1991, there was a limited public market for the Company's Common Stock.
The following table sets forth the range of high and low closing bid prices
of the Company's Common Stock as reported by NASDAQ-NMS during the period
indicated. The prices set forth below represent prices between dealers, do not
include retail markups, markdowns or commissions and do not necessarily
represent actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C> <C>
3 Months Ended 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
9/30/93 4.50 4.50
</TABLE>
As of June 30, 1996, there were 794 holders of record of the Company's
Common Stock. As of that same date, the closing bid price for the Common Stock
was $3.13.
7
<PAGE>
RISK FACTORS
THE SECURITIES BEING OFFERED HEREBY ARE HIGHLY SPECULATIVE AND INVOLVE
A HIGH DEGREE OF RISK. BEFORE MAKING AN INVESTMENT IN THE COMPANY, PROSPECTIVE
INVESTORS SHOULD GIVE CAREFUL ATTENTION TO THE FOLLOWING RISK FACTORS INHERENT
IN AND AFFECTING THE BUSINESS OF THE COMPANY.
1. LOSSES DUE TO EXPANSION OF OPERATIONS. The Company incurred losses in
the years ended September 30, 1984, 1986, 1987, 1988, 1989, 1992, and 1994 of
$1,831; $6,576; $1,816,777; $1,085,206; $1,363,832; $3,187,347; and $369,901
respectively. These losses were generated, in part, by recruiting and
Representative development expenditures during expansion of operations in these
periods. The Company plans to continue to devote available capital to these
activities and to operating improvements and marketing initiatives. The Company
expects that losses will be incurred in the future to the extent that available
capital is devoted to these expenditures (see "Use of Proceeds" and "Business -
New Programs"). The Company had Working Capital of $1,012,016 and $1,293,871,
and a Shareholders' Investment of $2,638,895 and $3,940,361 as of September 30,
1994 and September 30, 1995, respectively. The Company had Working Capital of
$799,128 and $3,006,883 and a Shareholders' Investment of $4,232,932 and
$6,244,705 as of June 30, 1995 and June 30, 1996, respectively. (See "Selected
Financial Information.")
2. OBLIGATIONS UNDER THE REPRESENTATIVES DEFERRED COMPENSATION PLAN.
Pursuant to the terms of the Company's Representative Deferred Compensation Plan
the Company will be required to distribute to each participating Representative
all deferred amounts plus matching amounts equal to 30%, 60% or 100% of the
amounts deferred. The Company plans to utilize all deferred amounts for
expenditures under certain programs (see "Use of Proceeds" and "Business") and
will not be reserving any funds for the future obligations under the Plan. To
the extent that cash flow from operations is not sufficient to meet these
obligations, the Company may be unable to meet its future cash payment
obligations under the Plan.
3. TAX TREATMENT. The Company has obtained an opinion from Arthur Andersen
LLP concluding that amounts deferred under the Plan will receive deferred tax
treatment and that such amounts plus Matching Contributions will be taxable as
received during the Distribution Period. This opinion will not be binding on the
Internal Revenue Service ("IRS"). If the IRS were to successfully challenge the
deferred tax treatment, then the individual participants would have to recognize
and report the deferral amounts as income in the year in which they were
deferred. If such an event occurred, the individual participants may be required
to recognize current and prior year tax liabilities related thereto.
4. ECONOMIC TRENDS. Prospective investors should understand that the
Company's revenues are directly affected by regional, national and international
economic and political considerations
8
<PAGE>
and broad trends in business and finance. Low trading volume generally results
in reduced commissions, adversely affecting profitability, since many costs are
either fixed or remain relatively unchanged. As a result of these and other
factors, a number of broker-dealer firms have failed or otherwise ceased doing
business during the past several years. (See "Business.")
5. DEPENDENCE ON KEY PERSONNEL. The Company's success during the
foreseeable future will depend to a great extent on the experience, ability and
continued services of Herb D. Vest and other officers, directors and employees.
If any of these persons should become incapacitated or otherwise unavailable,
the Company would be required to seek a qualified replacement. The Company
maintains a $2.5 million key-man life insurance policy on Herb D. Vest. (See
"Management.")
6. COMPETITION. The financial service industry is intensely competitive.
Many competitors have been in the business for many years and have substantially
greater financial resources than the Company. There is competition from other
broker-dealers for Representatives and the clients of Representatives. These
competitors offer similar products and services to the clients of the
Representatives. Other broker-dealers, financial planners and financial
institutions often have substantially greater resources and may have greater
operating efficiency than the Company. The existence and expansion of other
firms and of firms providing other financial services may adversely effect the
Company. In addition to competition, the Company's operations and its
profitability will depend upon a number of factors beyond the control of the
Company, including the general strength of the economy, legislative and
administrative changes and government regulations and policies. (See
"Competition.")
7. REGULATION. The securities, financial planning and insurance industries
are subject to extensive regulation on both federal and state levels. The SEC
regulates broker-dealers with respect to such matters as net capital
requirements, the holding of customers' credit balances and transactions in
securities. Much of the regulation of broker-dealers has been delegated to self-
regulatory organizations, principally the National Association of Securities
Dealers ("NASD") and the national securities exchanges. Subject to SEC approval,
these self-regulatory organizations ("SRO's") adopt rules by which the SEC
regulates the industry. In addition, the SRO's conduct periodic examinations of
member broker-dealers. The principal purpose of regulation and discipline of
broker-dealers is the protection of customers and the securities markets rather
than the protection of creditors and shareholders of broker-dealers. Failure to
comply with such regulations or with any of the other laws, rules or regulations
of state, federal or industry authorities, primarily the NASD, could result in
censure, fine, suspension or expulsion, all of which would have a materially
adverse effect upon the Company. Financial planning and investment advisory
services are subject to regulation by the SEC on the federal level and most
states have similar regulations. The insurance industry is regulated at the
state level where insurance
9
<PAGE>
laws vary from state to state. (See "Regulation" and "Legal Proceedings.")
8. EFFECT OF NET CAPITAL REQUIREMENTS. The SEC has stringent net capital
requirements applicable to the operation of broker-dealers in securities. A
significant operating loss or any extraordinary charge against net capital would
adversely affect the ability of HDVIS to expand its business or, depending upon
the magnitude of the loss or charge, require HDVIS to suspend activities pending
recovery of net capital. Failure to comply with these requirements would have a
material adverse effect upon the Company. The Securities and Exchange Commission
promulgated new regulations which increased net capital requirements. As a
consequence, H.D. Vest Investment Securities, Inc. had an increase in its
minimum net capital requirements. (See "Regulation.")
9. NO DIVIDENDS. The Company has paid no dividends on its Common Stock
since incorporation and does not anticipate paying dividends on its Common Stock
in the foreseeable future. The Company intends to continue to devote a
substantial portion of its earnings, if any, to the expansion of the
Representative base through which it distributes its services. Investors who
will need dividend income should not purchase these shares. (See "Description of
Securities.")
10. CONTROL BY CURRENT PRINCIPAL SHAREHOLDERS. Assuming the exercise of the
70,000 Underwriter's Warrants for the underlying 70,000 shares of Common Stock
(See "Description of Securities -Warrants"), existing principal shareholders of
the Company will own approximately 75% of the Common Stock then outstanding
(assuming the Class A Preferred Stock is not converted) and will be in a
position to elect all the Company's directors and otherwise control the Company.
11. POTENTIAL FUTURE SALES PURSUANT TO RULE 144. The Company has 5,423,341
shares of Common Stock outstanding, as of June 30, 1996, of which 4,118,754
shares 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 or has not
been an affiliate for the last three months, then the person can sell his shares
without any restrictions applicable to Rule 144 (see "Description of
Securities"). 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 July 1986. Also, Barbara Vest, a
director of the Company owns 1,487,808 shares which
10
<PAGE>
are subject to Rule 144. 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.
12. BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to use
the proceeds from this offering for certain new programs in the areas of
operating improvements, marketing initiatives and Representative development
activities. Accordingly, the Company's management will have broad discretion as
to the application of such proceeds. (See "Use of Proceeds" and "Business.")
13. CONFLICTS OF INTEREST. Herb D. Vest, a principal shareholder and
director of the Company, operates a sole proprietorship, H.D. Vest Insurance
Services ("HDVIns"), to which the Company provides certain management and other
services. To the extent that the Company renders such services to HDVIns for
which it is not compensated, such action could constitute a substantial conflict
of interest. Accordingly, HDVIns could receive an economic benefit which may not
be recognized by the Company. This could result in a direct benefit to Mr. Vest,
the sole proprietor of HDVIns.
14. ETHICS ISSUES AFFECTING CERTIFIED PUBLIC ACCOUNTANTS ("CPAS").
Currently, 29 boards of accountancy have regulations or laws prohibiting CPAs
from receiving commissions for the sale or referral of products or services to
their clients. Since 1988, approximately seventeen states have changed their
rules to allow commission income by CPAs, and several other states have proposed
rule changes. In California and Louisiana, where commissions are prohibited, CPA
Representatives have been challenged by their state regulatory boards. There is
no assurance that the remaining states will change their rules. The growth of
the Company may be materially impacted in the event these rules remain
unchanged. (See "Business - H.D. Vest Representatives.")
15. VOLATILITY OF STOCK PRICE. The stock market has from time to time
experienced significant price and volume fluctuations that may be unrelated to
the operating performance of particular companies. In addition, the Common
Stock, like the stock prices of many publicly traded financial services
companies, has been and may continue to be highly volatile. (See "Market
Information.")
16. INDEPENDENT CONTRACTOR STATUS. H.D. Vest Representatives are
independent contractors, rather than employees of the Company. Based on two
prior Private Letter Rulings, a test has been established to determine what the
Internal Revenue Service considers to be the actual status of such individuals.
There are
11
<PAGE>
pending federal legislative and administrative proposals which, if implemented,
would alter the current test and revise IRS rules in such a way that the
Company's Registered Representatives would be considered employees of the
Company. In this event, the Company could be subject to IRS withholding rules
and required to contribute Federal Social Security and Medicare taxes on each
Representative's behalf. In addition, the Plan may then be subject to the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"). This
could have a significant adverse affect on the Company and its revenues, and
could result in losses.
17. CONVERSION OF SERIES A PREFERRED STOCK. The holders of the Series A
Preferred Stock may at any time convert such shares in an equivalent number of
Common Stock shares. There are currently 250,067 shares of Preferred Stock
outstanding. (See "Certain Transactions - Issuance of Series A Preferred
Stock.")
18. ECONOMIC CONDITIONS. Production for the Company's Representatives is
lower than that of Representatives of other independent broker-dealers.
In understanding this fact, management of the Company believes there are
several factors which should be considered.
o Representatives are primarily accountants/tax professionals that have a
difficult time overcoming the psychological barriers and long held
professional restrictions on selling products to their clients.
o Individuals typically have a full-time job and income when they become
Representatives of the Company. They add financial planning as a part-
time business and are frequently distracted by their ongoing business
which pays their expenses. Therefore, the Company has a significant
challenge of motivation and focus to address with each Representative.
o The Company has lost an average 10% of its Representatives each year
for the last 5 years. The primary reasons for these Representatives
leaving are: 1) transfers to other broker-dealers and 2) non-producers
who have chosen not to stay in the financial planning business.
The Company has identified the following external factors which it believes
have more impact on Representatives' production than any internal factors that
could be controlled by the Company:
o Interest Rates: When interest rates are low clients are searching for
alternatives to their current investments (such as CDs). This puts H.D.
Vest Representatives in the unique position to assist their clients in
choosing alternative investments such as mutual funds.
12
<PAGE>
o Taxes: Tax law changes provide the Representatives with special
roadblocks as well as opportunities. In the face of significant change
most clients are hesitant to make changes in their investments and the
Representative as their accountant is not as likely to pursue this
business as the typical full-time independent Representative.
Opportunities also exist for Representatives that the typical
independent representative does not have. When tax laws change the
accountant is the logical choice for clients to discuss potential
effects on their investments.
o Market Conditions: Fluctuations in inflation and interest rates have a
direct correlation to the investments the public will use in their
search for a higher return. Stock market crashes and corrections
dramatically influence the performance of H.D. Vest Representatives. In
periods of market decline H.D. Vest Representatives are hesitant to
advise their clients regarding investment products.
o Legislation/Regulation: Legislative and regulatory policies and actions
affect the ability of the Company and its Representatives to generate
revenues and control costs. Legislation related to taxes, qualified
plans, insurance, tax credit elimination and the regulation of the
securities, financial planning, accounting and insurance industries are
the issues of most interest to the Company. Many of the laws currently
in place limit the ability of H.D. Vest Representatives to service
their clients effectively and efficiently. Most importantly has been
the CPA commissions compensation issue whereby certain states have
prohibited (via laws and regulations) CPAs from accepting commissions
as a form of compensation. The Company has actively contested these
regulations over the past 10 years. To the extent that these issues are
resolved in the Company's favor, they may have a significant effect on
production per Representative. The Company has developed an alternative
to the commissions compensation issue through the development of the
VestFlex, VestPremiere and VestAdvisor fee-based programs.
o Competition: The Company's Representatives face competition for the
services they provide from the accounting, financial planning, stock
brokerage and insurance industries. The Company's Representatives are
not as aggressive in overcoming this competition which puts them at a
disadvantage.
13
<PAGE>
SELECTED FINANCIAL INFORMATION
The following summary of certain financial information as of June 30, 1996
has been derived from unaudited financial statements of the Company. The
financial information of the Company for the five years ending September 30,
1995 has been derived from the audited financial statements of the Company.
Such information should be read in conjunction with the Consolidated Financial
Statements and the report thereon of Arthur Andersen LLP, independent public
accountants, appearing elsewhere in this document.
SUMMARY OF CONSOLIDATED STATEMENTS OF OPERATIONS:
<TABLE>
<CAPTION>
Nine Months
Ended
Years Ended September 30, June 30
------------------------ -------
1991 1992 1993 1994 1995 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Revenues $20,105,157 $35,532,056 $46,007,817 $50,287,196 $44,670,051 $50,002,766
Net Income (Loss) 921,941 (3,187,347) 2,934,722 (369,901) 1,329,001 2,399,996
Income (Loss)/
Common Share 0.20 (0.63) 0.52 (0.09) 0.22 0.42
Ratio of Earnings to
Fixed Charges or
Coverage 2.69 (8.52) 7.98 (0.05) 4.08 8.72
Deficiency
</TABLE>
SUMMARY OF CONSOLIDATED STATEMENTS OF FINANCIAL POSITION:
<TABLE>
<CAPTION>
As of
As of September 30, June 30,
------------------- --------
1991 1992 1993 1994 1995 1996
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Working Capital $ 900,994 $ 294,033 $2,533,029 $ 1,012,016 $ 1,293,871 $ 3,006,883
Total Assets 5,323,486 8,690,589 9,587,018 12,336,852 11,666,371 15,539,090
Long-Term Debt
and Capital Leases
(net of current
maturities) 862,025 620,900 187,858 543,848 430,739 677,485
Total Liabilities 4,899,598 8,361,445 6,720,687 9,697,957 7,726,010 9,294,385
Shareholders'
Investment 423,888 329,144 3,136,331 2,638,895 3,940,361 6,244,705
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1995, the Company had net working capital of $1,293,871,
an increase of $281,855 from the $1,012,016 of working capital at September 30,
1994. The Company had net working capital of $3,006,883 and $799,128 at June
30, 1996 and 1995, respectively. The increase in working capital at June 30,
1996 is the result of an increase in commission and fee-based revenues.
Management
14
<PAGE>
believes that the increase in revenues is due, in part, to continued strength in
overall financial markets added to the development of training and educational
programs put in place during fiscal year 1995.
The Company's cash flows provided by operations decreased by $755,018 to
$1,019,917 for the year ended September 30, 1995 compared to the year ended
September 30, 1994. The decrease in cash provided by operations is primarily
due to: (i) a decrease in amounts due on clearing transactions resulting from
regulatory changes that reduced from five business days to three business days
the time that funds may be remitted on investment trades and (ii) continuing
payments on severance agreements with former officers. The Company's cash flows
provided by operations increased to $3,307,303 for the nine months ended June
30, 1996, compared to $517,593 during the nine months ended June 30, 1995. The
increase in cash provided by operations for the period is primarily the result
of an increase in commission and fee based revenues.
Cash used for investing activities of $485,804 and $934,010 for the years
ended September 30, 1995 and 1994, respectively, includes costs of $95,145 and
$407,299 incurred for furniture, fixtures and computer equipment for those same
years, respectively. The $390,659 of funds used for investing activities for
the purchase of other assets during the year ended September 30, 1995 includes
costs incurred for software development, designed to improve the productivity of
the Company's Representatives, and costs related to the formation of the
Deferred Compensation Plan. The cash used for investing activities for the
purchase of property and equipment for the nine months ended June 30, 1996 and
1995 were $168,768 and $69,076, respectively. For the nine months ended June
30, 1996, the Company invested $66,321 in other assets for software development
activities. The additions to other assets of $442,260 during the nine months
ended June 30, 1995 included the increase in miscellaneous deposits and assets,
development of training programs for Representatives and software development
costs.
Cash used for financing activities of $1,344,293 during the fiscal year
ended September 30, 1995 included net advances on the lines of credit with Mr.
Vest of $879,290 in principal and $163,145 of accrued and unpaid interest, net
payments from Ms. Vest of $53,884 in principal and $1,754 of accrued and unpaid
interest, and payments for capital lease obligations and preferred stock
dividends. Cash used for financing activities of $1,872,119 during the fiscal
year ended September 30, 1994 included net advances on the lines of credit with
Mr. Vest of $1,120,710 in principal and $23,210 of accrued and unpaid interest
and with Ms. Vest of $350,000 in principal and $9,561 of accrued and unpaid
interest, payments for capital lease obligations and preferred stock dividends.
Cash used for financing activities of $551,293 during the nine months ended June
30, 1996, included payments by Mr. Vest on his line of credit, including
principal and interest, of $512,447, advances and accrued interest on his line
of credit of $457,061, payments by Ms. Vest on her line of credit including
principal and interest of $52,948, advances and accrued interest on
15
<PAGE>
her line of credit of $209,609, payments on capital lease obligations of
$354,366 and preferred stock dividends of $95,652. Cash used for financing
activities of $1,136,163 during the nine months ended June 30, 1995 included
payments for capital lease obligations, preferred stock dividends and net
advances on the lines of credit with Mr. Vest and Ms. Vest.
The Company's historical growth has been financed from inception via loans,
private placements of preferred and common stock, public offerings of common
stock and cash flows from operations. For the period from inception through
June 30, 1996, amounts from these sources have been approximately $2.5 million,
$2.6 million, $5.1 million and $6.7 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 June 30, 1996 approximately $480,777 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.
In fiscal 1996, the Company intends to continue to devote available
resources to new programs in the areas of operating improvements, computer
programs, marketing initiatives and Representative development activities
designed to improve the productivity of the Company's Representatives.
The Company does not intend to reserve any funds for future obligations
under the Plan. To the extent that cash flow from operations is not sufficient
to meet these obligations, the Company may be unable to meet its future cash
payment obligations under the Plan. (See "Risk Factors" - Obligations Under the
Representatives Deferred Compensation Plan.")
The Company continually monitors the capital markets for opportunities to
obtain financing to meet its growth needs. Historically, the Company has
significantly increased its recruiting and development activities upon obtaining
such financing. The Company must expense all costs related to these activities.
Additionally, in periods of extensive recruiting and development activities, the
Company has experienced higher general
16
<PAGE>
and administrative costs as overhead has increased to support the recruiting and
development activities. Consequently, the Company has generated substantial net
losses subsequent to obtaining financing needed to fund further growth. Should
the Company obtain future financing to fund its growth plans, it is likely the
Company would generate net losses in the period subsequent to obtaining such
financing.
This offering is being made in connection with the H.D. Vest Representative
Deferred Compensation Plan as further described in "Plan of Distribution -
Representatives Deferred Compensation Plan." 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.
Representatives may elect to defer Compensation for 36 month, 60 month or 84
month Deferral Periods for which the Company will match the deferred amounts
with additional cash contributions equal to 30%, 60% or 100% of the Deferral
Amount, respectively.
For financial reporting purposes, the Company must recognize Matching
Contributions of amounts deferred under the Plan as additional commission
expense ratably from the period deferred until the Representative is paid the
Deferral Amount and Matching Contribution. Deferral Amounts and Matching
Contributions are general unsecured obligations of the Company and will be paid
in cash.
RESULTS OF OPERATIONS
REVENUES - 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 were negatively impacted by interest rates
which made interest-bearing investments attractive to investors. Additionally,
the Company has begun to place increased emphasis on its fee-based business. As
Representatives switch their investment strategies for their clients from front-
end sales charge investments (i.e. mutual funds) to fee-based investments,
commission revenue will be replaced by portfolio management fees. In the short
term, the decrease in commission revenue will be greater than the increase in
portfolio management fees. However, portfolio management fees will be earned
annually on client funds that remain invested in fee-based programs, compared to
a one-time front-end sales charge on mutual fund investments. The Company's
revenues for the years ended September 30, 1994 and 1993, were $50,287,196 and
$46,007,817, respectively, a 9% and 30% increase over the years ended September
30, 1993 and 1992, respectively. Revenues for the nine months ended June 30,
1996, were $50,002,766, a 54% increase over the nine months ended June 30, 1995.
The Company 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 put in place during fiscal year 1995.
17
<PAGE>
Commission revenue as a percentage of gross product sales have declined
from approximately 4% in 1986 to approximately 3% in 1995. This decline is due
to an industry-wide reduction in commissions on mutual funds and unit investment
trusts. These products comprise a majority of the revenues generated by HDVIS,
the Company's main operating subsidiary. To the extent that these commissions
continue to decline, HDVIS must increase the volume of products sold to maintain
historical commission revenue levels.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company has devoted significant resources to further
development of its fee-based programs. Portfolio management fees from these
programs were $3,219,574 for the year ended September 30, 1995, a 92% increase
over the year ended September 30, 1994. Portfolio fee revenues for the years
ended September 30, 1994 and 1993, were $1,680,889 and $791,764, respectively, a
112% increase and 2% decrease over the years ended September 30, 1993 and 1992,
respectively. Portfolio management fees were $4,492,486 for the nine months
ended June 30, 1996, a 101% increase over the nine months ended June 30, 1995.
The reasons for changes in the Company's revenues in the years ended
September 30, 1993, 1994, and 1995 and the nine months ended June 30, 1996 are
summarized in the following table:
<TABLE>
<CAPTION>
% Change for the Periods Ended
as compared to Prior Year Comparable
------------------------------------
Periods
-------
Nine
Years ended months ended
September 30, June 30,
-------------- --------
Source of Revenue 1993 1994 1995 1996
- ------------------ ---- ---- ---- ----
<S> <C> <C> <C> <C>
Mutual Fund and UITs (1) +29% +4% -17% +54%
Variable Insurance Products (2) +43% +42% +10% +77%
Limited Partnership Interests (3) -56% -14% -29% -29%
Stocks, Bonds and Options (4) +72% +14% -15% +53%
Investment Advisory and Portfolio
Management Fees (5) -2% +112% +92% +101%
Facility and Service Fees (6) +43% -1% +75% -38%
Marketing and Educational Fees (7) +62% +22% -11% +25%
Other (8) +11% +9% -46% -20%
</TABLE>
(1) Revenues have increased in 1993, 1994, and 1996 due to increases in
product sales resulting from the growth in the number of Representatives
and the training programs provided by the Company. Revenues in 1995 have
decreased due to rising interest rates which have made interest-bearing
investments attractive to investors.
18
<PAGE>
(2) Revenues have increased due to the increase in the number of
Representatives licensed to offer this product and market conditions which
have made this product a better investment.
(3) Revenues decreased due to a decline in demand for this type of product due
to changes in tax laws and the economic viability of these products.
(4) Revenues have increased in 1993, 1994, and 1996 due to increases in product
sales resulting from the growth in the number of Representatives and the
training programs provided by the Company. Revenues in 1995 have decreased
due to rising interest rates which have made interest-bearing investments
attractive to investors.
(5) Revenues increased during 1994, 1995, and 1996 due in part to the increase
in the number of Representatives licensed to offer this product and the
development of additional fee-based services. During 1993 several accounts
were transferred to a competing investment company started by a former
officer of the Company. The division has continued to grow with the
addition of new accounts and new services; VestFlex and VestAdvisor
Investment Programs. During 1994, 1995, and 1996 the Company has devoted
significant resources to further develop these fee-based programs.
(6) Facility and Service Fees decreased in 1994 and 1996 due to a decrease in
the resources available to support this product line. Fees in 1993 and
1995 increased due to the allocation of more resources used to support this
product line.
(7) Revenues in 1993, 1994 and 1996 increased due to the increases in sales and
the expansion of the educational programs and seminars provided by the
Company. Product sponsors assist in the funding of our educational
services. Revenues in 1995 decreased as a direct result of a sluggish
market, which reduced the receipts from sponsors.
(8) Effective November 15, 1989, the Company began charging a transaction fee
of $10.50 for each transaction processed by the Company, subject to certain
limitations. This policy was discontinued in the first quarter of fiscal
year 1995. Transaction fees for the year ended September 30, 1993, 1994,
and 1995 were $775,735, $845,436, and $64,586, respectively.
During 1995, the Company developed programs designed to increase future
revenues. These programs continue in 1996 to be the emphasis of the Company.
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
19
<PAGE>
Representative. The RSS program is built around Foundation Teams (for
Representatives seeking to achieve $25,000 in rolling 12-month gross revenues),
Chapters (which are similar to the Foundation Teams except that they are held in
larger workshop formats) and Summit Teams (for Representatives above the $25,000
rolling 12-month gross revenue threshold). Each month 110 Chapter and 52
Foundation team meetings are held nationwide.
Total Client Commitment (TCC) - The TCC program reflects the Company's
-----------------------------
belief that H.D. Vest Representatives have a continuing obligation to provide
comprehensive, knowledge-based services to their clients in a professional and
ethical manner. To support the Representatives in fulfilling this obligation,
the Company is providing a wide range of educational tools including
newsletters, audiotapes, direct marketing programs and success training.
Additional programs include Client Appreciation Week, Client Service Awards, and
the H.D. Vest Merit Scholarship program for children of H.D. Vest investment
clients.
Partners for Success (PfS) - The PfS program offers successful H.D. Vest
--------------------------
Representatives the opportunity to work with low-producing Representatives to
generate a new source of revenue, while providing the low-producing
Representatives the opportunity to increase their revenue stream with little
effort, time or money.
The Rep Desktop - The Rep Desktop program is designed to provide H.D. Vest
---------------
Representatives with an innovative and integrated office management system. Key
components of the program rolled out through September 30, 1995 include an
automated contact management system and new Representative communication system
which will be the cornerstones of the new Rep Desktop. During fiscal 1996, the
Company's efforts have centered around client investment monitoring and
consolidated client investment reporting.
NET INCOME (LOSS) - Net income for the year ended September 30, 1995 was
-----------------
$1,329,001 compared to a net loss of $(369,901) and net income of $2,934,722 for
the years ended September 30, 1994 and 1993, respectively. Net income for the
nine months ended June 30, 1996, was $2,399,996, an increase of $780,307
compared to net income of $1,619,689 for the nine months ended June 30, 1995.
Net income for the nine month period ended June 30, 1996, rose substantially
from the comparable period ended June 30, 1995, as the incremental increase in
revenues (net of any related commissions) offset the increases in general and
administrative and Representative development expenses. The increase in
operating expenses is partially attributable to additional staffing required to
support current and anticipated transaction volume and Company incentive
compensation programs.
General and administrative expenses for the year ended September 30, 1995,
were $10,810,892, a decrease of $2,893,060 from the prior year total of
$13,703,952. General and administrative expenses for the year ended September
30, 1994 increased by $2,857,819 from the $10,846,133 reported at September 30,
1993. As revenues decline during the year, the Company was able to reduce
20
<PAGE>
certain expenses to maintain profitability. Additionally, the reduction for
fiscal 1995 is partially a result of a credit to expense of $381,331 related to
the cancellation of an officer's severance agreement. The increase in fiscal
1994 was primarily the result of severance agreements with the former officers,
professional fees, settlement charges related to litigation with two former
officers and accrued expenses related to a case involving questionable trading
practices of a former Representative (see Note 4 "Commitments and Contingencies"
to the consolidated financial statements). General and administrative expenses
increased by $2,939,322 to $10,548,409 for the nine months ended June 30, 1996,
compared to the same period for the prior year. This increase is due to amounts
accrued under incentive compensation plans for executive officers, senior
managers, and employees, current year management fees to Mr. Vest, and
additional administrative and operational staff to support current and projected
operating levels.
Representative development costs for the year ended September 30, 1995,
were $4,526,637, a decrease of $411,490 from the prior year. Representative
development costs for the year ended September 30, 1994 were $4,938,127, a
$1,648,299 increase over the $3,289,828 of development costs for the year ended
September 30, 1993. The decrease in development costs for 1995 is generally due
to reduced levels of variable and controllable expenses consistent with the
current year revenue decrease. However, Representative development costs have
not decreased at the same rate as other expense categories, because continued
training and development of Representatives must continue to be emphasized (i)
even in down markets to mitigate the revenue impact of the down market and (ii)
to ensure that appropriate training and educational materials are made available
to Representatives as financial planning techniques and investment products
proliferate and become more complicated. Representative development costs for
the nine months ended June 30, 1996, were $4,817,554, a 46% increase over
development costs of $3,300,550 for the nine months ended June 30, 1995. This
increase in Representative development costs is the result of programs developed
to educate the Company's Representatives as well as the expansion of staff
necessary to support participation in these programs.
Representative recruiting costs for the year ended September 30, 1995 were
$398,837, a decrease of $120,339 from the prior year. Representative recruiting
costs for the year ended September 30, 1994, were $519,176, an increase of
$204,771 over the expense of $314,405 for the year ended September 30, 1993. The
decrease in recruiting costs for fiscal 1995 is related to the curtailment of
direct mailing activities of the Company. Recruiting activities for fiscal 1995
and 1994 focused on the use of a referral program through which existing
Representatives received incentives for recruiting new Representatives and the
newly implemented RSS program. The increase in fiscal 1994 was the result of an
increased use of direct mail to find prospective Representatives. Representative
recruiting costs for the nine months ended June 30, 1996 were $496,502 a 74%
increase compared to recruiting costs of
21
<PAGE>
$285,514 for the nine months ended June 30, 1995. This increase in recruiting
costs is the result of an increase in direct mail and other recruiting methods
used to find prospective Representatives. To the extent that the Company decides
in the future to devote significant resources to rapidly expand its
Representative base through aggressive recruiting activities, future
profitability would likely be negatively impacted.
Currently, most state boards have regulations prohibiting CPAs from
receiving commissions for the sale or referral of products or services to their
clients. Since 1988, approximately seventeen states have changed their rules to
allow commission income by CPAs, and several other states have proposed rule
changes. In California and Louisiana, where commissions are prohibited, CPA
Representatives have been challenged by their state regulatory boards. The
Company has chosen to vigorously support these Representatives. In Louisiana, a
state court found in favor of the state board, but this case is continuing to be
litigated in federal court. The California litigation has not reached trial. The
Company incurred legal costs of approximately $464,000, $573,000 and $156,000
for the years ended September 30, 1993, 1994 and 1995, respectively, to support
these Representatives. The Company incurred legal costs of approximately
$185,000 for the nine months ended June 30, 1996.
The Company plans to use the proceeds from the Deferred Compensation Plan,
as well as cash from operations, to undertake several new programs in the coming
years in an effort to improve the productivity of its Representatives and the
efficiency of the Company's corporate support staff. Such new programs will be
implemented at the discretion of the Company and only to the extent that funding
is available. To the extent that the Company decides to devote significant
resources to these programs, future profitability could be negatively impacted.
USE OF PROCEEDS
The net proceeds to be realized by the Company from the sale of Units
consist of an estimated $7,000,000 in Cash Equivalents. Deferrals by a
Representative pursuant to the Plan shall be made as such Compensation is
earned. Accordingly, the amount attributed to Cash Equivalents will be received
by the Company over an extended period of time. The Company anticipates that the
net proceeds of the offering will be used for certain new programs in the
following areas: (i) operating improvements, (ii) marketing initiatives and
(iii) Representative development activities (see "Business - New Programs"). As
of June 30, 1996, the Company's Representatives had deferred $480,777 pursuant
to the Plan.
The following table represents the Company's estimate of the allocation of
the estimated proceeds of this offering that will be received over an extended
period of time. The Company may find it necessary or desirable to reallocate the
net proceeds among the described categories if its expectations regarding
general economic
22
<PAGE>
conditions and conditions in the financial services industry should change (see
"Business - New Programs"). If attractive opportunities become available, or if
circumstances indicate that it is imprudent or impractical to follow the
following estimated allocations, the Company may use portions of the proceeds
for other uses which may not be presently identifiable.
<TABLE>
<CAPTION>
Approximate Percent
Dollar Amount(1) of Net
---------------- --------
<S> <C> <C>
Operating Improvements (2) $2,800,000 40%
Marketing Initiatives (2) 2,100,000 30%
Representative Development
Activities (1) 2,100,000 30%
---------- ---
$7,000,000 100%
========== ====
</TABLE>
(1) The estimate by the Company is that Representatives will defer $7,000,000
as Cash Equivalents over an extended period of time.
(2) See "Business - New Programs"
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1996:
<TABLE>
<CAPTION>
Further Adjusted
Actual at for Deferral of
June 30, 1996 Cash Equivalents (2)
-------------- ---------------------
<S> <C> <C>
Long Term Debt: $ 480,777 $1,480,777
Shareholders' investment:
Preferred stock, $6 par value,
10,000,000 shares
authorized; 250,067 issued 1,500,402 1,500,402
Common stock, $.05 par value,
100,000,000 shares authorized;
5,423,341 outstanding (1) 271,167 274,667
Additional paid-in capital 5,080,834 5,328,834
Accumulated deficit (607,698) (607,698)
---------- ----------
Total shareholders' investment 6,244,705 6,496,205
---------- ----------
Total Capitalization $6,725,482 $7,976,982
========== ==========
</TABLE>
(1) Does not include up to 800,000 shares reserved for stock options (see
"Management - Stock Options").
(2) Assumes $1,000,000 of deferred compensation during the next twelve months
and $7,000,000 over the life of the Plan.
23
<PAGE>
BUSINESS
The Company conducts it business under its corporate name, H.D. Vest, Inc.,
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 are provided by the Company and/or its
subsidiaries as follows and are discussed in more detail on the pages that
follow:
H.D. VEST, INC. (THE "COMPANY") --
Technical and Sales Support Services
Regional Support System
Educational Services
Representative Recruiting
Representative Development
Representative Systems
Insurance Agency Management
H.D. VEST INVESTMENT SECURITIES, INC. ("HDVIS") --
Investment Services
Trading and Customer Service
Representative Licensing
Compliance and Due Diligence Services
H.D. VEST ADVISORY SERVICES, INC. ("HDVAS") --
Professional Investment Advisory Services
H.D. VEST MORTGAGE SERVICES, INC. ("HDVMS") --
Inactive Subsidiary
H.D. VEST COLLATERAL MANAGEMENT COMPANY ("HDVCMC") --
Inactive Subsidiary
H.D. VEST BUSINESS VALUATION SERVICES, INC. ("HDVBVS") --
Inactive Subsidiary
The financial services industry is subject to extensive regulation on both
federal and state levels, with which the Company and its subsidiaries must
comply (see "Regulation"). HDVIS and HDVAS must maintain current registration
with the applicable regulatory bodies.
At June 30, 1996, the Company's distribution network consists of
approximately 4,569 fully licensed Representatives, and approximately 315 at
various stages of the licensing process.
24
<PAGE>
H.D. VEST REGISTERED REPRESENTATIVE
DISTRIBUTION BY STATE AS OF JUNE 30, 1996
The following illustrates the geographic location of the Company's
approximately 4,569 fully-licensed Representatives.
<TABLE>
<S> <C> <C> <C>
Alabama 23 Montana 11
Alaska 5 Nebraska 12
Arizona 141 Nevada 20
Arkansas 24 New Hampshire 19
California 628 New Jersey 141
Colorado 120 New Mexico 11
Connecticut 37 New York 249
Delaware 12 North Carolina 75
District of Columbia 11 North Dakota 12
Florida 272 Ohio 193
Georgia 88 Oklahoma 143
Hawaii 6 Oregon 28
Idaho 8 Pennsylvania 198
Illinois 182 Puerto Rico 1
Indiana 62 Rhode Island 12
Iowa 32 South Carolina 15
Kansas 37 South Dakota 7
Kentucky 25 Tennessee 39
Louisiana 85 Texas 779
Maine 22 Utah 34
Maryland 89 Vermont 19
Massachusetts 117 Virginia 70
Michigan 99 Washington 56
Minnesota 67 West Virginia 12
Mississippi 28 Wisconsin 104
Missouri 78 Wyoming 11
-----
Total 4,569
=====
</TABLE>
25
<PAGE>
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, Certified Cash Managers, Chartered Pension
Consultants, Enrolled Agents, Certified Management Accountants, American
Institute of Certified Public Accountants-Accredited Personal Financial
Specialists, Lawyers and Pension and Executive Compensation Certificate
recipients. Through their capacity as consultants and instructors, these
financial professionals are dedicated to provide financial planning and product
information to H.D. Vest Representatives.
The Company has developed financial planning services needed by American
families and businesses in these areas:
O INVESTMENT PLANNING AND PRODUCT SELECTION -- Assistance in the
selection of the types of investments suitable to meet the objectives
of the client.
O RETIREMENT PLANNING -- Assistance in determining objectives to meet
future retirement needs of clients.
O EDUCATION PLANNING -- Assistance in determining objectives to ensure
adequate funding will be available for the education of the client's
children.
O EMPLOYEE BENEFITS -- Assistance to businesses in developing employee
benefits programs.
O TAX PLANNING -- Assistance in reducing tax liabilities through proper
investment and risk management.
O PORTFOLIO MANAGEMENT -- Assistance in the selection of money managers
and the allocation of assets for optimal portfolio results.
O RISK MANAGEMENT -- Assistance in determining insurance needs.
O QUALIFIED PLANS -- Assistance to businesses in establishing, funding
and maintaining qualified retirement plans.
O BUSINESS PLANS -- Assistance to businesses in the areas of financing,
cash management and risk management and Buy-Sell agreements.
O ESTATE PLANNING -- Assistance in planning for the eventual
distribution of a client's estate, focusing on reducing tax
liabilities at the time of distribution.
26
<PAGE>
REGIONAL SUPPORT SYSTEM
The Company has developed a local support system designed to provide
Representatives assistance in all aspects of financial planning including sales
and marketing training, time management, practice management, financial
products, and case studies. The Regional Support System (RSS) also provides a
network for Representatives to consult with each other and analyze actual client
situations. This system operates on the philosophy that the Representatives
will learn from other Representatives who have successfully added financial
planning services to their practice.
Each RSS group is led by a successful H.D. Vest Representative. This
Representative has met specific criteria and attended extensive training before
assuming this important role in the training of fellow H.D. Vest
Representatives. The Regional Support System is made up of Foundations,
Chapters and Summit teams.
FOUNDATIONS - Foundations teams are designed for Representatives who are
willing to commit to a 12-month individualized intensive training program.
The Foundation teams were created for those Representatives who want to
integrate financial planning into their 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 area. Chapters provide local H.D. Vest
Representatives six monthly standardized workshop programs between the
months of June and December. Each Chapter is made up of approximately
thirty Representatives.
SUMMIT - All Representatives with 12-month rolling gross revenues greater
than $25,000 are members of a Summit team. Monthly Summit meetings give
Representatives the opportunity to network and share ideas with each other.
In addition, all Summit members will have the opportunity to attend
regional conferences designed specifically for the more advanced technical
needs of higher producing Representatives.
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.
27
<PAGE>
REPRESENTATIVE RECRUITING
The Company recruits Representatives for its wholly-owned subsidiaries
HDVIS and HDVAS. Since its inception, the Company has developed a recruiting
process which the Company believes results in a larger network for distribution
of financial products. Based on its experience in this area, the Company plans
to use the methods that have been proven to be the most effective in the past in
order to gain market share. These methods include the following:
1. DIRECT MAIL. The Company has developed a database with over 300,000
tax and accounting professionals. Specially designed marketing letters are more
successful from each mailing when strategically and consistently used. Each
respondent receives an H.D. Vest information package ("Opportunity Package"),
follow-up calls, and invitations to recruiting seminars and H.D. Vest
conferences.
2. RECRUITING SEMINARS. The Company holds seminars (qualified for CPE)
designed to promote the benefits of adding financial planning services to the
tax professional's practice. These seminars also teach the tax professional how
to select a financial services support firm.
3. TELEMARKETING. Once contact has been made with an interested
professional via the Company's direct mail efforts, the recruiting staff follows
up by phone. The recruiting staff has been very effective in its follow-up
efforts utilizing its proprietary follow-up system.
4. TRADE SHOWS. The Company regularly exhibits at numerous national
seminars and training events held for tax professionals.
5. REFERRAL INCENTIVE PROGRAMS. The Company offers its current
Representatives, who refer their colleagues to the Company, override
compensation for their efforts in this area.
6. TRADE PUBLICATION ADVERTISING. The Company periodically places
advertisements to industry publications and other publications read by tax
professionals.
7. EDUCATIONAL EVENTS. Accounting and tax professionals are continually
invited to attend the Company's comprehensive financial planning seminars.
Participants receive continuing education credit, which provides the tax
professional additional incentive to attend.
8. REGIONAL OFFICES. The Company intends to open local support offices
on a regional basis as the size of the Representative base and the number of
Regional Support System Representatives increases. To date, the effectiveness
of local support offices has not been proven.
28
<PAGE>
REPRESENTATIVE DEVELOPMENT
The Representative Development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional available.
The Company has made a significant investment in the development of programs to
ensure that new recruits and veteran Representatives of the Company are provided
with a high level of training to keep them apprised of financial opportunities
for their clients.
The Company requires its Representatives to obtain specific licenses,
complete training programs, and follow prescribed procedures in adding financial
planning services to their practice.
The Company offers the following training and marketing support to assist
its Representatives:
1. SOFTWARE SUPPORT. The Company provides its Representatives with
computer software programs to assist them in the financial planning process.
These currently include an asset allocation program based on the Company's study
of how asset classes historically perform under varying economic scenarios and a
tax analysis program which recommends specific areas that need review based on
the client's Internal Revenue Service Form 1040. Each program is designed to
help the Representative with the implementation of financial planning products.
2. EDUCATIONAL EVENTS. The Educational Services Division of the Company
continually improves and develops new training and educational materials to keep
up with the industry and to meet the needs of its Representatives. The
educational events developed by the Company are as follows:
o RSS MEETINGS - During the educational season (from June through
------------
December), monthly hands-on training sessions are held in major
metropolitan cities. These meetings provide Representatives with
training in technical issues, products and sales ideas. A total of
600 RSS group meetings were held in 110 cities throughout the United
States in fiscal 1995, with 1,100 RSS group meetings planned for
fiscal 1996.
o 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.
o NATIONAL CONFERENCES - H.D.Vest holds two major training conferences
--------------------
per year. The Vest Fest is held in the spring and the Annual National
Conference is held in the winter.
3. MARKETING SYSTEM. Based on research results, the Company has
developed a step-by-step marketing system which provides new
29
<PAGE>
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:
o 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
o 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.
o 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.
o NEWSLETTERS. Representative newsletters are provided monthly.
Representatives may also subscribe to a syndicated column service.
o REGIONAL SUPPORT SYSTEM. Experienced Representatives assist new
Representatives in the educational and developmental process on a
local level to increase product sales.
o SPONSOR SUPPORT. Key sponsors provide local and regional support to
Representatives, as well as supporting the Company's educational
events.
o PARTNERS FOR SUCCESS. The Partners for Success program links the
Company's most successful Representatives with their peers who are
unable to market investment services. This provides a new source of
prospective clients for the most proactive and successful
Representatives and enables the Company to capitalize on the
opportunity represented by clients whose needs are currently untapped
by their primary Representatives.
30
<PAGE>
REPRESENTATIVE SYSTEMS
The Information Services Division provides computer systems for both the
Company and its Representatives. The division is responsible for developing and
writing all of the programs and hardware that supports the Company's operations.
Information Services is developing a Representative Desktop which is intended to
provide H.D. Vest Representatives with an integrated office management system.
Currently, the Company offers the Representatives computer software programs to
assist them with the implementation of financial planning products. The
Information Services Division intends to continue development of both the
Company's operating system and the Representative Desktop in fiscal 1996.
INSURANCE AGENCY MANAGEMENT SERVICES
The Company provides management services to an affiliated insurance agency,
H.D. Vest Insurance Services ("HDVIns"). HDVIns represents a diversified
spectrum of national insurance companies offering life, health, disability,
long-term care, and variable and fixed annuity products for both individuals and
businesses. Representatives of the Company are licensed through HDVIns to sell
insurance products. These Representatives are paid a commission on such sales
by HDVIns. The Company does not receive any portion of these commissions;
however, a facility and service fee is received for management and other
services rendered by the Company.
INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc. ("HDVIS") is registered as a broker-
dealer in all 50 states, the District of Columbia and the 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 ("NASD"), the
Securities Investor Protection Corporation ("SIPC") and the Securities Industry
Association ("SIA").
TRADING AND CUSTOMER SERVICES
Trading and customer services are provided by the Company to its
Representatives on an ongoing basis. The Company's trading room processes
thousands of investment trades in mutual funds, direct investments, unit
investment trusts, and individual securities. In addition, the H.D. Vest
Discount Brokerage Service allows investors to buy and sell individual
securities at discounted commission rates. Through the Customer Service
Department, regular statements concerning investment balances and status are
processed and distributed to allow Representatives and their clients to monitor
investments.
31
<PAGE>
The following table summarizes the number of securities transactions
processed by the Company:
<TABLE>
<CAPTION>
Years ended September 30, Nine months ended
------------------------- -----------------
1993 1994 1995 June 30, 1996
---- ---- ---- -------------
<S> <C> <C> <C>
1,323,715 1,928,779 2,351,346 2,109,830
</TABLE>
Customer accounts for trading of stocks and bonds are cleared on a fully
disclosed basis through National Financial Services Corporation, 161 Devonshire
Street, Mail Stop D6, Boston, Massachusetts 02110. National Financial Services
Corporation, as the clearing agent for HDVIS, reflects all stock, bond and
option transactions of HDVIS customers on its own books. Mutual funds and
direct participation programs are handled directly with the product
distributors.
REPRESENTATIVE LICENSING
The Company provides step-by-step assistance to Representatives in
obtaining their securities, insurance and Registered Investment Advisor
licenses, including educational programs for exams and complete administrative
processing with the National Association of Securities Dealers ("NASD"), the
securities licensing agent, and the state agencies that supervise insurance
licensing.
COMPLIANCE AND DUE DILIGENCE SERVICES
The Company requires that all Representatives follow the Company's
Professional Code of Ethics and Compliance and Supervisory Procedures. To that
end, the Company's Compliance Department is responsible for Representatives'
compliance with rules of the regulatory bodies that supervise the financial
services industry. Due to the strict regulation of the financial services
industry by federal and state agencies, it is important that the Company keep
abreast of the activities of its Representatives and internal staff. The
Company's Compliance Department supervises the activities of all
Representatives.
PROFESSIONAL INVESTMENT ADVISORY SERVICES
H.D. Vest Advisory Services, Inc. ("HDVAS") conducts all of the investment
advisory activities of the Company. HDVAS, formed in 1987 as a Texas
corporation, is registered as an investment advisor with the Securities and
Exchange Commission and various state regulatory agencies as well as a member of
the Investment Company Institute. The Company's Representatives can register as
Investment Advisor Representatives under HDVAS, giving them the capability of
providing fee-based financial planning services to their clients. As of June
30, 1996, there were approximately 1,652 Representatives registered with HDVAS.
32
<PAGE>
The VestPremiere Investment Program is a fee-based service of HDVAS. This
service, designed for investors 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 Analysts, Chartered Financial
Analysts, Certified Financial Planners, Chartered Financial Consultants, and
American Institute of Certified Public Accountants-Accredited Personal Financial
Specialists, this service helps investors in the asset allocation decision and
in choosing the proper money managers to manage various portions of their
investment portfolios. A quarterly report is provided to each client detailing
investment performance. As of June 30, 1996, there were approximately 925
client accounts utilizing the services of the VestPremiere Investment Program.
The VestFlex Investment Program is a service introduced by HDVAS during
July 1993. The program is designed to provide clients with 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 June 30, 1996, there were approximately 2,243
client accounts in the VestFlex Investment Program.
In October 1995, the Company began its VestAdvisor Investment Program.
This program accommodates clients with a minimum of $25,000 of current
investment 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 June 30, 1996, there were approximately 450 client accounts in the
VestAdvisor Investment Program.
SEASONALITY
As a result of the Company's Representatives consisting primarily of tax
professionals, a majority of the Company's revenues (approximately 51% in fiscal
1995) are generated during tax season (December through May). Tax season is the
time of year that the Company's Representatives have the most contact with the
greatest number of clients.
H.D. VEST REPRESENTATIVES
The Company's Representatives are highly educated and client-needs
oriented. Each professional associated with the Company adheres to rigorous
appropriate ethical standards, regulatory, and educational requirements and is
not required to maintain a quota. Representatives include Certified Public
Accountants, Enrolled
33
<PAGE>
Agents, Certified Financial Planners, Accredited Personal Financial Specialist,
attorneys, and public accountants who maintain independent offices throughout
the United States. Additional educational materials, a comprehensive program of
educational seminars, and a highly trained staff of technical specialists
complement the tax and financial professional's already in-depth knowledge base.
The Company is dedicated to ensuring that professionals associated with it
maintain the highest standards of conduct and excellence of professional
service. Therefore, the Company insists that all professionals associated with
it uphold appropriate ethical standards.
The HDVIS Representative base consists primarily of tax professionals
throughout the United States who are integrating financial planning
implementation services with their fee-based tax practices. Of the approximate
4,884 Representatives associated with the Company on June 30, 1996, 4,569
persons were fully licensed and registered, and approximately 315 persons were
in various stages of the licensing process. These figures have increased from
525 Representatives associated with the Company on December 31, 1986.
Historically, the Company has experienced attrition rates of 2% of mature
Representatives (those registered with the Company more than one year) and 22%
of new Representatives (those registered with the Company less than one year).
This attrition rate includes voluntary and involuntary terminations made by the
Company.
The Company's 4,884 Representatives consist of tax and financial
professionals, including CPAs which account for approximately 33% of the
Company's 4,884 Representatives. Currently, 29 states have rules prohibiting
CPAs from receiving commissions for the sale or referral of products or services
to their clients. Since 1988, the American Institute of Certified Public
Accountants and approximately seventeen states have changed their rules to allow
commission income by CPAs (prior to 1988, four states already permitted
commission income by CPAs). The Company is not aware of any plans by the states
allowing commissions to prohibit this form of income by CPAs.
NEW PROGRAMS
The Company plans to use the proceeds of this offering as well as cash
amounts deferred under the Plan to undertake several new programs in the coming
years in an effort to improve the productivity of its Representatives and the
efficiency of the Company's corporate support staff. Such new programs will be
implemented at the discretion of the Company.
OPERATIONAL IMPROVEMENTS. The Company is competing in an industry that is
- ------------------------
rapidly changing. In order to effectively respond to the competition, the
Company and its corporate support staff and Representatives must evolve to meet
these demands. The Company's
34
<PAGE>
goal is to provide its staff with the training opportunities and the systems
support to meet this challenge.
1. STAFF TRAINING. In order to achieve this goal the Company must
continually assess and enhance its employees' skills and effectiveness. With
the changes in the financial services industry, the Company's staff must learn
new skills that will make it more adaptable and flexible. In order to ensure
that the Company's staff is ready to meet the challenges afforded by working for
a growth company in a fast-paced industry, the Company will develop a
comprehensive training and continuing education curriculum. Various training
media will be utilized for the delivery of the training programs, including
audio, video, self-study and computer-based training.
2. CORPORATE INTEGRATED SYSTEMS. In order to stay competitive in the
financial services industry, the Company must vastly improve its systems'
capabilities. Because of the labor intensive nature of the Company's business
caused by increases in regulatory paperwork and disclosure and pressure from
Representatives regarding fees and payout, firms that do not keep pace with
technology advancements will be left behind by their competition.
To the extent feasible due to current regulatory requirements, the
Company's goal is to electronically communicate with the Representatives,
eliminating as much mail, paper and telephone calls as possible. This affects
every department at the Company and every Representative and client in the
field. The ability of the Company to improve technological capabilities in a
cost effective manner could significantly affect growth and profitability.
Over the coming years, the Company plans to make the following systems
improvements and enhancements:
o Improve analysis through development of systems.
o Improve telemarketing systems in Recruiting and Marketing.
o Develop software which integrates existing systems with outside
product information clearing houses to facilitate:
- Client account maintenance
- Transaction processing
- Cash Management
- Exchange of information regarding client accounts with major
product sponsors.
o Implement work flow management to improve staff efficiencies.
35
<PAGE>
o Develop expert system for staff and Representatives providing them
access to information with 70% of expert ability.
3. REPRESENTATIVE INTEGRATED SYSTEMS. The Representatives have the same
challenges that the Company faces in competing in today's financial services
industry. They require integrated systems to effectively manage their
practices. The Company must be on the leading edge of providing the best
systems available for the management of all areas of our Representatives
business. Over the coming years, the Company plans to develop or improve
Representative systems in the following areas:
o Communication software that not only allows direct communication with
the home office but provides look-up capabilities for client account
information, commission status, customer service problem log status
and access to compliance and licensing information and educational
event registration.
o Develop integrated systems to support marketing and operations,
including contact management, tax preparation, marketing from the tax
return, financial planning integrated with tax preparation software
and investment monitoring and reporting.
o Develop programs for preparing client presentations.
MARKETING INITIATIVES. The Company firmly believes that in order to achieve its
- ---------------------
objectives, it will need to become well known by accounting and financial
professionals as well as by the public at large. The Company has developed
several strategies to achieve public awareness.
1. BOOK PUBLISHING AND PUBLIC SEMINARS. The Company has identified a
series of financial planning oriented books to be published for the general
public. The Company has published two books, "Wealth: How to Get It, How to
Keep It" and "Wealth Workout", published in 1993 and 1995, respectively. The
Company will promote these books to Representatives, Representatives' clients
and to the general public. A media tour will help to promote the books and a 1-
800 number will be used to refer interested individuals to a qualified H.D. Vest
Representative. Additional books are planned for the following topics:
o Investing for Small Businesses
o Investing for Young Adults
o Investing for Women
o Investing for Retirees
o Reference Manual on Financial Designations
The Company plans to actively promote these books to:
o Gain name recognition
o Promote H.D. Vest Representatives
36
<PAGE>
o Educate the public
o Be perceived as different and unique in the industry
o Be perceived as experts in the industry
o Enhance recruiting efforts
2. COOPERATIVE ADVERTISING. Representatives who meet specific criteria
and agree to adhere to certain standard procedures will be invited to
participate in the Company's future cooperative advertising programs and will
share in the cost of development, testing and implementation of national,
regional and local advertising initiatives.
3. FEE-BASED PRODUCTS AND SERVICES. The Company believes that in order
to attract and retain successful Representatives, it must offer a variety of
fee-based compensation programs in addition to the commission-based products
which now comprise the majority of its revenues. In 1993 the VestFlex program
was introduced. The program has been well received by the Company's
Representatives and is expected to expand over the next five years to include:
o Flexible investing into specific mutual funds
o Portfolio consisting of mutual funds of more than one fund family
o Complete systemization of the processing of transactions and
simplification of paperwork
Additionally, in October 1995, the VestAdvisor Program was introduced.
This program accommodates clients with a minimum of $25,000 of current
investment assets.
4. DIRECT MARKETING PROGRAMS. The Company plans to develop tested direct
marketing programs for use by its Representatives. These would include
marketing letters, brochures, seminar presentations and one-on-one client
presentations and include complete training on use and implementation of the
programs.
5. PUBLIC SEMINARS. The Company plans to develop and conduct public
seminars to educate the public on the importance of an understanding of basic
financial principles.
REPRESENTATIVE DEVELOPMENT ACTIVITIES.
- -------------------------------------
1. SUPPORT. The accountant/tax professional Representative needs the
support of the Company to implement financial planning services into their
existing tax practice.
o FIELD SUPPORT. The Company believes that an important element that is
currently missing from its support services is the availability of in-
field training and sales assistance for new Representatives and those
who need more personalized services than can be provided via the
telephone support of the home office. The Company believes that this
can be accomplished through the widespread implementation of the
Regional Support System ("RSS"). The RSS is a field support program
designed to
37
<PAGE>
train and support Representatives in the technical aspects of
financial planning, motivation and sales training, time and practice
management, financial products, and support in actual client
situations.
o TECHNICAL SUPPORT. The Company offers comprehensive Technical Support
services to its Representatives. These services include support in
the areas of Retirement Planning, Investment Planning, Education
Planning, Employee Benefits, Tax Planning, Risk Management, Qualified
Plans, Product Selection, Bank Marketing Programs and Marketing
Strategies. The Company employs staff experts in every area who are
dedicated to providing technical information to its Representatives.
The Company believes that the addition of staff experts in Estate
Planning, Portfolio Management, Asset Allocation and Insurance are key
to the continued success of the Technical Support services.
o PRODUCT SUPPORT. Because of the large volume of product sales the
Company supplies to major product sponsors, it has been able to
negotiate personalized product support from the wholesaler teams of
the sponsors. The wholesalers are available to Representatives for
client presentations, seminar presentations and assistance in product
selection.
2. TRAINING. The Company has done extensive research into the training
necessary to accomplish a successful and profitable transition for the tax
professional to provide financial planning services to his or her clients. The
research has shown that the basic needs for training fall into the following
categories:
o Technical (identifying client needs)
o Product (choosing a product)
o Operations (processing paperwork)
o Sales (making the recommendation)
o Marketing (proven marketing techniques)
o Motivation (overcoming fears)
o Practice Management (transition to financial planning)
In June, 1994, the Company completed work on the first in its series of
many comprehensive, integrated training programs (the Rep Success Program).
These programs will utilize various training media in order to maximize the
success of the program.
In addition to providing top quality training programs to enhance the
skills of the Representatives, the Company plans to provide Continuing
Professional Education ("CPE") credit where available for CPAs, CFPs, EAs, CLUs,
ChFCs and other financial services designations.
38
<PAGE>
OPERATIONS AND SOURCES OF REVENUE
The Company and its subsidiaries operate 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>
Nine Months
ended
Year ending September 30, June 30,
------------------------- --------
1993 1994 1995 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Mutual Fund and UITs $35,537,273 $36,789,952 $30,611,062 $33,845,479
Partnership 323,807 280,053 198,910 104,935
Interests
Stocks, Bonds and 1,988,466 2,276,175 1,930,867 2,088,520
Options
Insurance Products 2,747,322 3,912,106 4,286,916 5,463,356
Marketing and 2,696,847 3,280,146 2,933,055 3,104,565
Education Fees
Portfolio Management 791,764 1,680,889 3,219,574 4,492,486
Fees
Facility and Service 316,289 314,196 551,379 309,190
Fee from Affiliate
All Other 1,606,049 1,753,679 938,288 594,235
----------- ----------- ----------- -----------
$46,007,817 $50,287,196 $44,670,051 $50,002,766
=========== =========== =========== ===========
</TABLE>
No material part of the Company's consolidated commission revenues is
originated by a single Representative.
39
<PAGE>
EMPLOYEES
At June 30, 1996, the Company employed 175 full-time employees who provide
support services to Representatives of the Company. The number of employees is
expected to increase in areas that provide Representative support during the
fiscal year ending September 30, 1996.
EMPLOYEES BY DEPARTMENT
AS OF JUNE 30, 1996
<TABLE>
<S> <C>
Marketing and Technical Support 46
Administration and Other 22
Operations 88
Educational Services 19
---
175
===
</TABLE>
The majority of employees are college graduates and are securities
licensed.
PROPERTY
At June 30, 1996, the Company occupied approximately 32,000 square feet of
office space in Irving, Texas. During May 1993, the Company renegotiated its
lease on the office space replacing Herb Vest as the lessee and naming the
Company as lessee. The Company's lease expires in May 1998. The 32,000 square
feet consists of the third floor and portions of the first, second, eighth, and
ninth floors of the Waterway Tower, located at 433 East Las Colinas Blvd.,
Irving, Texas.
REGULATION
H.D. Vest Investment Securities, Inc. ("HDVIS") - The securities industry
in the United States is subject to extensive regulation under federal and state
laws. The SEC is the federal agency charged with administration of the federal
securities laws. Much of the regulation of broker-dealers such as HDVIS,
however, has been delegated to self-regulatory organizations such as the NASD.
The NASD conducts periodic examinations of member broker-dealers. Securities
firms are also subject to regulation by state securities commissions in the
states in which they are registered. HDVIS is currently registered as a broker-
dealer in all fifty states, the District of Columbia, and the 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
40
<PAGE>
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
"Legal Proceedings".)
HDVIS is a member of the Securities Investor Protection Corporation
("SIPC"). SIPC provides protection to customers if a SIPC member fails
financially. Customers (NOT INCLUDING INVESTORS IN THIS OFFERING) 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. SIPC DOES NOT
-------------
PROVIDE PROTECTION TO INVESTORS WITH RESPECT TO FLUCTUATIONS IN THE MARKET VALUE
- --------------------------------------------------------------------------------
OF SECURITIES AND ACCORDINGLY, DOES NOT PROVIDE INVESTORS IN THIS OFFERING WITH
- -------------------------------------------------------------------------------
ANY PROTECTION OR ASSURANCE WITH RESPECT TO CURRENT OR FUTURE MARKET VALUES OF
- ------------------------------------------------------------------------------
THE SECURITIES BEING OFFERED HEREIN.
- ------------------------------------
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, whichever is greater. In computing net capital under the Uniform
Net Capital Rule, various adjustments are made to net worth to exclude assets
which are not readily convertible into cash and to conservatively state other
assets, such as a firm's position in the securities that it holds in its own
account. To that end, a deduction is made against the market value of such
securities to reflect the possibility of a market decline prior to their
disposition. For each dollar that net capital is reduced, by means of such
deductions or otherwise (for example, through operating losses or capital rules,
which are unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed on corporations
engaged in certain other types of business (see "Use of Proceeds," "Business-
Operations and Sources of Revenue" and "Management's Discussion and Analysis of
Results of Operations and Financial Condition-Liquidity and Capital Resources").
41
<PAGE>
The current net capital calculation and the calculation under the July 1,
1994 requirements are as follows:
<TABLE>
<CAPTION>
15c3-1
-----------
<S> <C>
Minimum Net Capital Requirement $ 250,000
Computed Net Capital Requirement based on
6 2/3% of Aggregate Indebtedness
as of June 30, 1996 $ 330,834
Actual Net Capital as of June 30,1996 $1,029,450
Net Capital in excess of Required Net
Capital as of June 30, 1996 $ 698,616
</TABLE>
H.D. Vest Advisory Services, Inc. ("HDVAS") - The financial planning
industry is subject to federal regulation under the Investment Advisor Act of
1940, requiring those providing fee-based investment advice to register with the
SEC. Most states also have registration and reporting requirements. HDVAS is
registered as an investment advisor with the SEC and 49 state regulatory
agencies.
H.D. Vest, Inc. (the Company) - The Company and its subsidiaries'
regulatory environment, which consists of various areas of securities,
investment advisory, and accountancy law, is extremely complex. In recognition
of this reality, the Company has found it prudent to open the channels of
communication between Company officials, the elected officials 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 $93,500 and
$103,321 for the years ended September 30, 1994 and 1995, respectively. The
Company contributed such funds totaling approximately $33,321 and $109,750 for
the nine months ended June 30, 1995 and 1996, respectively. All such activities
and contributions are carefully reviewed by the Company's legal counsel to
ensure that they comply with the law.
COMPETITION
There is intense competition in the brokerage and insurance industry from
large, diversified, well-capitalized brokerage firms, financial institutions and
other organizations. Retail-oriented, financial services companies and other
financial institutions are employing substantial funds in advertising and direct
solicitation of customers to increase their market share of commission dollars
and other securities-related income. In many cases the Company is directly
competing with such organizations for the same customer and market share.
42
<PAGE>
MANAGEMENT
The following table provides certain information about the Company's
current directors and executive officers.
<TABLE>
<CAPTION>
Name Age Position with the Company
- ---- --- -------------------------
<S> <C> <C>
Herb D. Vest 52 Chairman of the Board, President
and Chief Executive Officer
Barbara Vest 50 Director
Kenneth E. Reynolds 67 Director
Jack B. Strong 66 Director
Jerry M. Prater 53 Director
Phillip W. Mayer 54 Director
Lynn R. Niedermeier 42 Director
Shannon A. Soefje 36 Senior Vice President/Corp.
Resources/Corp. Secretary
W. Ted Sinclair 32 Vice President/CFO
</TABLE>
DIRECTORS AND OFFICERS
HERB D. VEST, CHAIRMAN OF THE BOARD, 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.
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, Chartered Life Underwriter, Chartered Financial
Consultant, Accredited Personal Financial Specialist, Certified Investment
Management Analyst, and Certified Employee Benefit Specialist. He holds
certificates in Management Accounting and Estate Planning & Taxation. He holds a
Master of Science in Taxation degree 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 member of the Fellow Life
Management Institute. 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 army, including
two (2) tours of duty in Vietnam. He has served as lecturer at local colleges
and
43
<PAGE>
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, DIRECTOR AND CO-FOUNDER OF THE COMPANY, 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 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 Women's Alliance
and Sales and Marketing Executives associations.
KENNETH E. REYNOLDS, DIRECTOR, 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 CPAs and past President
of the Norman Chapter of the Oklahoma Society of CPAs. 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, DIRECTOR, 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.
44
<PAGE>
JERRY M. PRATER, DIRECTOR, 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, DIRECTOR, held a variety of command and staff positions as an
Infantry Officer in the United States Army prior to his retirement in 1982. Mr.
Mayer holds two master's degrees and was designated a Certified Public Manager
by the Arizona State University Advanced Public Executive Program in 1990. Since
1985, he has worked in the corrections profession as a Program Manager and
Director of Staff Training. He currently 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, DIRECTOR, was President of the Company from November 1994
through December 1995. She held the position of Executive Vice President of H.D.
Vest, Inc. from February 1993 until her resignation in April 1994. From 1987 -
1993, she was the Company's Vice President of Marketing responsible for managing
sales, marketing, recruiting and educational programs. Ms. Niedermeier is a
Certified Public Accountant and was a Manager with 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 (see
"Transactions with Management - Severance Agreements").
SHANNON A. SOEFJE, SENIOR VICE PRESIDENT/CORPORATE RESOURCES/CORPORATE
SECRETARY, was employed by the Company in 1990. In fiscal 1993, she was promoted
to Vice President and was responsible for the management of the Company and the
Operations department which includes trading, trading support, customer service
and order processing. She has assumed the responsibilities of Corporate
Secretary and was promoted to Senior Vice President of Corporate Resources for
fiscal year 1995. She has held other management positions with the Company in
the Compliance, Licensing, Recruiting and Research departments. Since 1977, Ms.
Soefje has worked for various investment firms. She is a General Securities
Principal, Registered Options Principal, Municipal Securities Principal and
Financial and Operations Principal.
W. TED SINCLAIR, VICE PRESIDENT/CHIEF FINANCIAL OFFICER, 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, for the financial, tax and
management reporting and for 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
45
<PAGE>
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.
REMUNERATION OF DIRECTORS AND MANAGEMENT
The following table sets forth all remuneration earned in salary, bonus and
fees in the current year to the Chief Executive Officer and the highest paid
directors and executive officers each receiving in excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
______________________________________________________________________________________________________
Restricted Stock
Name & Principal Position Fiscal Stock Options All Other
Year Salary Bonus Awards (1) Compensation
______________________________________________________________________________________________________
<S> <C> <C> <C> <C> <C> <C>
Herb Vest (2)(4) 1995 $500,000 - - - $ 20,766
Chairman of the Board of 1994 543,750 $88,778 - 7,200
Directors and Chief Executive 1993 830,000 - - - 7,200
Officer
Barbara Vest 1995 - - - - 218,937
Director and Consultant 1994 - - - - 207,200
1993 - - - - 175,800
Lynn Niedermeier (3) 1995 245,834 - $100,000 - 86,004
Director 1994 224,361 - - - 6,668
1993 176,667 - - - -
Roger Ochs (5) 1995 107,000 - - - -
Director of Marketing 1994 - - - - -
1993 - - - - -
</TABLE>
(1) All key employees are covered under a stock option plan ("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 December 1995. Presently is a member of the Board of
Directors (see "Transactions with Management - Severance Agreements").
(4) Paid pursuant to Management Agreement in effect prior to April, 1994
amended agreement (see "Certain Transactions - Management Agreements").
(5) Compensation below disclosure requirement in prior years.
46
<PAGE>
CERTAIN TRANSACTIONS
ISSUANCE OF SERIES A PREFERRED STOCK
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 held by a Financial Services company. The price of the non-
voting Series A Convertible Preferred Stock was determined through consultation
with RAF Financial Corporation. This transaction was completed pursuant to an
exemption from registration under Section 4(2) of the Securities Act of 1933 and
was effective September 30, 1991 (see "Certain Transactions - Loan Agreements").
The Company issued for cash 83,400 shares of non-voting Series A Preferred
Stock at a price of $6.00 per share, in exchange for $500,400, to a second
Financial Services company. This sale was effected pursuant to an exemption from
registration under Section 4(2) of the Securities Act of 1933 and was effective
September 24, 1991.
INVESTMENT BANKING AGREEMENT
RAF Financial Corporation acted as the underwriter for the Company's
November 21, 1991 offering. Pursuant to the underwriting agreement, RAF
Financial Corporation ("RAF") received Warrants to purchase 210,000 shares of
Common Stock of the Company. The Warrants issued to RAF Financial Corporation
consisted of 70,000 Underwriter's Warrants with an exercise price of $6.60,
70,000 A Warrants with an exercise price of $5.50, and 70,000 B Warrants with an
exercise price of $9.62. The A Warrants expired unexercised in May 1993. The B
Warrants expired unexercised in November 1994 and the Underwriter's Warrants
expire in November 1996. The 70,000 Underwriter's Warrants issued to RAF
Financial Corporation are presently held as follows: Robert Long, 31,500, Robert
C. Dunwoody, 7,000, and RAF Financial Corporation, 31,500.
The Company will pay RAF Financial Corporation a consulting fee through
November 21, 1996, in connection with any merger, consolidation, stock exchange
or acquisition or sale of all or substantially all assets in which the Company
or any of its subsidiaries are involved, and the Company has agreed to pay RAF
Financial Corporation a fee on sales of the Company's Preferred Stock. The fee
will be from 1% to 5% of the value of the transaction. In connection with any
such transaction, RAF Financial Corporation will provide consulting services
which are customary in the industry. RAF Financial Corporation shall have a
preferential right to purchase for its account or to sell for the account of the
Company or any of its subsidiaries any securities with respect to which the
Company or any of its subsidiaries may seek a public or private offering for
cash.
The Company has agreed that it will not, without the unanimous consent of
those members of the Board of Directors of the Company
47
<PAGE>
who are not affiliated with either the Company or RAF Financial Corporation, or,
if there are no such nonaffiliated directors, without the approval of a majority
of a three-person panel, one of whom is to be chosen by directors who are
affiliated with the Company, one of whom is to be chosen by RAF Financial
Corporation, and the third of whom is to be chosen by the two so selected, amend
its Articles of Incorporation or Bylaws or enter into any contract or agreement
with its officers, directors, or employees or any other person, for the purpose
of preventing a corporate takeover of the Company; provided, however, only the
vote of approval of a majority of the Board of Directors of the Company shall be
required for an amendment of the Company's Articles of Incorporation or Bylaws
designed to prevent a "two-step" takeover of the Company involving a second step
which includes unfair provisions for minority shareholders of the Company.
TRANSACTIONS WITH MANAGEMENT
The terms of the transactions described below are as fair to the Company as
could have been made with unaffiliated parties where available and were approved
by the Company's independent and disinterested directors.
Future transactions between the Company and its affiliates will be approved
by the independent and disinterested directors and will be on terms no less
favorable than could be obtained from unaffiliated parties, where available.
MANAGEMENT AGREEMENTS
---------------------
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. During April 1994, the Company amended the
agreement with Herb D. Vest and provided for a management fee of $500,000 per
year plus an annual bonus based on the Company's performance related to revenue
and net income goals established by the Board of Directors. The annual bonus for
fiscal 1995 ranged from $0 to $500,000. No bonus was accrued or paid under the
amended plan for the fiscal year ended September 30, 1994 or 1995. A bonus of
$88,778 was paid during fiscal 1994 related to the previous plan. Management
fees under these agreements were $830,000, $632,528 and $500,000 for the years
ended September 30, 1993, 1994, and 1995 respectively. The agreement calls for a
management fee of $750,000 for fiscal year 1996 plus an annual bonus based on
the Company's performance related to revenue and net income goals established by
the Board of Directors.
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 and 1995, fees under this agreement totaled $200,000 each.
For the nine months ended June 30, 1996, Ms. Vest received $150,000 under this
agreement.
48
<PAGE>
H.D. VEST INSURANCE SERVICES
----------------------------
H.D. Vest Insurance Services ("HDVIns") is a sole proprietorship owned by
Herb D. Vest. HDVIns general insurance agency appoints Representatives with
various insurance companies to enable them to sell insurance products to their
clients. The Company, in accordance with the terms of a facilities and services
agreement, provides certain management and other services to HDVIns and is paid
a fee for these services. The value of these services for fiscal year ended 1995
has been determined based on the pro rata portion of certain relevant expenses
as a percentage of HDVIns revenue 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 the majority
shareholder and Chairman of the Board of Directors of the Company.
The services provided to HDVIns are management, accounting, referral data
base, client tracking services, solicitation, tracking of renewal policies of
insurance, collection of premiums and commissions, processing of insurance
transactions, payment of salaries and other expenses, cost of recruiting,
training and reporting to agents and other services as deemed appropriate by the
Company. In accordance with this agreement, the Company has charged HDVIns
$316,289, $314,196 and $551,379 for the years ended September 30, 1993, 1994,
and 1995 respectively. The Company has charged HDVIns $496,881 and $309,190 for
the nine months ended June 30, 1995 and 1996, respectively for management
services rendered.
LINES OF CREDIT
---------------
During April, 1994, the Company entered into an agreement to provide Herb
Vest an unsecured revolving line of credit in an amount not to exceed
$1,000,000. The terms of the agreement require an annual payment to be made on
November 30, of each year equal to one-seventh of the then outstanding principal
balance plus accrued interest. The final payment of all outstanding principal
and accrued interest shall be due and payable on or before November 30, 2001.
The agreement bore interest on unpaid principal balances at the margin interest
rate as of August 31, 1994 (6.5%), as quoted by National Financial Services
Corporation, the Company's clearing firm, on the first day of the month and
interest on matured unpaid amounts at an annual rate of 10%. Effective September
1, 1994, the Company amended the agreement to provide Mr. Vest with a revolving
line of credit not to exceed $2,000,000 collateralized by Mr. Vest's
unrestricted Company common stock in an amount equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The
effective interest rate of the amended agreement is 11%. At June 30, 1996, Mr.
Vest had drawn $2,000,000 in principal against the line of credit. The Company
has recorded $130,969 of accrued interest on this line.
During May 1994, the Company entered into an agreement to provide Barbara
Vest a revolving line of credit in an amount not to exceed $350,000
collateralized by 100,000 shares of Ms. Vest's
49
<PAGE>
unrestricted Company common stock. The terms of the agreement require an annual
payment be made on November 30 of each year equal to one-seventh of the then
outstanding principal balance plus accrued interest. The final payment of all
outstanding principal and accrued interest shall be due and payable on or before
November 30, 2001. The agreement bore interest on unpaid principal balances at
the margin interest rate as of August 31, 1994 (6.5%), as quoted by National
Financial Services Corporation, the Company's clearing firm, on the first day of
the month and interest on matured unpaid amounts at an annual rate of 10%.
Effective September 1, 1994, the Company amended the agreement to provide Ms.
Vest with a revolving line of credit not to exceed $700,000 collateralized by
Ms. Vest's unrestricted Company common stock equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The
effective interest rate of the amended agreement is 11%. At June 30, 1996, Ms.
Vest had drawn $431,813 in principal against the line of credit. The Company has
recorded $28,770 of accrued interest on this line.
SEVERANCE AGREEMENTS
--------------------
In April 1994, Lynn R. Niedermeier resigned her position as Executive Vice
President of the Company. The Company and Ms. Niedermeier entered into a
severance agreement that provided for the payment of severance of $16,667 per
month commencing on May 1, 1994, and continuing for 30 months, in exchange for
an agreement restricting the use of Company materials and information for a
period of 48 months. In November 1994, Lynn R. Niedermeier rejoined the Company
as President. At that time, there remained $383,331 payable to Ms. Niedermeier
pursuant to her severance agreement with the Company. In connection with her
return, the Company and Ms. Niedermeier agreed to terminate the severance
agreement. In December 1995, Ms. Niedermeier resigned as President of the
Company. Under her employment agreement, the Company agreed to pay her $16,600
per month until October 1, 1996, in exchange for Ms. Niedermeier agreeing, among
other things, to not solicit clients of the Company's Representatives and to not
compete with the Company through that date.
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 from one
to three members. The members of the Committee shall be eligible to receive
options under the Stock Option Plan.
The Committee currently consists of one member, Herb D. Vest. Options
granted under the Stock Option Plan are not intended to qualify as Incentive
Stock Options under Section 422a of the
50
<PAGE>
Internal Revenue Code of 1986, as amended from time to time. The Company has
reserved up to 800,000 shares of its common stock for options under the Stock
Option Plan. The options must be paid in cash, unless otherwise permitted by the
Committee. The exercise price of any options granted in the future will not be
less than 100% of the fair market value of the Common Stock on the date of
grant.
The Committee, at the direction of the Chief Executive Officer, may amend,
modify or terminate the Stock Option Plan provided, however, no action of the
Committee, without approval of the Chief Executive Officer and the shareholders
of the Company, may:
(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 June 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. 100,000 of these options remain outstanding as of June 30,
1996.
In November 1992, the Company resolved that the independent directors
receive stock options for 2,000 shares of common stock to be exercisable at the
price of the common stock on the date of issuance and to be issued quarterly to
the independent directors. At June 30, 1996, 44,000 options remain outstanding.
As a result of the foregoing, options covering 270,748 shares of common
stock, with exercise price ranging from $5.00 to $8.50 per share have been
issued to officers of the Company. The following table provides information with
respect to the named officers and directors concerning the exercise of options
during the last fiscal year ending September 30, 1995:
51
<PAGE>
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
Through Options Value Fiscal Year End Options Fiscal Year End(1,2)
--------------------- ----------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb D. Vest - - 100,000 45,148 - -
Barbara Vest - - - 45,148 - -
Lynn Niedermeier (3) - - - 3,996 - -
Wesley T. Sinclair - - - 1,456 - -
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on September 30, 1995 and the exercise price of the options.
(2) The current fair Market Value of the stock at September 30, 1995 was below
the option exercise price.
(3) Resigned as President in December 1995, but remains as a director. All
options terminated upon resignation in December 1995.
EXECUTIVE OFFICER COMPENSATION PLAN
- -----------------------------------
During April 1994, the Board of Directors of the Company adopted an
Executive Officers Compensation Plan. The purpose of the Executive Officers
Compensation Plan is to provide additional compensation to a select group of
management employees of the Company in order to motivate and retain them, as
well as to provide them an incentive to guide the Company in attaining higher
revenue goals. The Company will provide this additional compensation under the
Executive Officers Compensation Plan in the form of salary, restricted stock,
incentive cash, 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 at
its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officers
Compensation Plan, the individual must be an executive employee of the Company,
have completed at least two (2) full years of service with the Company, and be
part of a select group of management employees as designated by the Board of
Directors of the Company. The individual employee must also sign an Officers
Deferred Compensation Agreement and an Officer Agreement as a condition
precedent to becoming a participant in the Executive Officers Compensation Plan.
Under the Restricted Stock portion of the Executive Officers Compensation
Plan, a number of shares of restricted stock is determined by the Chief
Executive Officer of the Company as allocable to a particular participant. This
restricted stock is credited to the participant's account and will be vested and
distributable upon the first to occur of the following events: (1) Long term
disability, death of the participant or attaining the preselected Deferral Date;
or (2) The date of a "change-in-control"
52
<PAGE>
of the Company (as that term is defined in the officers Plan). No stock was
earned under the Executive Officers Compensation Plan for the fiscal year ended
September 30, 1995. Under the Executive Officers Compensation Plan, the Board of
Directors also annually sets three revenue goals - a threshold, target, and
maximum goal. If attained, the revenue goals will generate a set cash bonus for
the participant, payable unless certain losses are also incurred.
In addition, bonus stock will be credited to participants' accounts in the
form of restricted stock on the basis of the Company's attaining three year
cumulative revenue goals. Each year these goals are set by the Board of
Directors for the upcoming three years and are based in part on the previous
years goals that consist of a threshold, a target, and a maximum cumulative
revenue goal. Upon attaining one of these goals, bonus stock credited in the
form of restricted stock to the participant's plan vests and will become
distributable only upon retirement, long term disability, or death of the
participant, or the date of a "change-in-control" of the Company (as that term
is defined in the Executive Officers Compensation Plan). No awards were earned
under the officers plan in 1994 or 1995.
OFFICE SPACE
------------
At June 30, 1996, the Company occupied approximately 32,000 square feet of
office space in Irving, Texas. During May 1993, the Company renegotiated its
lease on the office space replacing Herb Vest as the lessee and naming the
Company as lessee. The Company's lease expires in May 1998. The 32,000 square
feet consists of the third floor and portions of the first, second, eighth and
ninth floors of the Waterway Tower, located at 433 East Las Colinas Blvd.,
Irving, Texas.
EXCHANGE OFFER
--------------
The Company made an offer to exchange the Company's Common Stock for the
outstanding shares in HDVIS. Under the terms of the offering, which was
completed on February 15, 1987, all of the HDVIS shareholders, owning 546,000
shares of HDVIS Common Stock, exchanged each share of stock for four (4) shares
of Common Stock of the Company which resulted in the issuance of the stock
split.
STOCK SPLIT
-----------
In June 1987, the Company effected a 2-for-1 stock split to all existing
shareholders. After the stock split, there were 4,368,000 shares of the Company
outstanding.
FACILITIES AND SERVICES AGREEMENT WITH HDVINS
---------------------------------------------
The Company provides to HDVIns certain facilities and services in
accordance with the terms of a Facilities and Services Agreement. The Company
charges a monthly fee to HDVIns based on rates arbitrarily established by the
Company. The services provided are as follows:
53
<PAGE>
Management, accounting, referral data base and client tracking services,
solicitation and tracking of renewal policies of insurance and collection of
premiums and commissions, processing of insurance transactions, payment of
salaries and other expenses, costs 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 and $551,379 for the
years ended September 30, 1994 and 1995. The Company has charged HDVIns $496,881
and $309,190 for the nine months ended June 30, 1995 and 1996, respectively for
management services rendered.
LOAN AGREEMENTS
---------------
In Fiscal 1993, the Company prepaid two notes payable; one note to a
financial services company in the amount of $418,211 and one note to an
insurance company in the amount of $45,898.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
-----------------------------------------
The Company's By-Laws contain certain indemnification provisions for its
officers and directors whereby each is to be indemnified to the fullest extent
permitted by Texas law for expenses and liabilities arising out of litigation by
reason of the fact that such person was an officer or director of the Company.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
Company pursuant to the foregoing provisions, the Company has been informed that
in the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
54
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The following information is furnished as of June 30, 1996, to indicate
beneficial ownership of the Company's common stock by directors and certain
executive officers.
<TABLE>
<CAPTION>
OWNER NUMBER OF SHARES OF COMMON STOCK OWNED
----- --------------------------------------
Before Offering Percent of Class
--------------- ----------------
<S> <C> <C>
Herb D. Vest, Chairman (1) 2,591,512 48%
Barbara Vest (1) 1,519,746 28%
Lynn R. Niedermeier (2) (3) 41,087 -
Jerry Prater (2) 2,000 -
Kenneth E. Reynolds (2) 550 -
Jack Strong (2) 100 -
Shannon A. Soefje (2) 677 -
W. Ted Sinclair (2) 25 -
---------
4,155,697
</TABLE>
(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.
(2) Less than one percent.
(3) Resigned as President in December 1995, but remains as a director.
Based upon the Company's review of Forms 3, 4 and 5 and any amendments
thereto furnished to the Company pursuant to Section 16 of the Securities
Exchange Act of 1934, all of such forms were filed on a timely basis by
reporting persons.
55
<PAGE>
PRINCIPAL SHAREHOLDERS
<TABLE>
<CAPTION>
Number of Percent Shares Owned Percent
Shares Owned of Upon Completion of
Owner Before Offering Shares Of Offering (2)(5) Shares
- ----- --------------- ------ ------------------ -------
<S> <C> <C> <C> <C>
Herb D. Vest (s1) (4) 2,591,512 48% 2,591,512 47%
433 E. Las Colinas Blvd.
3rd Floor
Irving, Texas 75039
Barbara Vest (1) (4) 1,519,746 28% 1,519,746 28%
433 E. Las Colinas Blvd.
3rd Floor
Irving, Texas 75039
Other Shareholders (3) 1,312,083 24% 1,382,083 25%
</TABLE>
(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.
(2) Assumes that the Stock Options are not exercised.
(3) Assumes that the holders of the 250,067 shares of Preferred Stock do not
exercise their conversion privileges.
(4) Not included in this number are options to purchase 45,148 shares of the
Common Stock of the Company which are presently exercisable at an exercise
price of $8.50.
(5) Assumes that 70,000 outstanding Underwriter's Warrants are exercised.
SHARES ELIGIBLE FOR FUTURE SALE
The 5,423,341 shares held by existing shareholders includes 2,478,092
restricted shares owned by Herb D. Vest and 1,487,808 restricted shares owned by
Barbara Vest (see "Principal Shareholders"), 350,600 restricted shares issued by
the exchange of HDVIS Common Stock for the Common Stock of the Company in
February, 1987, 113,600 restricted shares sold in the private offering pursuant
to section 4 (2) and Regulation D of the Securities and Exchange Act of 1933
("Act"), 214,787 shares sold in a public offering pursuant to the Securities Act
of 1933 in 1988, 22,800 restricted shares issued as compensation to officers of
the Company in June, 1991 and 700,000 shares issued in connection with a public
offering completed in November, 1991. Shares denoted as restricted are subject
to limitation under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted shares of
Common Stock for at least two years is entitled to sell (within any three-month
period), a number of those shares which does not exceed the greater of one
percent of the then outstanding shares of Common Stock of the Company or the
average weekly trading volume in the Company's Common Stock during the four
calendar weeks preceding such sale. Pursuant to Rule 144 of the Act, the
restricted shares may not be sold prior to the expiration of two years from the
dates of their respective purchases which occurred
56
<PAGE>
between November 1988 to November 1989. Of the 5,423,341 shares outstanding as
of the date of the offering, 4,118,754 shares are restricted securities which
are currently available for sale under Rule 144.
The Company intends to register under the Act all shares covered by
outstanding stock options. (See "Certain Transactions - Stock Options.") It is
expected that, after such registration, shares acquired thereunder will be
freely tradeable without restriction or further registration, except for shares
issued to directors, officers and principal shareholders.
The Company's Common Stock is traded on the National Association of
Securities Dealers Automated Quotation system - National Market System (NASDAQ-
NMS) under the symbol HDVS. The Company's Warrants have expired.
As of June 30, 1996 the Company's stock was listed on the NASDAQ National
Market System. The trading volume of the Company's stock is fairly light on a
daily basis. There can be no assurance that a more active market will develop.
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 surplus 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, minimum bid for
outstanding shares of $1.00, and 400 shareholders.
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
and does not anticipate paying dividends on its Common Stock in the foreseeable
future. The Company intends to continue to devote its earnings, if any, to the
growth and development of the Company. Any dividends in the future will depend
upon substantial earnings, the Company's financial requirements and other
factors.
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company is authorized to issue 100,000,000 shares of Common Stock. The
holders of Common Stock are entitled to equal dividends and distributions, if
any, with respect to the Common Stock when, as and if declared by the Board of
Directors, from funds legally available therefor. No holder of any shares of
Common Stock has any preemptive right to subscribe for any securities of the
Company nor are any shares subject to redemption. Upon liquidation, dissolution
57
<PAGE>
or winding up of the Company, and after payment of creditors, the assets will be
divided pro rata on a share-for-share basis among the holders of the shares of
Common Stock. All shares of Common Stock now outstanding and shares to be
outstanding upon completion of this offering are and will be fully paid, validly
issued and nonassessable.
Holders of the Company's Common Stock do not have cumulative voting rights,
so that the holders of more than 50% of the shares voting for election of
directors will be able to elect 100% of the directors if they choose to do so
and, in that event, the holders of the remaining shares will not be able to
elect any members of the Board of Directors.
The Company has never paid any dividends to shareholders of its Common
Stock. The declaration in the future of any cash or stock dividends will be at
the discretion of the Board of Directors and will depend upon the earnings,
capital requirements and financial position of the Company, general economic
conditions and other pertinent factors. It is the present intention of the
Company not to pay any cash or stock dividends in the foreseeable future.
Management intends to reinvest any earnings in the development and expansion of
the Company's business.
STOCK SPLIT. The Company's Board of Directors approved a resolution on June
- -----------
14, 1987, which the shareholders of record as of June 15, 1987 subsequently
approved on June 29, 1987 authorizing a two-for-one split of the Company's
Common Stock to such shareholders of record. This resulted in the shareholders
being issued one additional share of Common Stock for each share held. All
references in this Prospectus relating to shares of Common Stock have been
adjusted for this stock split.
EXCHANGE OFFER. The Company made an offer to exchange the Company's Common
- --------------
Stock for the outstanding shares in HDVIS. Under the terms of the offering,
which was completed on February 15, 1987, all of the HDVIS shareholders
exchanged each share of stock for four (4) shares of Common Stock of the
Company.
PREVIOUS STOCK OFFERINGS. Pursuant to an Underwriting Agreement with RAF
- ------------------------
Financial Corporation, the Company offered Common Stock in a public offering
pursuant to the Securities Act of 1933 in November, 1991. In this offering
700,000 shares were sold as part of 700,000 Units consisting of one Share of
Common Stock, one A Warrant, and one B Warrant. The price per unit was $5.50.
The Company offered Common Stock in a public offering pursuant to the
Securities Act of 1933 during July, 1987 through April, 1988. In this offering
214,787 shares were sold at $6.00 per share. Sales of the Company's Common Stock
in this offering were limited to associated persons of the Company.
The Company offered Common Stock in a private offering pursuant to the
Securities Act of 1933, Rule 506 of Regulation D during February, 1987 to May,
1987. In this offering, 113,600 shares were
58
<PAGE>
sold at $5.00 per share. In this offering, the Company sold to 34 unaccredited
investors and 14 accredited investors.
WARRANTS
The Company currently has 70,000 Underwriter's Warrants outstanding. The
Underwriter's Warrants entitle the holder to purchase one share of Common Stock
at an exercise price of $6.60 and are exercisable until November 21, 1996.
In order for a holder to exercise his/her Underwriter's Warrants, there
must be a current registration statement on file with the SEC and various state
securities commissions to continue registration of the shares of Common Stock
underlying the Warrants. The Company intends to maintain a current registration
statement while the Warrants are exercisable. The maintenance of a currently
effective registration statement could result in substantial expense to the
Company, and there is no assurance that the Company will be able to maintain a
current registration statement covering the shares issuable upon the exercise of
the Warrants. The Company believes that it will be able to qualify the shares of
Common Stock underlying the Warrants for sale in those states where the Warrants
are to be offered. The Warrants may be deprived of any value if a current
Prospectus covering the shares issuable upon the exercise thereof is not kept
effective or if such underlying shares are not qualified in the states in which
Warrant Holders reside. In addition, if the Company merges with a business which
does not have and cannot obtain audited financial statements, the Warrant
Holders will be unable to exercise their Warrants because the Company will be
unable to provide a current Prospectus.
PLAN OF DISTRIBUTION
REPRESENTATIVES DEFERRED COMPENSATION PLAN
On January 20, 1994, the Board of Directors established the H.D. Vest
Representatives Deferred Compensation Plan ("the Plan" -capitalized terms used
in this section have specific meanings as defined in the Plan). The Plan is an
optional, non-qualified, unfunded, deferred compensation plan which is available
exclusively to the Company's Representatives who are independent contractors and
neither employees nor officers of the Company. The Plan provides Representatives
an opportunity to defer receipt of Compensation on a pre-tax basis for selected
periods, thus postponing recognition of income otherwise currently taxable, and
subsequently receiving the deferred compensation plus a Matching Contribution.
At the end of each Deferral Period, the Deferral Amount and the related Matching
Contribution will be paid to the Participant.
DEFERRAL OPTIONS
----------------
Participants may defer up to one hundred percent (100%) of their Gross
Compensation and may elect to defer Compensation for one of
59
<PAGE>
three Deferral Periods (36, 60 or 84 months). Amounts deferred by Participants
and the Company's Matching Contribution will ultimately be paid to the
Participant pursuant to the Plan in the form of cash.
PARTICIPATION
-------------
Enrollment in the Plan is optional. The Initial Enrollment Period will be a
period of 60 days commencing the first day of the month, following the Effective
Date.
CHANGES IN ELECTIONS
--------------------
The Annual Election Period extends from November 1 through December 31
after the Initial Enrollment Period. During the Election Period, Participants
may prospectively adjust their Deferral Amount and Deferral Period elections.
Representatives who become affiliated with the Company subsequent to
January 1, 1994, will be eligible to enroll in the Plan during the first Annual
Election period that occurs after said Representative has been affiliated with
the Company for at least sixty (60) days. Deferral Amounts may be adjusted
downward only during the Election Period.
Elections to increase Deferral Amounts may be made by written notice a
minimum of thirty (30) days prior to the beginning of each calendar quarter and
are effective on a prospective basis beginning the first Compensation Day of the
next calendar quarter.
DEFERRAL ACCOUNTS
-----------------
Compensation payments are currently made to Representatives five business
days following the first and the fifteenth of each month. In accordance with the
Participant's Plan elections, the Company will credit each Participant's Account
with the amount of Cash Equivalents.
DISTRIBUTIONS
-------------
The distribution of each Deferral Amount and Matching Contribution will be
made on the 36th, 60th or 84th month anniversary of the deferral as determined
by the election in effect at the time of the deferral.
RIGHTS
------
All Accounts are unfunded and paid from the Company's general assets. As
general unsecured obligations, these accounts will be senior in rank to the
Common Stock listed on NASDAQ-NMS. Participants will have no right to receive
either the Deferral Amount or the Company's Matching Contribution until they are
paid the applicable Distribution. If the Representative's affiliation with the
Company terminates prior to the expiration of a Distribution Period, for reasons
other than death, Disability, or attaining age
60
<PAGE>
65, the Representative will forfeit all Company Matching Contributions.
The Company has obtained an opinion from Arthur Andersen LLP concluding
that amounts deferred under the Plan will receive deferred tax treatment and
that such amounts plus Matching Contributions will be taxable as received during
the Distribution Period. In the event of a successful challenge by the IRS, the
Company may choose to amend the Plan or terminate the Plan and refund all
Deferral Amounts without matching contributions.
The securities offered hereby are being distributed exclusively by H.D.
Vest Investment Securities, Inc., a wholly owned subsidiary of the Company. No
selling discount, commissions, or other sales charges will be received by HDVIS
in connection with the sale of the securities being offered hereunder. A bona
fide market exists for the Company's Common Stock as of the effective date of
this prospectus and accordingly, pursuant to Schedule E of the Bylaws of the
NASD, (Schedule E) no independent underwriter is being utilized by the Company
in connection with this offering.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and registrar for the Common Stock is Society National
Bank, whose post office address is P. O. Box 6477, Cleveland, Ohio, 44101-1477,
and whose physical address is 900 Euclid Avenue, Cleveland, Ohio 44101-1477.
LEGAL PROCEEDINGS
During the fiscal year ended September 30, 1995, the Securities and
Exchange Commission (SEC) began an investigation of the Company's wholly-owned
broker-dealer subsidiary, H.D. Vest Investment Securities, Inc. (HDVIS),
relating to the activities of a former Representative. In July 1995, concurrent
with an administrative proceeding instituted against HDVIS, the SEC and HDVIS
entered into a settlement agreement. Pursuant to the settlement agreement, HDVIS
(i) paid a monetary sanction of $50,000 and (ii) agreed to modify its
supervisory and compliance procedures in accordance with the recommendations of
an independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described
above, a group of clients of the former Representative commenced a civil action
against HDVIS and the former Representative alleging violations of securities
laws, fraud, conversion and related causes of action. This action was submitted
to binding arbitration before the NASD. Prior to the arbitration, the Company
voluntarily paid approximately $450,000 for the benefit of the clients which
amount the Company believes represented the clients' actual out-of-pocket
losses, plus interest. 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
61
<PAGE>
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 the net capital of HDVIS pursuant to a
previously executed Facility and Services Agreement between the Company and
HDVIS. As a result of the award, the Company and HDVIS recorded a combined
$1,450,000 charge to earnings. 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 may make
additional capital contributions to HDVIS which will in turn reduce the income
of the Company.
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.
LEGAL MATTERS
The legality of the shares of Common Stock offered hereby will be passed
upon for the Company by Malouf Lynch Jackson Kessler & Collins, A Professional
Corporation, Dallas, Texas.
EXPERTS
The opinion regarding the deferred tax treatment of amounts deferred under
the Plan referred to in this prospectus and elsewhere in the Registration
Statement has been rendered by Arthur Andersen LLP, independent public
accountants, and has been referred to herein in reliance upon the authority of
such firm as experts in giving said opinion.
The financial statements included in this prospectus and elsewhere in the
Registration Statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
62
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the SEC a registration statement under the
Securities Act of 1933, as amended, with respect to the shares of Common Stock
offered by this Prospectus. For further information with respect to the Company
and the Common Stock, reference is made to such registration statement,
including the exhibits thereto and the financial statements filed as part
thereof. Statements contained in this Prospectus as to the content of any
contracts or other documents are necessarily incomplete, and in each instance
reference is made to the copy of such contract or other documents filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. Copies of these documents may be inspected by
anyone without charge at the public reference facilities maintained by the
Commission at its principal office located at 450 Fifth Street, N.W., Judiciary
Plaza, Washington, D.C., 20549. Copies of all such material may be obtained from
the Public Reference Section of the Commission upon payment of prescribed fees.
63
<PAGE>
Financial Statements and Supplementary Data
-------------------------------------------
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1994, AND 1993
Report of Arthur Andersen, LLP, Independent F-1
Public Accountants
Consolidated Statements of Financial F-2 & F-3
Position - September 30, 1995 and 1994
Consolidated Statements of Operations - F-4
Three years ended September 30, 1995,
1994, and 1993
Consolidated Statements of Shareholders' F-5
Investment - Three years ended September 30,
1995, 1994, and 1993
Consolidated Statement of Cash Flows - F-6
Three years ended September 30,
1995, 1994, and 1993
Notes to Consolidated Financial Statements F-7
FOR THE NINE MONTH PERIOD ENDED JUNE 30, 1996,
AND 1995
Consolidated Statement of Financial Position - F-19 & F-20
June 30, 1996 (Unaudited)
and September 30, 1995
Consolidated Statements of Operations - F-21
Nine months ended June 30, 1996
and 1995 (Unaudited)
Consolidated Statement of Cash Flows - F-22
Nine months ended June 30, 1996
and 1995 (Unaudited)
Notes to Consolidated Financial Statements F-23
(Unaudited)
</TABLE>
<PAGE>
Report of Independent Public Accountants
To the Shareholders and Directors of H.D. Vest, Inc.:
We have audited the accompanying consolidated statements of financial
position of H.D. Vest, Inc. (a Texas Corporation) as of September 30, 1994 and
1995, and the related consolidated statements of operations, shareholders'
investment and cash flows for each of the three years in the period ended
September 30, 1995. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of H.D. Vest,
Inc. as of September 30, 1994 and 1995, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1995 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 29, 1995 (except
with respect to the matter
discussed in Note 12, as to
which the date is October 3,
1996).
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 4,193,240 $ 3,383,060
Commissions and accounts
receivable 3,680,679 3,329,869
Current portion - notes receivable
- related parties 214,783 522,178
Receivable from affiliate 152,540 98,929
Prepaid expenses 251,165 56,773
------------ ------------
Total current assets 8,492,407 7,390,809
------------ ------------
Property and equipment, net of
accumulated depreciation
of $1,409,087 at 1994, and
$1,924,547 at 1995 1,602,573 1,289,111
Notes receivable - related parties,
net of current portion 1,288,698 1,978,099
Other assets 953,174 1,008,352
------------ ------------
Total assets $ 12,336,852 $ 11,666,371
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-2
<PAGE>
Page 2 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
September 30,
----------------------------
1994 1995
------------- -------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 3,010,321 $ 3,005,316
Amounts due on clearing transactions 1,673,531 669,187
Commissions payable 2,391,139 2,222,435
Payable to officer and directors 405,400 200,000
------------- -------------
Total current liabilities 7,480,391 6,096,938
------------- -------------
Obligations under capital leases,
excluding current installments 543,848 430,739
Other noncurrent liabilities 483,331 157,331
Unearned revenue 1,190,387 1,041,002
Commitments and contingencies (Note 4)
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1994 and 1995 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,392,287 outstanding at September 30,
1994 and 5,423,341 outstanding at
September 30, 1995 269,614 271,167
Additional paid-in capital 4,982,387 5,080,834
Deficit (4,113,508) (2,912,042)
------------- -------------
Total shareholders'
investment 2,638,895 3,940,361
------------- -------------
Total liabilities and
shareholders' investment $ 12,336,852 $ 11,666,371
============= ============-
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-3
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
----------------------------------------------------
1993 1994 1995
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Commissions $ 40,596,868 $ 43,258,286 $ 37,027,755
Marketing and education fees 2,696,847 3,280,146 2,933,055
Portfolio management fees 791,764 1,680,889 3,219,574
Facility and service fee
from affiliate 316,289 314,196 551,379
Other 1,606,049 1,753,679 938,288
------------ ------------ ------------
Total revenues 46,007,817 50,287,196 44,670,051
------------ ------------ ------------
Expenses:
Commissions 28,315,039 31,332,505 27,322,184
General and administrative 10,846,133 13,703,952 10,810,892
Representative development 3,289,828 4,938,127 4,526,637
Representative recruiting 314,405 519,176 398,837
Interest 99,690 62,603 100,280
------------ ------------ ------------
Total expenses 42,865,095 50,556,363 43,158,830
------------ ------------ ------------
Net income (loss) before state
and federal income tax 3,142,722 (269,167) 1,511,221
Provision for state and federal
income tax 208,000 100,734 182,220
------------ ------------ ------------
Net income (loss) $ 2,934,722 $ (369,901) $ 1,329,001
============ ============ ============
Net income (loss)
per common share $ 0.52 $ (0.09) $ 0.22
============ ============ ============
Weighted average number of
common shares outstanding 5,392,287 5,392,287 5,406,337
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1993, 1994, AND 1995
<TABLE>
<CAPTION>
Shares of Stock 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, 1992 250,067 5,392,287 $ 1,500,402 $ 269,614 $ 4,982,387 $ (6,423,259) $ 329,144
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 2,934,722 2,934,722
----------- ------------- ------------ ------------ ------------ ------------ -----------
Balance at
September 30, 1993 250,067 5,392,287 1,500,402 269,614 4,982,387 (3,616,072) 3,136,331
Preferred Dividends - - - - - (127,535) (127,535)
Net Loss - - - - - (369,901) (369,901)
----------- ------------- ------------ ------------ ------------ ------------ -----------
Balance at
September 30, 1994 250,067 5,392,287 1,500,402 269 614 4,982,387 (4,113,508) 2,638,895
Issuance of Common
Stock as Compensation - 31,054 - 1,553 98,447 - 100,000
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,329,001 1,329,001
----------- ------------- ------------ ------------ ------------ ------------ -----------
Balance at
September 30, 1995 250,067 5,423,341 $ 1,500,402 $ 271,167 $ 5,080,834 $ (2,912,042) $ 3,940,361
=========== ============= ============ ============ ============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
-------------------------------------------------------
1993 1994 1995
-------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,934,722 $ (369,901) $ 1,329,001
Reconciliation of net income (loss) to
net cash provided by operating activities
Depreciation and Amortization 416,294 668,489 850,941
Common stock issued as compensation - - 100,000
Writedown of non-current assets to net realizable value - 276,153 -
Changes in assets and liabilities Commissions and
accounts receivable (468,573) (1,461,157) 350,810
Receivable from affiliate (231,766) 133,245 53,611
Prepaid expenses (122,762) (93,174) 194,392
Receivable from (payable to) officers and
directors 83,697 255,950 (205,400)
Accounts payable and accrued expenses (73,798) 1,616,162 (331,005)
Commissions payable 113,387 999,367 (168,704)
Amounts due on clearing transactions (1,034,697) (262,460) (1,004,344)
Unearned revenue 191,428 12,261 (149,385)
-------------- ------------- -------------
Net cash provided by operating activities 1,807,932 1,774,935 1,019,917
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) reductions to other assets (484,545) (526,711) (390,659)
Purchases of property and equipment (258,326) (407,299) (95,145)
-------------- ------------- -------------
Net cash used for investing activities (742,871) (934,010) (485,804)
-------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,535) (127,535) (127,535)
Advances on notes receivable related parties - (1,503,481) (2,315,308)
Payments on notes receivable related parties - - 1,318,512
Payments on notes payable and
capital lease obligations (920,775) (241,103) (219,962)
Net cash provided by (used for) -------------- ------------- -------------
financing activities (1,048,310) (1,872,119) (1,344,293)
-------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,751 (1,031,194) (810,180)
CASH AND CASH EQUIVALENTS,
beginning of year 5,207,683 5,224,434 4,193,240
-------------- ------------- -------------
CASH AND CASH EQUIVALENTS,
end of year $ 5,224,434 $ 4,193,240 $ 3,383,060
============== ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION - H.D. Vest, Inc. (the "Company") is a Texas corporation
formed in December, 1986 to manage the various financial services arms of the
H.D. Vest Financial Services group. Through its wholly-owned subsidiaries, the
Company provides financial services through tax and accounting professionals.
The Company's services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(B) CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three months
or less.
(C) PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and is
depreciated by the straight-line method using estimated useful lives ranging
from five to six years. At September 30, 1994 and 1995, property and equipment
consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Leasehold improvements $ 124,530 $ 127,073
Computer equipment 1,473,912 1,593,035
Furniture and fixtures 1,084,414 1,154,412
Telephone equipment 293,524 303,858
Other 35,280 35,280
Less accumulated depreciation
and amortization (1,409,087) (1,924,547)
----------- -----------
Total property and equipment, net $ 1,602,573 $ 1,289,111
=========== ===========
</TABLE>
(D) AMOUNTS DUE ON CLEARING TRANSACTIONS - The Company remits customer funds
on certain clearing transactions on a settlement date basis rather than on a
trade date basis. Under the settlement date basis of remittance, the Company
holds customer funds from the trade date until the time at which the trades are
cleared by the product sponsor (not to exceed three business days). During
fiscal 1995, an industry wide regulatory action changed the clearing time from
five days to three days.
F-7
<PAGE>
(E) REVENUE RECOGNITION - Commission revenue and related commission expense
are recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees. These fees are unearned until the first
quarter of each fiscal year. Marketing and education fees are charged to
various product wholesalers, the Company's Registered Representatives, and new
licensees for Company-sponsored educational seminars and materials. Portfolio
management fees represent fee-based revenues and are recognized based on the
value of client investment balances during the period.
(F) REPRESENTATIVE DEVELOPMENT - Representative development expenses consist
of incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(G) REPRESENTATIVE RECRUITING - Representative recruiting expenses represent
the incremental costs incurred by the Company to recruit potential Registered
Representatives. Recruiting expenses include certain salaries, office expenses,
referral incentive programs, advertising, direct mail and telemarketing costs.
(H) INCOME TAXES - Deferred income taxes are provided for temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Deferred taxes are recorded based upon enacted tax rates anticipated
to be in effect when the temporary differences are expected to reverse.
(I) NET INCOME (LOSS) PER COMMON SHARE - Net income (loss) per common share is
based on the weighted average number of shares issued and outstanding during
each period presented.
(J) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1993, 1994 and 1995 were $106,205, $62,603 and $100,280
respectively. During the fiscal years ended September 30, 1993, 1994 and 1995
the Company acquired assets through capital leases amounting to $6,171,
$597,093, and $106,853 respectively.
F-8
<PAGE>
2) 401(K) RETIREMENT PLAN
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20%, up to an
annual limit of $1,848 per employee. Company contributions to the plan for
the fiscal years ended September 30, 1993, 1994 and 1995 were $16,628, $29,077
and $46,568 respectively.
3) NOTES PAYABLE
In July 1995, the Company entered into a line of credit with a bank under which
the Company may borrow up to a maximum of $500,000. The line bears interest,
payable monthly, at prime plus 1% (9.50% as of September 30, 1995). The line is
secured by a $250,000 Certificate of Deposit held by H.D. Vest Investment
Securities, Inc. ("HDVIS"). Additionally, the Company's two largest shareholders
have pledged a portion of their holdings as collateral for the line. The line
of credit is intended for working capital purposes and expires February 1, 1996.
At September 30, 1995, no amount had been drawn against the line.
4) COMMITMENTS AND CONTINGENCIES
(a) LEASES - The Company leases its office space and certain office equipment
under lease agreements which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements which qualify as
capital leases. At September 30, 1994 and 1995 the capitalized basis of the
leases included in property and equipment was approximately $1,071,586 and
$1,162,857 and accumulated amortization applicable to the leased equipment was
approximately $306,533 and $525,975 respectively. Future minimum lease payments
under operating lease commitments with initial or noncancellable terms in excess
of one year and under capital lease obligations as of September 30, 1995, are as
follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
Year ended September 30:
1996 $ 268,362 $ 793,427
1997 222,352 789,560
1998 172,625 558,433
1999 107,181 31,893
2000 1,150 12,446
---------- ----------
Total minimum lease payments 771,670 $2,185,759
==========
Less amount representing interest 135,669
----------
Present value of net minimum
capital lease payments 636,001
Less current installments
included in payable 205,262
----------
Obligations under capital
leases, excluding current
installments $ 430,739
==========
</TABLE>
Rent expense for the years ended September 30, 1993, 1994 and 1995 was
approximately $583,325, $552,463 and $594,756 respectively. The future minimum
rental payments under the current leases are as follows: 1996 - $684,081; 1997
- - $696,966; and 1998 - $481,824.
(b) LITIGATION AND CONTINGENCIES - During the fiscal year ended September 30,
1994, the Securities and Exchange Commission (SEC) began an investigation of the
Company's wholly-owned broker-dealer subsidiary, H.D. Vest Investment
Securities, Inc. (HDVIS), relating to the activities of a former Representative.
In July 1995, concurrent with an administrative proceeding instituted against
HDVIS, the SEC and HDVIS entered into a settlement agreement. Pursuant to the
settlement agreement, HDVIS (i)paid a monetary sanction of $50,000 and
(ii)agreed to modify its supervisory and compliance procedures in accordance
with the recommendations of an independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the
F-10
<PAGE>
Company paid for the benefit of the plaintiffs approximately $450,000 as
reimbursement of what the Company believes represents actual out-of-pocket
losses, plus interest. The Company believes a fidelity bond issued in favor of
HDVIS will cover actual out-of-pocket losses, up to an aggregate of $250,000
incurred by the plaintiffs. The plaintiffs seek an additional amount of actual
and punitive damages, some of which they allege are related to their actual
economic losses. HDVIS is vigorously contesting the plaintiffs' right to
recover any of these additional alleged damages. As of September 30, 1995, the
Company has accrued approximately $139,400, net of the fidelity bond, related to
legal expenses and costs associated with expert consultants.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not, in
the opinion of management, have a material adverse effect upon the financial
position of the Company.
5) SEVERANCE AGREEMENTS
In April 1994, an Executive Vice President resigned her position with the
Company. The Company and the officer entered into a severance agreement that
provided for the payment of severance of $16,667 per month commencing on May 1,
1994 and continuing for 30 months, in exchange for an agreement restricting the
use of Company materials and information for a period of 48 months. Subsequent
to September 30, 1994, the former officer rejoined the Company as President. In
connection with the officer's return, the Company and the officer agreed to
terminate the severance agreement. In December 1994, the Company credited the
remaining amount of $381,331 to general and administrative expenses. In October
1995, the Company granted the officer a medical leave of absence, discontinued
monthly payments and monthly stock awards under her existing employment
agreement, and agreed to pay her $16,600 per month until the earlier of October
1, 1996 or when the officer resumes her normal duties with the Company. Upon
her return, compensation to the officer would resume under her existing
employment agreement.
In June 1994, an Executive Vice President resigned his position with the
Company. The Company and the former officer entered into a severance agreement
that provided for the payment of severance
F-11
<PAGE>
of $16,667 per month commencing on September 15, 1994 and continuing for 30
months, in exchange for an agreement restricting the use of Company materials
and information for a period of 48 months.
In connection with these agreements the Company charged $1,000,000 to general
and administrative expense during the fiscal year ended September 30, 1994. The
related liabilities at September 30, 1994 and 1995 were $883,331 and $283,329,
respectively.
6) SHAREHOLDERS' INVESTMENT
In September 1991, the Company issued 166,667 shares of non-voting Series A
Convertible Preferred Stock at a price of $6.00 in exchange for $1,000,002 in
principal amount on a note payable to a financial services company. The
Company issued an additional 83,400 shares on non-voting Series A Preferred
Stock at a price of $6.00 in exchange for $500,400 in cash to a second financial
services company. The Company's preferred stock pays a dividend at an annual
rate of 8.5% and is payable quarterly. The preferred stock is callable by the
Company and convertible by the preferred stockholder based on terms detailed in
the offering agreement. During each of fiscal 1993, 1994, and 1995, dividends of
$127,535 ($0.51 per share) were declared and paid.
The Company sold 70,000 warrants (net of now expired A and B warrants) to the
Underwriter for $100. The exercise price for the warrants is $6.60 per share
and the warrants will be exercisable at any time during the four-year period
commencing October 4, 1992. The warrants contain certain demand and piggyback
registration rights as defined. The warrants are protected against dilution
upon the occurrence of certain events. The warrants issued to the Underwriter
may not be transferred or assigned except to officers or shareholders of the
Underwriter. These warrants were registered pursuant to the Underwriter's
agreement in amendment number two to Form S-1 filed in May, 1995.
7) NET CAPITAL REQUIREMENTS
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc.
("HDVIS") is subject to the Securities and Exchange Commission Uniform Net
Capital Rule (Rule 15c3-1), which requires the maintenance of minimum net
capital and requires that the ratio of aggregate indebtedness to net capital,
both as defined, shall not exceed 15 to 1. Minimum net capital can never be
lower than $250,000 or 6 2/3% of aggregate indebtedness, whichever is greater.
F-12
<PAGE>
HDVIS had net capital, required net capital, and excess net capital for the
years ended September 30, 1993, 1994, and 1995, as follows:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Net capital $ 1,203,249 $ 1,299,003 $ 1,449,906
Required net capital 252,157 293,682 250,000
----------- ----------- -----------
Excess net capital $ 951,092 $ 1,005,321 $ 1,199,906
=========== =========== ===========
</TABLE>
8) RELATED-PARTY TRANSACTIONS
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. During April 1994, the Company amended the
agreement with Herb D. Vest and provided for a management fee of $500,000 per
year plus an annual bonus based on the Company's performance related to revenue
and net income goals established by the Board of Directors. The annual bonus for
fiscal 1995, ranged from $0 to $500,000. No bonus was accrued or paid under the
amended plan for the fiscal year ended September 30, 1994 or 1995. A bonus of
$88,778 was paid during fiscal 1994 related to a previous plan. Management fees
under these agreements were $830,000, $632,528 and $500,000 for the years ended
September 30, 1993, 1994 and 1995, respectively.
During April 1994, the Company entered into an agreement to provide Herb Vest an
unsecured revolving line of credit in an amount not to exceed $1,000,000. The
terms of the agreement require an annual payment to be made on November 30, of
each year equal to one-seventh of the then outstanding principle plus accrued
interest. The final payment of all outstanding principal and accrued interest
shall be due and payable on or before November 30, 2001. The agreement bore
interest on unpaid principal balances at the margin interest rate as of August
31, 1994(6.5%), as quoted by National Financial Services Corporation, the
Company's clearing firm, on the first day of the month and interest on matured
unpaid amounts at an annual rate of 10%. Effective September 1, 1994, the
Company amended the agreement to provide Mr. Vest with a revolving line of
credit not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The effective interest
rate of the amended agreement is 11%. At September 30, 1995, Mr. Vest had drawn
$2,000,000 in principal against the line of credit. The Company has recorded
$186,355 of accrued interest on this line.
F-13
<PAGE>
During fiscal 1994, the Company modified Ms. Howard-Vest's consultant contract
to receive $16,667 per month pursuant to the agreement. For the years ended
September 30, 1994 and 1995, fees under this agreement totaled $200,000 each.
During May 1994, the Company entered into an agreement to provide Barbara
Howard-Vest a revolving line of credit in an amount not to exceed $350,000,
collateralized by 100,000 shares of Ms. Howard-Vest's unrestricted Company
stock. The terms of the agreement require an annual payment be made on November
30 of each year equal to one-seventh of the then outstanding principal balance
plus accrued interest. The final payment of all outstanding principal; and
accrued interest shall be due and payable on or before November 30, 2001. The
agreement bore interest on unpaid principal balances at the margin interest rate
as of August 31, 1994(6.5%), as quoted by National Financial Services
Corporation, the Company's clearing firm, on the first day of the month and
interest on matured unpaid amounts at an annual rate of 10%. Effective September
1, 1994, the Company amended the agreement to provide Ms. Howard-Vest with a
revolving line of credit not to exceed $700,000, collateralized by Ms. Howard-
Vest's unrestricted Company stock in an amount equal to the unadjusted current
balance of the line of credit based on the stock's current ask price. The
effective interest rate of the amended agreement is 11%. At September 30, 1995,
Ms. Howard-Vest had drawn $296,116 in principal against the line of credit. The
Company has recorded $7,807 of accrued interest on this line.
The Company entered into a Facilities and Services Agreement, effective January
1, 1987, with H.D. Vest Insurance Services ("HDVIns"), a sole proprietorship
operated by Mr. Vest. Under the terms of this agreement, the Company provides
HDVIns certain management and other services. The Company has charged HDVIns
$316,289, $314,196, and $551,379, for the years ended September 30, 1993, 1994,
and 1995, respectively. As of September 30, 1995, the Company had a receivable
of approximately $98,929 from HDVIns.
9) STATE AND FEDERAL INCOME TAXES
Effective October 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109
requires an asset and liability approach for financial accounting and reporting
for income taxes. This standard requires that the financial impact of changes in
the tax laws on deferred tax assets be recorded as an 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.
F-14
<PAGE>
Income tax expense consisted of the following components:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 54,500 $ 2,914 $ 14,220
State 153,500 97,820 168,000
Deferred:
Federal - - -
State - - -
--------- --------- ---------
$ 208,000 $ 100,734 $ 182,220
========= ========= =========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
--------------------------------------------
1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
Statutory rate 34.0% (34.0)% 34.0%
State taxes, net of Federal 4.9 36.4 11.1
Fines and penalties 0.0 25.3 (3.4)
Other 1.1 14.9 (3.5)
Alternative minimum taxes 1.7 1.1 0.9
Nondeductible net operating
loss 0.0 0.0 0.0
Utilization of net operating
loss carryforward (35.1) (6.3) (27.0)
--------------------------------------------
Effective rate 6.6% 37.4% 12.1%
============================================
</TABLE>
F-15
<PAGE>
The following table presents the components of the net deferred tax asset:
<TABLE>
<CAPTION>
Deferred
October 1, Expense September
30,
1994 (Benefit) 1995
---- --------- ----
<S> <C> <C> <C>
Accrued severance $ 272,000 $ 175,668 $ 96,332
Depreciation (90,693) 13,708 (104,401)
Unearned Revenue 153,481 66,300 87,181
Other 49,739 (40,979) 90,718
Alternative minimum tax
credit carryforward 83,462 (17,025) 100,487
Net operating loss carryforward 642,590 394,054 248,536
----------- ---------- ----------
1,110,579 591,726 518,853
Valuation allowance (1,110,579) (591,726) (518,853)
----------- ---------- ----------
Net deferred tax asset $ - $ - $ -
=========== ========== ==========
</TABLE>
The Company's tax effected net temporary differences result in a deferred tax
asset reflecting a benefit expected to be utilized in the future. However, the
Company has recorded a 100% valuation allowance against this asset. Management
currently estimates that it is more likely than not that no future benefit will
be received from this asset due to historical fluctuations in net income.
As of September 30, 1995, the Company had net operating loss carryforwards of
approximately $731,000, which will begin to expire in 2007 if not utilized
earlier. As of September 30, 1995, the Company has alternative minimum tax
credit carryforwards available of approximately $100,487, which are available as
a credit against future regular income taxes payable.
10) STOCK OPTION PLANS
The Company has a non-qualified stock option plan for all employees. The Company
has reserved 800,000 shares of common stock for the plan. The option price at
the date of grant cannot be less than the fair market value of the common stock
at that date. As of September 30, 1995, 142,257 options had been granted under
the plan at an exercise price of $8.50 per share. No stock options were
exercisable at September 30, 1995, nor were any exercised during the year ended
September 30, 1995.
F-16
<PAGE>
During the fiscal year ended September 30, 1992, the Company issued 460,000
stock options to certain officers and advisors to the board of directors.
380,000 of these options remain outstanding as of September 30, 1995. The
exercise price on the majority of the options is $5.00 (which was the fair
market value of the Company stock at the date of grant). At September 30, 1995,
no options had been exercised.
In November 1992, the Company resolved that each independent director would
receive stock options of 2,000 shares of common stock to be exercisable at the
price of the common stock on the date of issuance and to be issued quarterly to
the independent directors. At September 30, 1995, 22,000 options have been
issued and remain outstanding.
11) DEFERRED COMPENSATION PLAN
In July 1995 the Company began accepting contributions for the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution as defined in the Plan.
Amounts deferred as of September 30, 1995 were approximately $73,000.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash.
Matching contributions accrued for the fiscal year ended 1995 approximated
$1,000.
12) SUBSEQUENT EVENT
The legal action discussed in Note 4(b) "Litigation and Contingencies" was
submitted to binding arbitration before the NASD. In September 1996, the
arbitration panel awarded the plaintiffs approximately $1.7 million of which
approximately
F-17
<PAGE>
$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
the net capital of HDVIS pursuant to a previously executed Facility and Services
Agreement between the Company and HDVIS. As a result of the award, the Company
and HDVIS recorded a combined $1,450,000 charge to earnings. 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 may make additional capital contributions to HDVIS which
will in turn reduce the income of the Company.
F-18
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
(Unaudited)
------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 5,903,981 $3,383,060
Commissions and accounts
receivable 4,193,532 3,329,869
Receivable from affiliate 100,558 98,929
Notes receivable - related parties 507,141 522,178
Prepaid expenses 270,222 56,773
----------- ----------
Total current assets 10,975,434 7,390,809
----------- ----------
Property and equipment, net
of accumulated depreciation
of $2,105,682 at June 30, 1996,
and $1,924,547 at September
30, 1995 1,646,895 1,289,111
Notes receivable - related parties 2,094,411 1,978,099
Other assets 822,350 1,008,352
----------- -----------
$15,539,090 $11,666,371
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-19
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
LIABILITIES AND SHAREHOLDERS' INVESTMENT
<TABLE>
<CAPTION>
June 30, September 30,
1996 1995
(Unaudited)
------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued
expenses $3,101,528 $ 3,005,316
Amounts due on clearing
transactions 1,066,503 669,187
Commissions payable 3,675,526 2,222,435
Payable to officers and directors 124,994 200,000
------------- -----------
Total current liabilities 7,968,551 6,096,938
------------- -----------
Obligations under capital leases,
excluding current installments 677,485 430,739
Other noncurrent liabilities 508,349 157,331
Unearned revenues 140,000 1,041,002
Shareholders' investment:
Preferred stock, $6 par value;
250,067 shares outstanding 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
and 5,423,341 outstanding 271,167 271,167
Additional paid-in capital 5,080,834 5,080,834
Deficit (607,698) (2,912,042)
------------- -----------
Total shareholders' investment 6,244,705 3,940,361
------------- -----------
$15,539,090 $11,666,371
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-20
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
--------------------------
1996 1995
------------ ------------
<S> <C> <C>
Revenues:
Commissions $41,502,290 $26,579,352
Portfolio management fees 4,492,486 2,240,263
Marketing and education fees 3,104,565 2,480,094
Interest 356,046 254,839
Other 547,379 985,479
----------- -----------
Total revenues 50,002,766 32,540,027
----------- -----------
Expenses:
Commissions 28,837,836 18,337,874
Portfolio management fees 2,453,112 1,223,636
General and administrative 10,548,409 7,609,087
Representative development 4,817,554 3,300,550
Representative recruiting 496,502 285,514
Interest 68,926 51,752
----------- -----------
Total expenses 47,222,339 30,808,413
----------- -----------
Net income before taxes 2,780,427 1,731,614
Income taxes 380,431 111,925
----------- -----------
Net income $ 2,399,996 $ 1,619,689
=========== ===========
Net income per common share $ .42 $ .28
=========== ===========
Weighted average number of
common shares outstanding 5,423,341 5,401,683
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-21
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended June 30,
---------------------------
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $2,399,996 $ 1,619,689
Noncash items included in income -
Depreciation and Amortization 664,419 567,954
Common stock award - 70,000
Net changes in certain working
capital and other components
Commissions and accounts receivable (863,663) 1,287,536
Receivable from affiliate (1,629) (81,883)
Prepaid expenses (213,449) (62,756)
Payable to officers and directors (75,006) (203,566)
Amounts due on clearing transactions 397,316 (580,876)
Accounts payable and accrued expenses 447,230 (926,188)
Commissions payable 1,453,091 (266,346)
Unearned revenues (901,002) (905,971)
---------- -----------
Net cash provided by operating
activities 3,307,303 517,593
---------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchases of property and equipment (168,768) (69,076)
Other assets (66,321) (442,260)
----------- -----------
Net cash used for
investing activities (235,089) (511,336)
----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Preferred stock dividends (95,652) (95,652)
Advances on notes receivable
-related parties (666,670) (2,489,247)
Payments on notes receivable
-related parties 565,395 1,580,192
Payments on capital lease
obligations (354,366) (131,456)
----------- -----------
Net cash used for
financing activities (551,293) (1,136,163)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 2,520,921 (1,129,906)
CASH AND CASH EQUIVALENTS,
September 30, 1995 and 1994 3,383,060 4,193,240
----------- -----------
CASH AND CASH EQUIVALENTS,
June 30, 1996 and 1995 $5,903,981 $ 3,063,334
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-22
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1) Basis of Financial Statements
The accompanying unaudited consolidated financial statements have been prepared
in accordance with Rule 10-01 of Regulation S-X, "Interim Financial Statements",
and accordingly do not include all information and footnotes required under
generally accepted accounting principles for complete financial statements. The
financial statements have been prepared in conformity with the accounting
principles and practices as disclosed in the Company's Annual Report on Form 10-
K for the year ended September 30, 1995. In the opinion of management, these
interim financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the Company's
financial position as of June 30, 1996 and September 30, 1995, the results of
operations for the three and nine month periods ended June 30, 1996 and 1995,
and the cash flows for the nine month periods ended June 30, 1996 and 1995.
Results of operations for the interim period ended June 30, 1996, are not
necessarily indicative of the results that may be expected for the year ended
September 30, 1996. For additional information, refer to the consolidated
financial statements and footnotes included in the Company's Annual Report on
Form 10-K for the year ended September 30, 1995.
2) Contingencies
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission (SEC) began an investigation of the Company's wholly-owned broker-
dealer subsidiary, H.D. Vest Investment Securities, Inc. (HDVIS), relating to
the activities of a former Representative. In July 1995, concurrent with an
administrative proceeding instituted against HDVIS, the SEC and HDVIS entered
into a settlement agreement. Pursuant to the settlement agreement, HDVIS (i)
paid a monetary sanction of $50,000 and (ii) agreed to modify its supervisory
and compliance procedures in accordance with the recommendations of an
independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the Company paid
for the benefit of the plaintiffs approximately
F-23
<PAGE>
$450,000 as reimbursement of what the Company believes represents actual out-of-
pocket losses, plus interest. The Company believes a fidelity bond issued in
favor of HDVIS will cover actual out-of-pocket losses, up to an aggregate of
$250,000 incurred by the plaintiffs. The plaintiffs seek an additional amount of
actual and punitive damages, some of which they allege are related to their
actual economic losses. HDVIS is vigorously contesting the plaintiffs' right to
recover any of these additional alleged damages. Included in accounts payable
and accrued expenses at June 30, 1996, is a reserve of approximately $107,000,
net of the fidelity bond, related to legal expenses incurred and costs
associated with expert consultants retained in connection with this matter.
3) Related-Party Transactions
The Company has an agreement with Herb D. Vest (majority shareholder) for
management services to the Company. The agreement, as amended in January 1996,
allows for a management fee of $750,000 per fiscal year plus an annual bonus
based on the Company's performance related to revenue and net income goals
established by the Board of Directors.
4) Subsequent Event
The legal action discussed in Note 2 "Contingencies" 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 the net capital
of HDVIS pursuant to a previously executed Facility and Services Agreement
between the Company and HDVIS. As a result of the award, the Company and HDVIS
recorded a combined $1,450,000 charge to earnings. 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 may make additional capital contributions to HDVIS which will in turn
reduce the income of the Company.
F-24
<PAGE>
===================================
No dealer, salesman or other person
has been authorized in connection
with this offering to give any
information or to make any
representation other than that as
contained in this Prospectus and if
given or made such information or
representation must not be relied
upon as having been authorized by
the Company. This Prospectus does
not constitute an offer or
solicitation in any State or other
jurisdictions to any person to whom
it is unlawful to make such an offer
or solicitation in such State or
jurisdiction.
------------------------------------
This Company, H.D. Vest, Inc., plans
to furnish annual reports including
audited financial statements, to the
shareholders. The Company will issue
unaudited interim reports to its
shareholders on a quarterly basis.
====================================
DEFERRED COMPENSATION PLAN UNITS
H.D. VEST, INC.
_____________________________
OFFERING PRICE: MARKET VALUE
_____________________________
__________________
PROSPECTUS
__________________
OCTOBER 8, 1996
H.D. VEST INVESTMENT
SECURITIES, INC.
433 E. LAS COLINAS BLVD.
IRVING, TEXAS 75039
(214) 863-6000
==================================
