<PAGE>
FILED PURSUANT TO RULE 424(B)(3)
FILE NO. 33-74868
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 3, 1996
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
_____________________
POST EFFECTIVE AMENDMENT NO. 1
TO
FORM S-1
Registration Statement
Under
THE SECURITIES ACT OF 1933
____________________
H.D. VEST, INC.
(exact name of registrant as specified in charter)
Texas 6210 75-2154244
(State or other jurisdiction (Standard Industrial (IRS Employer
of organization) Classification Code No.) Identification Number)
433 E. Las Colinas Blvd.
Third Floor
Irving, Texas 75039
(Address of principal executive offices and principal place of business)
Registrant's telephone number, including area code (214) 863-6000
HERB D. VEST, CHAIRMAN
H.D. VEST, INC.
433 E. LAS COLINAS BLVD.
THIRD FLOOR
IRVING, TEXAS 75039
(214) 863-6000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
Copies of communications to:
Curtis Swinson
Malouf Lynch Jackson Kessler & Collins
A Professional Corporation
700 Preston Commons West
8117 Preston Road
Dallas, Texas 75225-6306
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: MAY 8, 1995
Calculation of Registration Fee
<TABLE>
<CAPTION>
==========================================================================================================
Title of Each Class of Amount to be Proposed Maximum Proposed Maximum Amount of
Securities to be Registered Offering Price Per Aggregate Offering Registration
Registered Unit Price (2) Fee
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units consisting of:
Cash Equivalents $7,000,000 100% $7,000,000(1) $2,413.80
- ----------------------------------------------------------------------------------------------------------
TOTAL $7,000,000 100% $7,000,000 $2,413.80
==========================================================================================================
</TABLE>
(1) The Company estimates for the purposes of calculating the registration fee
that its Representatives will acquire through deferral of compensation
Units consisting of Cash Equivalents pursuant to a Deferred Compensation
Plan (see "Plan of Distribution") equal to $7,000,000.
(2) Before deducting estimated offering expenses payable by the Company of
$210,500.
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO RULE 501(B)
<TABLE>
<CAPTION>
ITEM IN FORM S-1 CAPTION IN PROSPECTUS
- ---------------- ---------------------
<S> <C> <C>
Item 1 Forepart of the Registration
Statement and Outside Front Cover Page
of Prospectus............................. Outside Front Cover Page
Item 2 Inside Front and Outside Back
Cover Pages of Prospectus................. Inside Front Cover Page;
Outside Back Cover Page
Item 3 Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges........ Prospectus Summary; Risk
Factors
Item 4 Use of Proceeds........................... Use of Proceeds
Item 5 Determination of Offering Price........... Certain Transactions
Item 6 Dilution.................................. Dilution
Item 7 Selling Security Holders.................. Not Applicable
Item 8 Plan of Distribution...................... Plan of Distribution
Item 9 Description of Securities
to be Registered.......................... Description of
Securities
Item 10 Interests of Named Experts and Counsel.... Not Applicable
Item 11 Information with Respect to the
Registrant
(a) Description of Business........... Business
(b) Description of Property........... Property
(c) Legal Proceedings................. Legal Proceedings
(d) Market Price of and Dividends
on the Registrant's Common Equity
and Related Stockholder Matters... Risk Factors-Potential
Future Sales Pursuant to
Rule 144; Description of
Securities
(e) Financial Statements.............. Consolidated Financial State
(f) Selected Financial Data........... Selected Financial
Information
(g) Supplementary Financial
Information....................... Not Applicable
(h) Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... Management's Discussion
and Analysis of
Financial Condition and
Results of Operations
(i) Changes In and Disagreements with
Accountants on Accounting and
Financial Disclosure.............. Not Applicable
(j) Directors and Executive Officers.. Management
(k) Executive Compensation............ Business; Management
(l) Security Ownership of Certain
Beneficial Owners and Management.. Principal Shareholders;
Certain Transactions
(m) Certain Relationships and Related
Transactions...................... Business; Management;
Certain Transactions
Item 12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
</TABLE>
<PAGE>
Filed Pursuant to Rule 424(b)(3)
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 Proceeds to
Discounts Company
and Commissions (3)(4)
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Deferred Compensation Plan 100% $ 0.00 (3) $7,000,000
Units (1) (2)
--------------------------------------------------------------------------------
Total:
Deferred Compensation Plan $7,000,000(2) $ 0.00 $7,000,000
Units (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 3, 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
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> <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>
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
4
<PAGE>
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 believes that the increase in revenues is due, in part, to
14
<PAGE>
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 her line of credit of $209,609, payments on capital
lease
15
<PAGE>
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 and administrative
costs as overhead has increased to support the
16
<PAGE>
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
(map)
The following map illustrates the geographic location of the Company's
approximately 4,569 fully-licensed Representatives.
<TABLE>
<CAPTION>
<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
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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").
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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.
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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
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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.
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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
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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.
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<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
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<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.
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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
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<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
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<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:
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<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
END AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised,
Shares Options Held At In-The-Money
Acquired Fiscal Year End Options Fiscal Year End(1,2)
Through Options Value --------------- ----------------------------
Name Exercised Realized Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <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" of the Company (as that term is defined
in the officers Plan). No stock was earned under the Executive Officers
Compensation Plan for
52
<PAGE>
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 (1) (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 between November 1988 to
November 1989. Of the 5,423,341 shares
56
<PAGE>
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
or winding up of the Company, and after payment of creditors, the
57
<PAGE>
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 Anderson, 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 Statements 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 Statements 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
Outstanding Additional
--------------------------- Preferred Common Paid-in
Preferred Common Stock Stock Capital Deficit Total
--------------- ---------- ------------- ------------- ---------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
September 30, 1992 250,067 5,392,287 $ 1,500,402 $ 269,614 $ 4,982,387 $ (6,423,259) $ 329,144
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 2,934,722 2,934,722
--------------- ---------- ------------- ------------- --------------- -------------- ----------
Balance at
September 30, 1993 250,067 5,392,287 1,500,402 269,614 4,982,387 (3,616,072) 3,136,331
Preferred Dividends - - - - - (127,535) (127,535)
Net Loss - - - - - (369,901) (369,901)
--------------- ---------- ------------- ------------- --------------- -------------- ----------
Balance at
September 30, 1994 250,067 5,392,287 1,500,402 269 614 4,982,387 (4,113,508) 2,638,895
Issuance of Common
Stock as Compensation - 31,054 - 1,553 98,447 - 100,000
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,329,001 1,329,001
--------------- ---------- ------------- ------------- --------------- -------------- ----------
Balance at
September 30, 1995 250,067 5,423,341 $ 1,500,402 $ 271,167 $ 5,080,834 $ (2,912,042 $ 3,940.361
--------------- ---------- ------------- ------------- --------------- -------------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
-----------------------------------------------
1993 1994 1995
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,934,722 $ (369,901) $ 1,329,001
Reconciliation of net income (loss) to
net cash provided by operating activities
Depreciation and Amortization 416,294 668,489 850,941
Common stock issued as compensation - - 100,000
Writedown of non-current assets to
net realizable value - 276,153 -
Changes in assets and liabilities
Commissions and accounts receivable (468,573) (1,461,157) 350,810
Receivable from affiliate (231,766) 133,245 53,611
Prepaid expenses (122,762) (93,174) 194,392
Receivable from (payable to)
officers and directors 83,697 255,950 (205,400)
Accounts payable and accrued expenses (73,798) 1,616,162 (331,005)
Commissions payable 113,387 999,367 (168,704)
Amounts due on clearing transactions (1,034,697) (262,460) (1,004,344)
Unearned revenue 191,428 12,261 (149,385)
----------- ----------- -----------
Net cash provided by operating
activities 1,807,932 1,774,935 1,019,917
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
(Additions) reductions to other assets (484,545) (526,711) (390,659)
Purchases of property and equipment (258,326) (407,299) (95,145)
----------- ----------- -----------
Net cash used for investing activities (742,871) (934,010) (485,804)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Preferred stock dividends (127,535) (127,535) (127,535)
Advances on notes receivable -
related parties - (1,503,481) (2,315,308)
Payments on notes receivable -
related parties - - 1,318,512
Payments on notes payable and
capital lease obligations (920,775) (241,103) (219,962)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,048,310) (1,872,119) (1,344,293)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 16,751 (1,031,194) (810,180)
CASH AND CASH EQUIVALENTS,
beginning of year 5,207,683 5,224,434 4,193,240
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 5,224,434 $ 4,193,240 $ 3,383,060
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION - H.D. Vest, Inc. (the "Company") is a Texas corporation
formed in December, 1986 to manage the various financial services arms of the
H.D. Vest Financial Services group. Through its wholly-owned subsidiaries, the
Company provides financial services through tax and accounting professionals.
The Company's services are designed to assist in making individual tax and
accounting professionals financial service centers for their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(b) CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three months
or less.
(c) PROPERTY AND EQUIPMENT - Property and equipment is stated at cost and is
depreciated by the straight-line method using estimated useful lives ranging
from five to six years. At September 30, 1994 and 1995, property and equipment
consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1994 1995
------------ ------------
<S> <C> <C>
Leasehold improvements $ 124,530 $ 127,073
Computer equipment 1,473,912 1,593,035
Furniture and fixtures 1,084,414 1,154,412
Telephone equipment 293,524 303,858
Other 35,280 35,280
Less accumulated depreciation
and amortization (1,409,087) (1,924,547)
----------- -----------
Total property and equipment, net $ 1,602,573 $ 1,289,111
=========== ===========
</TABLE>
(d) AMOUNTS DUE ON CLEARING TRANSACTIONS - The Company remits customer funds
on certain clearing transactions on a settlement date basis rather than on a
trade date basis. Under the settlement date basis of remittance, the Company
holds customer funds from the trade date until the time at which the trades are
cleared by the product sponsor (not to exceed three business days). During
fiscal 1995, an industry wide regulatory action changed the clearing time from
five days to three days.
F-7
<PAGE>
(e) REVENUE RECOGNITION - Commission revenue and related commission expense
are recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees. These fees are unearned until the first
quarter of each fiscal year. Marketing and education fees are charged to various
product wholesalers, the Company's Registered Representatives, and new licensees
for Company-sponsored educational seminars and materials. Portfolio management
fees represent fee-based revenues and are recognized based on the value of
client investment balances during the period.
(f) REPRESENTATIVE DEVELOPMENT - Representative development expenses consist
of incremental salaries, office expenses, telephone expenses, educational events
and promotional expenses directly related to training Registered
Representatives.
(g) REPRESENTATIVE RECRUITING - Representative recruiting expenses represent
the incremental costs incurred by the Company to recruit potential Registered
Representatives. Recruiting expenses include certain salaries, office expenses,
referral incentive programs, advertising, direct mail and telemarketing costs.
(h) INCOME TAXES - Deferred income taxes are provided for temporary differences
between the tax bases of assets and liabilities and their financial reporting
amounts. Deferred taxes are recorded based upon enacted tax rates anticipated
to be in effect when the temporary differences are expected to reverse.
(i) NET INCOME (LOSS) PER COMMON SHARE - Net income (loss) per common share is
based on the weighted average number of shares issued and outstanding during
each period presented.
(j) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1993, 1994 and 1995 were $106,205, $62,603 and $100,280
respectively. During the fiscal years ended September 30, 1993, 1994 and 1995
the Company acquired assets through capital leases amounting to $6,171,
$597,093, and $106,853 respectively.
F-8
<PAGE>
2) 401(K) RETIREMENT PLAN
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20%, up to an
annual limit of $1,848 per employee. Company contributions to the plan for the
fiscal years ended September 30, 1993, 1994 and 1995 were $16,628, $29,077 and
$46,568 respectively.
3) NOTES PAYABLE
In July 1995, the Company entered into a line of credit with a bank under which
the Company may borrow up to a maximum of $500,000. The line bears interest,
payable monthly, at prime plus 1% (9.50% as of September 30, 1995). The line is
secured by a $250,000 Certificate of Deposit held by H.D. Vest Investment
Securities, Inc. ("HDVIS"). Additionally, the Company's two largest shareholders
have pledged a portion of their holdings as collateral for the line. The line of
credit is intended for working capital purposes and expires February 1, 1996. At
September 30, 1995, no amount had been drawn against the line.
4) COMMITMENTS AND CONTINGENCIES
(a) LEASES - The Company leases its office space and certain office equipment
under lease agreements which qualify as operating leases. The Company also
leases certain office equipment under certain lease agreements which qualify as
capital leases. At September 30, 1994 and 1995 the capitalized basis of the
leases included in property and equipment was approximately $1,071,586 and
$1,162,857 and accumulated amortization applicable to the leased equipment was
approximately $306,533 and $525,975 respectively. Future minimum lease payments
under operating lease commitments with initial or noncancellable terms in excess
of one year and under capital lease obligations as of September 30, 1995, are as
follows:
F-9
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
--------- ----------
<S> <C> <C>
Year ended September 30:
1996 $268,362 $ 793,427
1997 222,352 789,560
1998 172,625 558,433
1999 107,181 31,893
2000 1,150 12,446
-------- ----------
Total minimum lease payments 771,670 $2,185,759
==========
Less amount representing interest 135,669
--------
Present value of net minimum
capital lease payments 636,001
Less current installments
included in payable 205,262
--------
Obligations under capital
leases, excluding current
installments $ 430,739
=========
</TABLE>
Rent expense for the years ended September 30, 1993, 1994 and 1995 was
approximately $583,325, $552,463 and $594,756 respectively. The future minimum
rental payments under the current leases are as follows: 1996 - $684,081; 1997
- - $696,966; and 1998 - $481,824.
(b) LITIGATION AND CONTINGENCIES - During the fiscal year ended September 30,
1994, the Securities and Exchange Commission (SEC) began an investigation of the
Company's wholly-owned broker-dealer subsidiary, H.D. Vest Investment
Securities, Inc. (HDVIS), relating to the activities of a former Representative.
In July 1995, concurrent with an administrative proceeding instituted against
HDVIS, the SEC and HDVIS entered into a settlement agreement. Pursuant to the
settlement agreement, HDVIS (i)paid a monetary sanction of $50,000 and
(ii)agreed to modify its supervisory and compliance procedures in accordance
with the recommendations of an independent consultant retained by the Company.
Additionally, during fiscal 1994, in connection with the matter described above,
a group of clients of the former Representative commenced a civil action against
HDVIS and the former Representative alleging violations of securities laws,
fraud, conversion and related causes of action. In June 1995, the
F-10
<PAGE>
Company paid for the benefit of the plaintiffs approximately $450,000 as
reimbursement of what the Company believes represents actual out-of-pocket
losses, plus interest. The Company believes a fidelity bond issued in favor of
HDVIS will cover actual out-of-pocket losses, up to an aggregate of $250,000
incurred by the plaintiffs. The plaintiffs seek an additional amount of actual
and punitive damages, some of which they allege are related to their actual
economic losses. HDVIS is vigorously contesting the plaintiffs' right to recover
any of these additional alleged damages. As of September 30, 1995, the Company
has accrued approximately $139,400, net of the fidelity bond, related to legal
expenses and costs associated with expert consultants.
The Company is subject to other legal proceedings and claims which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not, in
the opinion of management, have a material adverse effect upon the financial
position of the Company.
5) SEVERANCE AGREEMENTS
In April 1994, an Executive Vice President resigned her position with the
Company. The Company and the officer entered into a severance agreement that
provided for the payment of severance of $16,667 per month commencing on May 1,
1994 and continuing for 30 months, in exchange for an agreement restricting the
use of Company materials and information for a period of 48 months. Subsequent
to September 30, 1994, the former officer rejoined the Company as President. In
connection with the officer's return, the Company and the officer agreed to
terminate the severance agreement. In December 1994, the Company credited the
remaining amount of $381,331 to general and administrative expenses. In October
1995, the Company granted the officer a medical leave of absence, discontinued
monthly payments and monthly stock awards under her existing employment
agreement, and agreed to pay her $16,600 per month until the earlier of October
1, 1996 or when the officer resumes her normal duties with the Company. Upon her
return, compensation to the officer would resume under her existing employment
agreement.
In June 1994, an Executive Vice President resigned his position with the
Company. The Company and the former officer entered into a severance agreement
that provided for the payment of severance
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 3, 1996
H.D. Vest Investment
Securities, Inc.
433 E. Las Colinas Blvd.
Irving, Texas 75039
(214) 863-6000
================================================================================
<PAGE>
<PAGE>
H.D VEST, INC.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses Of Issuance And Distribution (estimated).
a. SEC and NASD Filing Fee..................................... $ 10,000
b. Blue Sky Fees and Expenses.................................. 3,000
c. Printing and Engraving Costs................................ 10,000
d. Legal Fees.................................................. 87,000
e. Accounting Fees............................................. 85,000
f. Miscellaneous............................................... 15,000
-------
Total....................................................... $ 210,500
Item 14. Indemnification Of Directors And Officers.
The By-laws of the Company and each of its subsidiaries contain provisions
which provide for the indemnification of directors, officers, and other in an
official capacity who, while acting in good faith, in the best interests of the
Company and within the scope of their offices, are or are threatened to be
named a defendant or respondent in a civil or criminal action. The extent of the
indemnification is limited to judgements, penalties, fines, settlements and
reasonable expenses actually incurred.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant 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.
Item 15. Recent Sales Of Unregistered Securities.
The Company issued 166,667 shares of Series A Preferred Stock at a price of
$6.00 in exchange for $1,000,002 in principal amount on the note held by Kemper
Financial Services, Inc. This transaction was completed pursuant to an exemption
from registration under Section 4(2) of the Securities Act of 1993 and was
effective September 30, 1991.
The Company sold 83,400 shares of Series A Preferred Stock at a price of
$6.00 per share to Oppenheimer Management Corp. This sale was effected pursuant
to an exemption from registration under Section 4(2) of the Securities Act of
1993 and was effective September 24, 1991.
The Company issued 22,800 shares of Common Stock to certain officers of the
Company as compensation for services to the Company through March 31, 1991.
These shares were issued pursuant to an exemption under Section 4(2) of the
Securities Act of 1993 at a basis of $5.00 per share.
<PAGE>
The Company sold Common Stock through a private offering under Regulation D
and Section 4(2) of the Securities Act of 1993. This Stock, therefore, has
restrictions on the ability to sell it for the next two (2) years, It was sold
to 14 accredited investors (as defined in the Securities Act of 1993 Section
2(15) and 34 unaccredited investors. The private offering was closed out on
May 15, 1987, with a total of 113,600 shares sold at $5.00 per share net
proceeds to the Company. The shares were sold through the assistance if HDVIS
licensed registered Representatives and other registered selling agents.
At the initial capitalization of the Company, each outstanding share of
HDVIS was exchanged for four shares of the Company. The creation of the
Company was necessary in order to expand the services offered by the Company
to its Representatives.
Item 16. Exhibits
3.1 Articles of Incorporation and By-Laws (1)
3.2 First Articles of Amendment to the Articles of Incorporation of H.D.
Vest, Inc. (1)
3.3 Second Articles of Amendment of Articles of Incorporation of H.D.
Vest, Inc. (1)
5. Opinion Regarding Legality (1)
22. List of Subsidiaries (1)
24.1 Consent of Arthur Andersen, LLP (2)
28.1 Specimen Common Stock Certificate (1)
28.2 Registered Representative Sales Agreement (1)
28.3 B Warrant Certificates (1)
28.4 B Warrant Agreements (1)
28.5 Non-Qualified Stock Option Plan (1)
28.6 Facilities and Services Agreement with H.D. Vest Insurance Services
(1)
28.7 Representative's Warrants to Purchase Common Stock (1)
28.8 Management Agreement with Herd D. Vest (1)
28.9 H.D. Vest Representatives Deferred Compensation Plan (2)
28.10 Opinion of Arthur Andersen, LLP regarding Federal Income Tax
Consequences (1)
28.11 Agreement for Line of Credit with Herd Vest and Barbara Vest (1)
(1) Previously filed.
(2) Amended herewith.
(3) New Exhibit.
2
<PAGE>
Item 17. Undertakings
Subject to the terms and conditions of Section 15 (d) of the Securities and
Exchange Act of 1934, the undersigned Registrant undertakes to file with the
Securities and Exchange Commission such supplementary and periodic information,
documents and reports as may be prescribed by any rule or regulation of the
Commission heretofore or hereafter duly adopted pursuant to authority conferred
in that Section.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issues.
The undersigned Registrant hereby undertakes; (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this registration statement, (i) to include any prospectus required by section
10(a) (3) of the Securities Act of 1933, (ii) to reflect in the Prospectus any
facts or events arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set forth in
the registration statement, (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement; (2) that, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein , and
the offering of such securities at the time shall be deemed to be the initial
bona fide offering thereof; (3) to remove from registration by means of a post-
effective amendment any of the securities being registered which remain unsold
at the termination of the offering; (4) and agrees that each such post-effective
amendment will comply with the applicable forms and rules and regulations in
effect at the time such post-effective amendment is filed; (5) and agrees that,
in the event it enters into any arrangements with third parties on terms
differing from those set forth herein, it will promptly file an appropriate
post-effective amendment setting forth the pertinent information.
3
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the udersigned, thereunto duly authorized.
H.D. VEST, INC.
---------------
(Registrant)
Date: October 3, 1996 By: s/ Herb D. Vest
---------------------------------
Herb D. Vest
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: s/ Herb D. Vest By: s/ Barbara Vest
------------------------------ ---------------------------------
Herb D. Vest Barbara Vest
Chairman of the Board Director
Chief Executive Officer
By: s/ Kenneth E. Reynolds By: s/ Jack B. Strong
------------------------------ ----------------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
By: s/ Jerry M. Prater By: s/ Phillip W. Mayer
------------------------------ ----------------------------------
Jerry M. Prater Phillip W. Mayer
Director Director
By: s/ Lynn R. Niedermeier By: s/ Wesley Ted Sinclair
------------------------------ ----------------------------------
Lynn R. Niedermeier Wesley Ted Sinclair
Director Vice President and
Chief Financial Officer
(Principal Financial
and Accounting Officer)
4
<PAGE>
EXHIBIT 24.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
As independent public accountants, we hereby consent to the use of our
report on the fiscal 1995, 1994, and 1993 consolidated financial statements of
the Company and to the use of our opinion dated December 15, 1994, regarding the
deferred tax treatment of amounts deferred under the Plan (and to all references
to our Firm) included in or made part of this registration statement.
Arthur Andersen LLP
Dallas, Texas,
October 3, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM S-1
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> SEP-30-1995 SEP-30-1996
<PERIOD-START> OCT-01-1994 OCT-01-1995
<PERIOD-END> SEP-30-1995 JUN-30-1996
<CASH> 3,383,060 5,903,981
<RECEIVABLES> 5,929,075 6,895,642
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 2,297,463 2,469,245
<TOTAL-ASSETS> 11,666,371 15,539,090
<SHORT-TERM> 0 0
<PAYABLES> 6,096,938 7,968,551
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 588,070 1,185,834
0 0
1,500,402 1,500,402
<COMMON> 271,167 271,167
<OTHER-SE> 2,168,792 4,473,136
<TOTAL-LIABILITY-AND-EQUITY> 11,666,371 15,539,090
<TRADING-REVENUE> 0 0
<INTEREST-DIVIDENDS> 371,864 0
<COMMISSIONS> 37,027,755 41,502,290
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 3,219,574 4,492,486
<INTEREST-EXPENSE> 100,280 68,926
<COMPENSATION> 27,322,184 31,290,948
<INCOME-PRETAX> 1,511,221 2,780,427
<INCOME-PRE-EXTRAORDINARY> 1,329,001 2,399,996
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,329,001 2,399,996
<EPS-PRIMARY> .22 .42
<EPS-DILUTED> .22 .42
</TABLE>
<PAGE>
EXHIBIT 28.9
H.D. VEST, INC. REPRESENTATIVES'
DEFERRED COMPENSATION PLAN
<PAGE>
Section 1. INTRODUCTION
1.1 Establishment. H.D. Vest, Inc., a Texas Corporation, established the
-------------
Deferred Compensation Plan ( (the "Plan") for the Representatives of the Company
in March, 1995. The Plan provides (i) the opportunity for Participants to defer
part or all of their Cash Compensation through an effective tax mechanism, and
(ii) the opportunity to receive an additional deferred Company Matching
contribution.
1.2 Purpose. The purpose of the Plan is to provide the Company's
-------
Representatives with the opportunity both to defer the receipt of compensation
on a pre-tax basis and to receive additional income in the form of the Company
Matching Contribution.
1.3 Effective Date. This Plan shall be effective upon the Effective Date
--------------
as defined below .
Section 2. DEFINITIONS AND CONSTRUCTION
2.1 Definitions. The following capitalized words and phrases when used in
-----------
the Plan shall have the meanings set forth below:
"Account" means an account established for a Participant which
contains the Participant's, Cash Equivalents and the Company's
Matching Contribution and which will be carried by the Company as a
general unsecured obligation senior in rank to Vest's stock listed on
NASDAQ/NMS .
"Administrative Committee" means the committee appointed by the
Board and serving pursuant to Section 7.
C. "Annual Election Period" means November 1 to December 31 of each year
subject to the provisions of Sections 3.2 and 3.3.
D. "Enrollment" means a Representative becomes enrolled as a Participant
in the Plan under Section 3.2 or 3.3.
E. "Board" means the Board of Directors of Vest.
F. "Cash" means money in the form of United States Currency or some
reasonable equivalent thereof.
G. "Cash Equivalent" means a hypothetical Cash amount allocated to
the Participant's Account.
H. "Company" means H. D. Vest, Inc., and its subsidiaries.
-1-
<PAGE>
"I. "Company Matching Contribution" means an amount which the Company
credits as a Cash Equivalent to a Participant's Account pursuant to
the Plan.
J. "Compensation" means cash remuneration, including but not limited to
gross commissions, advisory or other fees or any other type of
remuneration, earned by and while a Representative of the
Company.
K. "Compensation Date" means the dates on which Net Compensation is
paid to Representatives, which currently occurs, twice a month, on the
fifth business day following the first and fifteenth of each month, or
such other dates the Company establishes to pay Net Compensation to
Representatives.
L. "Deferral Amount" means the amount of Net Compensation for each
Deferral Period which a Participant elects to defer under the
Plan.
M. "Deferral Period" means the period of time constituting a moving
number of aggregate and consecutive calendar months for which a
Participant elects under the Plan to delay receipt of any Deferral
Amount. Each Deferral Period begins on the last day of the Annual
Election Period and ends on the last day of the next consecutively
following 36th, 60th or 84th calendar month, depending on the number
of months established pursuant to Section 3.2, 3.3 or 5.1.
N. "Disability" means a determination by the Administrative Committee
that a Participant is unable because of illness, injury, accident or
other reason to perform substantially all of the acts which a
Representative normally performs and that such inability is likely to
continue for at least five (5) consecutive months.
O. "Distribution Period" means the thirty-six (36), sixty (60) or
eighty-four (84) consecutive calendar months immediately following the
end of a Deferral Period. The duration of a Distribution Period shall
be the same number of consecutive calendar months as the Deferral
Period which it immediately follows.
P. "Effective Date" means the first date in which a Registration
Statement filed with the Securities and Exchange Commission ("SEC")
becomes effective, any required state Registration Statement becomes
effective, and the Company's
Board has approved the Plan.
Q. "Gross Compensation" means the total amount of a Participant's
Compensation, including advisory service fees, but excluding
compensation earned on the sales of certain insurance products through
H.D. Vest Insurance Services, unreduced by any amount.
-2-
<PAGE>
R. "Initial Enrollment Period" means the first Annual Election Period,
following the Effective Date. In the event the Effective Date is after
November 1, 1996, the Initial Enrollment Period will be extended
beyond December 31, and will terminate 60 days after the Effective
Date.
S. "Net Compensation" means Gross Compensation earned by and while a
Representative of the Company multiplied by the Participant's payout
rate (as defined in the applicable current H.D. Vest payout schedule)
and less any fees, expenses, or other amounts which reduce Gross
Compensation.
T. "Participant" means a Representative of the Company who elects to
participate in the Plan pursuant to Section 3.2 or 3.3, who satisfies
all requirements established by the Administrative Committee and who
designates a Deferral Amount and a Deferral Period pursuant to the
Plan. Participant does not include employees or officers of the
Company.
U. "Representative" means an independent contractor associated with the
Company through H.D. Vest Investment Securities, Inc. The Company
shall promptly inform the Administrative Committee if any individual
ceases to be a Representative. Representative does not include any
employee or officer of the Company.
V. "Vest" means H.D. Vest, Inc., a Texas Corporation.
2.2 Construction. Whenever any word is used herein in the singular
------------
form, it shall be construed as though it were also used in the plural form in
all cases where it would so apply. Headings of articles and sections are
inserted for convenience and reference, and they constitute no part of the Plan.
Except where otherwise indicated by the context, any masculine terminology
herein shall include the feminine and neuter. When the Plan requires or permits
an act to occur on a day and that day falls on a Saturday, Sunday, or Vest
holiday, the day for the act shall be the next business day.
Section 3. ELIGIBILITY AND PARTICIPATION
3.1 General. All Participants may defer from a minimum of one percent
-------
(1%) to a maximum of one hundred percent (100%) of their Net Compensation and
may elect to defer Net Compensation for
-3-
<PAGE>
one of three Deferral Periods. The Deferral Amount shall not exceed the
Participant's Net Compensation.
3.2 Initial Enrollment.: All Representatives shall have the opportunity
------------------
to enroll in the Plan during the Initial Enrollment Period. As such, they shall,
at that time, choose the Deferral Amount of their future Net Compensation earned
after the end of the Initial Enrollment Period and elect a Deferral Period from
the three Deferral Period Options. All such Deferral Amounts shall be allocated
to each Participant's Account as a Cash Equivalent beginning after the end of
the Initial Enrollment Period. After the Initial Enrollment Period, any
modification of any Deferral Amount, or Deferral Period is governed by Sections
4 and 5.
3.3 Enrollment :. Future Representatives. Representatives who join the
---------- ----------------------
Company after the Initial Enrollment Period shall not be eligible to become a
Participant until the Annual Election Period immediately following the date that
a Representative becomes affiliated with Company. However, no Representative
will be eligible to enroll in the Plan if, prior to an Annual Election period,
the Plan is not registered with the SEC or the Representative's state of
residence, if required, or the Board elects to terminate or suspend the Plan
pursuant to Section 7.3. Upon enrollment in the Plan, said Representative shall
be subject to the same terms as those who are Participants.
Section 4. ASPECTS OF DEFERRAL
4.1 Electing Deferral Amount. A Participant may elect a Deferral
------------------------
Amount and Deferral Period during each Annual Election Period by complying with
the Plan and all Administrative Committee requirements (including giving timely
written notice and properly completing all forms required by the Administrative
Committee). A Participant must specify the Deferral Amount as a specific
percentage, or dollar amount, of his total Net Compensation earned after an
Annual Election Period and during a Deferral Period. The Deferral Amount shall
not exceed the Participant's Net Compensation. Anyone who is no longer a
Representative shall no longer be entitled to elect any Deferral Amounts and
Deferral Amounts shall immediately stop.
4.2 Accounts. When a Participant has appropriately selected a Deferral
--------
Amount, the Administrative Committee shall establish or continue an Account on
the Company's books in the Participant's name. The Participant's Account is a
Cash Equivalent account.
4.3 Participant's Rights. Neither the Administrative Committee nor the
--------------------
Company shall be required to reserve or otherwise set aside funds for the
payment of any Cash Equivalents or other amounts credited to any Account. All
Accounts are unfunded accounts established under the Plan in the Participant's
name.
-4-
<PAGE>
Moreover, until a Participant actually receives a distribution of Cash
from his Account, the Participant maintains a position as a general creditor of
the Company as regards any Cash Equivalent or other amount credited to or to be
distributed from the Participant's Account and as regards any and all rights of
the Participant under the Plan. In addition, the Company shall not be required
to actually fund any Cash Equivalents or credit Cash to any Account until the
time for payment thereof during the Distribution Period.
As general unsecured obligations, Participant's account will be senior in rank
to the Company's Common Stock listed on NASDAQ/NMS. The Company has received an
opinion letter from Arthur Andersen LLP as to the federal income tax
consequences to Representatives of the Company who become Participants in the
Plan. Each Participant may request a copy of the opinion letter .
4.4 Time for Electing Deferral. Except as otherwise permitted in
--------------------------
Section 3.2, 3.3 or 4.5, during each Annual Election Period, a Participant shall
select the (i) Deferral Amount, and (ii) Deferral Period, Except as provided in
Section 4.5, only one Deferral Amount can be selected for one Deferral Period
during any Annual Election Period. Any election so made shall remain in effect
until the next Annual Election Period and shall immediately cease if the
Participant is no longer an Representative.
4.5 Prospectively Increasing Deferral Amount. A Participant may elect to
----------------------------------------
increase future Deferral Amounts only pursuant to this Section. Any election to
increase the Deferral Amount or change the Investment Mix may be made only on a
calendar quarterly basis and must be in writing and actually received by the
Administrative Committee no later than 30 days before the beginning of a
calendar quarter. Any election to increase prospectively the Deferral Amount
shall begin on the first Compensation Day of the next calendar quarter. Unless
the Participant prospectively increases the Deferral Amount under this Section
4.5, such an election shall remain in effect until the next Annual Election
Period or the Participant ceases to be a Representative. Any such increase in
the Deferral Amount elected shall be deferred for the same Deferral Period which
applies to the other Deferral Amount selected during the most recent preceding
Initial Enrollment Period or Annual Election Period during which the Participant
elected a Deferral Amount.
4.6 Irrevocable Selections. Once the Participant has selected a
----------------------
Deferral Amount and an Annual Deferral Period, he may not change that Deferral
Period and he may only change the Deferral Amount for the Deferral Period
pursuant to Section 4.5.
Section 5. DEFERRAL PERIODS AND COMPANY MATCHING CONTRIBUTIONS
-5-
<PAGE>
5.1 Deferral Periods. Except as otherwise permitted in Sections 3.2 or
----------------
3.3, during an Annual Election Period, Participants shall select one of three
Deferral Periods:
Option No. 1 Deferral Amount deferred for thirty-six months (36
months).
Option No. 2 Deferral Amount deferred for sixty months (60
months).
Option No. 3 Deferral Amount deferred for eighty-four months (84
months).
5.2 Company Matching Contribution. Depending on the Deferral Period and
-----------------------------
Deferral Amount selected by the Participant, the Company shall allocate the
Company's Matching Contribution to the Participant's Account pursuant to Section
4.2. In addition, the Company may prior to any calendar year establish a
Matching Contribution for aggregate total Deferral Amount elected by all
Participants for such year. For the initial Plan year ending December 31, 1996,
the amount of the Company's Matching Contribution is determined as follows:
<TABLE>
<CAPTION>
COMPANY MATCHING CONTRIBUTION
AS A PERCENTAGE OF THE DEFERRAL AMOUNT
--------------------------------------
DEFERRAL PERIOD COMPANY MATCHING
--------------- ----------------
CONTRIBUTION CASH
- --------------------------------------------------------------------------------
<S> <C> <C>
Option 1: 36 Months 30%
Option 2: 60 Months 60%
Option 3: 84 Months 100%
</TABLE>
5.3 Forfeiture of Company Matching Contribution. Anyone who is no longer
-------------------------------------------
a Representative shall no longer receive any Company Matching Contributions.
Anyone who ceases being a Representative of the Company before the expiration of
the Deferral Period for any reason other than death, disability, or attaining
the age of 65, shall forfeit all of the Company's Matching Contributions for
which any Deferral Period has not expired. Forfeited Company Matching
Contributions shall revert to the Company. The Company shall distribute the rest
of the terminated Participant's Account, excluding all amounts attributable to
the Company's Matching Contributions, during the Distribution Period. A
disabled Participant or Participant attaining the age of 65 who ceases being a
Representative of the Company shall not forfeit the Company's Matching
Contribution unless the Participant becomes a registered representative of a
broker/dealer other than H.D. Vest Investment Securities, Inc. prior to the end
of the Participant's Deferral Period.
-6-
<PAGE>
Section 6. DISTRIBUTION OF ACCOUNTS
6.1 Payment of Accounts. The Participant has no right to demand or
--------------------
receive any payment or distribution in kind or in Cash of any amount in a
Participant's Account until its payment is due during the Distribution Period.
All amounts credited to an Account shall be distributed as Cash. Subject to
the Plan, the Deferral Amounts and non-forfeited Company Matching
Contributions credited to a Participant's Account for each Deferral Period shall
be distributed to the Participant as follows:
Normal Representative Commissions are paid bi-monthly; therefore, the
payments of the Deferred Compensation and Matching Contributions will be paid
bi-monthly subsequent to the end of the Deferral Period. Consequently, if a
Representative elects to defer an amount of his or her bi- monthly compensation
for a period of 36 months, he or she will receive payment of that Deferred
Amount and matching contribution 37 months from the date of the deferral. Each
representative payroll period and Deferral Amount shall be payable independently
from one another under the Plan .
6.2 Payment to Deceased Participant's Estate. If a Participant dies
----------------------------------------
before all of his Account has been distributed to him, the amount remaining
shall be distributed at the Administrative Committee's discretion either (i) in
payments at the same times, and in the same manner, as were being paid to the
Participant before death or (ii) in accelerated payments to any extent that the
Administrative Committee determines appropriate. Such distribution shall be made
to the beneficiary or beneficiaries determined under Section 6.3.
6.3 Designation of Beneficiary. A Participant may designate a
--------------------------
beneficiary in a form provided, approved, and accepted by the Administrative
Committee. In the absence of such a form, all amounts remaining in a deceased
Participant's Account shall be distributed to the deceased Participant's estate.
6.4 Disabled Participants. If a Participant becomes disabled before all of
his Account has been distributed to him, the amount remaining shall be
distributed at the Administrative Committee's discretion either (i) in payments
at the same times, and in the same manner, as were being paid to the Participant
before his disability or (ii) in accelerated payments to any extent that the
Administrative Committee determines appropriate.
Section 7. MISCELLANEOUS
7.1 Plan Administration. The members of the Administrative Committee
-------------------
shall be appointed by the Board and shall function pursuant to rules and
procedures approved or ratified by the Board.
-7-
<PAGE>
Any vacancy on the Administrative Committee shall be filled by the Board.
7.2 Finality of Determinations. Sole and absolute authority and
--------------------------
discretion to apply, interpret and implement this Plan, including the
determination of any contested issues or claims arising under the Plan, shall be
vested in the Administrative Committee. By way of example, the Administrative
Committee shall assure that allocations to any Account are based on Net
Compensation actually earned by a Representative/Participant and may make any
increases or deductions in any Account to correct any erroneous amount of Net
Compensation, Deferral Amount or Company Matching Contribution. Any
determination by the Administrative Committee shall be final and binding for all
purposes and upon all interested persons and their heirs, successors and
personal representatives.
7.3 Amendment, Suspension, or Termination of the Plan. The Board may
-------------------------------------------------
amend, suspend or terminate the Plan in whole or in part at any time, provided
that such amendment, suspension or termination shall not, adversely affect any
rights or obligations under the Plan with respect to amounts credited to the
Account of any Participant before the amendment, suspension or termination.
7.4 Limitations on Transfer. Participants shall have no right to any
-----------------------
amount credited to their Accounts except as set forth in the Plan. Neither such
rights nor any amount credited to any Account may be anticipated, assigned,
alienated or transferred, except pursuant to Section 6.3. Any attempt to
alienate, sell, exchange, transfer, assign, pledge, hypothecate or otherwise
encumber or dispose of any such rights or amounts by a Participant, the spouse
of a Participant, or any other person shall be void and of no effect. The
foregoing limitations on transfer or assignment shall apply with equal force and
effect to any person who is designated or becomes a beneficiary pursuant to
Section 6.3.
7.5 Release. The Administrative Committee may require as a condition
-------
precedent before the distribution of any amount from any Account a complete
release and final settlement from the Participant, and/or the Participant's
spouse, any beneficiary or either or any other person of all claims against the
Company, the Administrative Committee, the Plan or any other individual or
person.
7.6 Governing Law. The Plan and all agreements hereunder shall be
-------------
construed in accordance with and governed by the laws of the State of Texas. Any
elections to be made under this Plan shall be accepted and all actions to be
taken or payments under the Plan shall occur and be made at the Company's home
office located at 433 Las Colinas Boulevard, Third Floor, Irving, Texas, 75039,
or as such other location as specified by the Administrative Committee.
-8-
<PAGE>
Because of its terms and provisions, the Plan is not governed by the Employer
Retirement Income Security Act of 1974, as amended.
7.7 Statement of Account. A statement will be sent to each Participant
--------------------
as to his Account at least once each calendar year.
7.8 Expenses of Administration. All costs and expenses incurred in the
--------------------------
operation and administration of this Plan shall be borne by the Company.
-9-
