<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X Annual Report Pursuant to Section 13 or 15(d)
---
of the Securities Exchange Act of 1934 (Fee Required)
For the fiscal year ended September 30, 1997
Transition Report Pursuant to Section 13 or 15(d)
---
of the Securities Exchange Act of 1934 (No Fee Required)
For the transition period from _____ to _____
Commission File No. 0-19614
H.D. VEST, INC.
(Exact name of registrant as specified in its charter)
Texas 75-2154244
------------------------------- -------------------------
(State or other jurisdiction of (IRS Employer ID.)
incorporation or organization)
433 E. Las Colinas Blvd., Third Floor, Irving, Texas 75039
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code (972)863-6000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class Exchange on which registered
------------------------------ ------------------------------
Common stock, $.05 par value NASDAQ National Market Tier
Indicate by check mark whether the registrant (1) has filed all reports required
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months, and (2) has been subject to such requirements for the past
90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Aggregate market value of voting stocks (which consists solely of shares of
Common Stock) held by non-affiliates of the registrant as of September 30, 1997,
as computed by reference to the closing sale price of the registrant's Common
Stock on the NASDAQ National Market Tier of the NASDAQ Market System on such
date: $6,500,795.
Number of shares of the registrant's Common Stock outstanding as of September
30, 1997: 5,423,341.
DOCUMENTS INCORPORATED BY REFERENCE
-----------------------------------
NONE
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PART I
Item 1. Business
- -----------------
(a) General Development of Business
-------------------------------
H.D. Vest, Inc. ("Company"), founded by Herb D. Vest, was formed on December 17,
1986, as a Texas corporation. The Company is a financial services company,
organized for the purpose of investing in financial service companies and
providing management services to such companies as well as other entities. The
Company also conducts operations under the corporate assumed name of H.D. Vest
Financial Services. The Company owns all outstanding shares of the following
subsidiaries:
H.D. Vest, Inc.
d/b/a H.D. Vest Financial Services
<TABLE>
<CAPTION>
Incorporated
Subsidiaries (TEXAS) Services
------------ ------------ --------
<S> <C> <C>
H.D. Vest Investment Securities, Inc. 1983 Registered Securities
"HDVIS" Broker-dealer
Products:
Mutual Funds
Unit Investment Trusts
Limited Partnerships
Stocks and Bonds
H.D. Vest Advisory Services, Inc. 1987 Registered Investment
"HDVAS" Advisor
Agent Licensing
Assistance
Money Management
Services
H.D. Vest Mortgage Services, Inc. 1989 Inactive Subsidiary
"HDVMS"
H.D. Vest Collateral Management 1988 Inactive Subsidiary
Company "HDVCMC"
H.D. Vest Business Valuation 1987 Inactive Subsidiary
Services, Inc. "HDVBVS"
H.D. Vest Corporate Finance, Inc. 1990 Inactive Subsidiary
"HDVCF"
</TABLE>
The Company was established to meet the growing demand for professional
financial services, and to provide such services primarily through tax
professionals. The Company's management
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believes that the tax professional is uniquely qualified to give confidential,
professional financial advice and implement financial plans due to the tax
professional's knowledge of his or her clients' financial affairs. The Company
offers the tax professional the means to provide personalized financial services
to the consumer while simultaneously providing the tax professional with an
additional source of income.
The Company actively recruits tax professionals to become affiliated with the
Company's subsidiaries HDVIS and HDVAS, and an affiliated insurance entity, in
order to maintain and expand a network for providing financial services.
Representatives registered with the Company include CPAs, CFPs, Enrolled Agents
(EA), PhDs, CFAs, Registered Investment Advisors, tax attorneys, and other tax
professionals. Many hold state or national offices in CPA societies, EA
organizations and public accounting societies.
The Company's subsidiary HDVIS is a securities broker-dealer, registered with
the Securities and Exchange Commission ("SEC") and securities regulatory
commissions in all fifty (50) states, the District of Columbia and the
Commonwealth of Puerto Rico. HDVIS is a member of the National Association of
Securities Dealers ("NASD"), Securities Investors Protection Corporation
("SIPC") and the Securities Industry Association ("SIA"). HDVIS' Representatives
are primarily tax professionals located throughout the United States who provide
their clients with a wide range of financial services consisting of such
investments as mutual funds, unit investment trusts, limited partnership
interests, stocks and bonds. The Company utilizes the Representative base of
HDVIS to market other services provided by the Company through its subsidiaries
and an affiliated insurance entity.
The Company's subsidiary HDVAS is an investment advisor registered with the
Securities and Exchange Commission and various state regulatory agencies as well
as a member of the Investment Company Institute. The Company's Representatives
can register as Investment Advisor Representatives under HDVAS. HDVAS has
developed proprietary fee-based services, which give its Representatives the
capability of providing fee-based money management services to their clients.
(b) Financial Information About Industry Segments
---------------------------------------------
The Company and its subsidiaries operate primarily in a single industry segment:
securities brokerage and related financial
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services. The following table sets forth the Company's total revenues by major
source:
SUMMARY OF COMPANY'S SOURCES OF REVENUE
<TABLE>
<CAPTION>
Year ending September 30,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Mutual Fund and UITs $30,611,062 $44,960,556 $54,222,732
Partnership Interests 198,910 126,945 101,885
Stocks, Bonds and Options 1,930,867 2,752,832 4,084,707
Insurance Products 4,286,916 7,753,815 10,098,858
Trading - 29,863 228,217
Marketing and Education Fees 2,933,055 4,182,201 6,396,111
Portfolio Management Fees 3,219,574 6,480,537 11,070,632
Facility and Service Fees
from Affiliate 551,379 416,298 538,700
All Other 938,288 806,175 1,082,540
----------- ----------- -----------
Total Revenue $44,670,051 $67,509,222 $87,824,382
=========== =========== ===========
</TABLE>
The Company had assets of $11,666,371, $16,950,759 and $19,747,631 for the years
ended September 30, 1995, 1996 and 1997, respectively. The Company had net
income of $1,329,001, $1,188,707 and $2,142,063 for the years ended September
30, 1995, 1996 and 1997, respectively.
(c) Narrative Description of Business
---------------------------------
THE REGISTRANT AND ITS SUBSIDIARIES
The Company conducts its business under its corporate name and under the assumed
name of H.D. Vest Financial Services. Through its business divisions and
nationwide network of Representatives, the Company provides a comprehensive
package of financial services and products.
The various services of the Company, provided by the Company and/or its
subsidiaries, are as follows and are discussed in more detail on the pages that
follow:
4
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<TABLE>
<CAPTION>
Entity Name: Service Performed
------------ -----------------
<S> <C>
H.D. Vest, Inc. Technical and Sales Support
Services, Regional Support System,
Educational Services,
Representative Recruiting,
Representative Development,
Representative Systems, Insurance
Agency Management Services.
H.D. Vest Investment Securities, Inc. Investment Services, Trading and
Customer Service, Representative
Licensing, Compliance and Due
Diligence Services.
H.D. Vest Advisory Services, Inc. Professional Investment Advisory
Services
H.D. Vest Mortgage Services, Inc. Inactive Subsidiary
H.D. Vest Collateral Management
Company, Inc. Inactive Subsidiary
H.D. Vest Business Valuation Services,
Inc. Inactive Subsidiary
H.D. Vest Corporate Finance, Inc. Inactive Subsidiary
</TABLE>
TECHNICAL AND SALES SUPPORT SERVICES
The Company has assembled staff experts in areas of individual and business
financial planning, including Certified Public Accountants, Certified Financial
Planners, Chartered Financial Analysts, Chartered Life Underwriters, Certified
Investment Management Analysts, Chartered Financial Consultants, Certified
Employee Benefits Specialists, Chartered Pension Consultants, Enrolled Agents,
Certified Management Accountants, American Institute of Certified Public
Accountants-Accredited Personal Financial Specialists, Lawyers and Pension and
Executive Compensation Certificate recipients. The Company's staff of financial
professionals provide financial planning and product information to H.D. Vest
Representatives who in turn assist their clients with their financial planning
needs. These services to clients include, but are not limited to, investment
and insurance planning and product selection, portfolio management, assistance
in establishment of employee benefit plans, and estate planning.
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REGIONAL SUPPORT SYSTEM
The Company has developed a local support system designed to provide
Representatives assistance in all aspects of financial planning including sales
and marketing training, time management, practice management, financial
products, and case studies. The Regional Support System (RSS) also provides a
network for Representatives to consult with each other and analyze actual client
situations. This system operates on the philosophy that the Representatives will
learn from other Representatives who have successfully added financial planning
services to their practices.
Each RSS group is led by a successful H.D. Vest Representative. This
Representative has met specific criteria and attended training before beginning
to train fellow H.D. Vest Representatives. The Regional Support System is
divided into Mentor, Chapter and Summit teams determined by varying degrees of
Representative production.
EDUCATIONAL SERVICES
The Company's educational staff develops educational materials, programs and
seminars designed to enhance the technical skills and knowledge of
Representatives. Tools used to train and educate the Company's Representatives
and their clients include, but are not limited to, self-study courses,
newsletters, promotional pieces and software.
REPRESENTATIVE RECRUITING
At September 30, 1997, the Company has approximately 5,197 fully licensed
Representatives and approximately 1,073 Representatives in various stages of
licensing.
The Company recruits Representatives for its subsidiaries HDVIS and HDVAS and an
affiliated insurance entity. Since its inception, the Company has developed a
recruiting process which the Company believes results in a larger network for
distribution of financial products and services. Based on its experience in
this area, the Company typically uses methods that have been proven to be the
most effective in the past. These methods include direct mail, recruiting
seminars, telemarketing, trade shows, referral incentive programs, trade
publication advertising and various educational events. The Company may employ
additional methods of recruiting in order to develop and determine the
effectiveness of such alternatives.
6
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REPRESENTATIVE DEVELOPMENT
The Representative Development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional
Representative available. The Company has made, and will continue to make,
significant investments in the development of programs to provide
Representatives with training designed to keep them apprised of financial
opportunities for their clients.
The Company requires its Representatives to obtain specific licenses, complete
training programs and follow prescribed procedures in adding financial planning
and implementation services to their practices.
The training and marketing programs offered by the Company to its
Representatives include software support such as an asset allocation and tax
form based investment analysis program, educational events such as the RSS
meetings (described above) and marketing initiatives including self-study kits
and newsletters, and various other regional and national meetings sponsored by
the Company. Currently, the Company holds two national training conferences
annually.
REPRESENTATIVE SYSTEMS
The Information Services Division ("Division") provides computer support systems
for both the Company and its Representatives. The Division is responsible for
developing and writing programs and for maintaining the hardware that support
the Company's operations.
The Company recognizes that access to information, and the ability to process
that information quickly and accurately, must be a business priority. To that
end, the Company has developed an Intranet Site, Internet Site, and undertaken a
variety of other computer software and hardware improvement initiatives.
During fiscal 1997, the Company developed an Internet site that is accessible to
any World Wide Web user at www.hdvest.com. The Company's web site is primarily
an advertising and recruiting tool used by the Company to provide information
about itself to interested individuals. The Company intends to continually
expand the information available on this web site.
Also in fiscal 1997, the Company developed, for the sole use of its
Representative base, an Intranet site. The Company's Intranet
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site provides, to licensed Representatives, a complete array of information and
services primarily for use in providing investment services to clients. Services
provided, or to be provided in the future, include access to information on
client accounts, on-line quotes, remote order entry capability, and access to
the forms libraries of mutual fund product sponsors. The Company intends to
continually expand the information available on, and capabilities of, the
Intranet site.
The Company is currently developing a Representative Desktop. This computer
system will provide the Representative with an office management system that
will integrate with the Company's existing computer hardware and software.
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
or HDVIS in certain circumstances. The Company does not receive any portion of
these commissions but does receive a facility and service fee for management and
other services rendered by the Company. The Company has charged HDVIns a
facility and service fee of $551,379, $416,298 and $538,700 for the years ended
September 30, 1995, 1996 and 1997, respectively. As of September 30, 1997, the
Company had a receivable of approximately $142,145 from HDVIns.
INVESTMENT SERVICES
H.D. Vest Investment Securities, Inc. is registered as a broker-dealer in all 50
states, the District of Columbia and the Commonwealth of Puerto Rico, and is the
investment products and trading subsidiary of the Company. HDVIS offers non-
proprietary investment products including mutual funds, unit investment trusts,
direct investments, stocks and bonds. HDVIS is a member of the National
Association of Securities Dealers, the Securities Investors Protection
Corporation, and the Securities Industry Association.
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TRADING AND CUSTOMER SERVICE
Trading and customer services are provided by the Company to its Representatives
on an ongoing basis. The Company's trading room processes 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.
The following table summarizes the number of securities transactions processed
by the Company:
Years Ended September 30,
-------------------------
1995 1996 1997
---- ---- ----
1,569,425 2,422,705 4,042,941
Customer accounts for trading of stocks and bonds and certain mutual fund and
direct participation programs are cleared on a fully disclosed basis through
National Financial Services Corporation, 161 Devonshire Street, Mail Stop D6,
Boston, Massachusetts 02110. National Financial Services Corporation, as the
clearing firm for HDVIS, maintains all stock, bond and option transactions of
HDVIS' customers on its own records. The majority of transactions involving
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 administrative processing through
the National Association of Securities Dealers, and the state agencies
supervising securities and insurance licensing.
COMPLIANCE AND SUPERVISION
The financial services industry is subject to extensive regulation on both the
federal and state levels, with which the Company and its subsidiaries must
comply (see "Government Regulation"). HDVIS and HDVAS must maintain current
registration with the applicable regulatory bodies.
The Company requires that all Representatives follow the Company's Compliance
and Supervisory Procedures. To that end, the Company's
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Compliance Department is responsible for Representatives' compliance with rules
of the regulatory bodies that supervise the financial services industry. Due to
the strict regulation of the financial services industry by federal and state
agencies, it is important that the Company keep abreast of the activities of its
Representatives and internal staff. The Company's Compliance Department
supervises the investing activities of all Representatives.
PROFESSIONAL INVESTMENT ADVISORY SERVICES
H.D. Vest Advisory Services, Inc. ("HDVAS") conducts the investment advisory
activities of the Company. HDVAS, formed in 1987 as a Texas corporation, is
registered as an investment advisor with the Securities and Exchange Commission
and various state regulatory agencies and is a member of the Investment Company
Institute. The Company's Representatives can register as Investment Advisor
Representatives under HDVAS, giving them the capability of providing fee-based
financial planning services to their clients.
HDVAS provides three fee-based services. The VestPremiere Investment Program is
designed for clients with a minimum $100,000 of currently investable assets, and
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. This service
helps investors to determine an appropriate asset allocation and to choose the
proper money managers to manage various portions of their investment portfolio.
A quarterly report is provided to each client detailing investment performance.
The VestFlex Investment Program is designed to provide clients with a minimum
$10,000 of investable assets with asset allocation and professional-monitoring
services. 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.
The Vest Advisor Investment Program accommodates clients with a minimum of
$25,000 of current investable assets. These investments are managed by the
client's Representative according to the portfolio goals established by the
client. Each client's investment is held in a single brokerage account. A
quarterly
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report is provided to each client detailing investment performance.
TRADEMARKS
The Company has trademarks, including H.D. Vest Financial Services, that protect
the Company against the unauthorized use of its corporate name and programs.
These trade names are valuable assets of the Company and unauthorized use of
these trade names are prosecuted as necessary to protect the Company's
interests.
GOVERNMENT REGULATION
H.D. VEST INVESTMENT SECURITIES, INC. - The securities industry in the United
States is subject to extensive regulation under federal and state laws. The SEC
is the federal agency charged with administration of the federal securities
laws. Much of the regulation of broker-dealers such as HDVIS, however, has been
delegated to self-regulatory organizations such as the NASD. The NASD conducts
periodic examinations of member broker-dealers. Securities firms are also
subject to regulation by state securities commissions in the states in which
they are registered. HDVIS is currently registered as a broker-dealer in all
fifty states, the District of Columbia and the Commonwealth of Puerto Rico.
The regulations to which broker-dealers are subject cover all aspects of the
securities business, including sales methods, representative supervision, trade
practices among broker-dealers, capital structure of securities firms, record
keeping and the conduct of directors, officers and employees. Additional
legislation, changes in rules promulgated by the SEC and by self-regulatory
organizations, and changes in the interpretation of enforcement of existing laws
and rules often directly affect the method of operation and profitability of
broker-dealers. The SEC and the self-regulatory organizations may conduct
administrative proceedings that can result in censure, fine, suspension or
expulsion of a broker-dealer, its officers or employees. The principal purpose
of regulations and discipline of broker-dealers is the protection of customers
and the securities markets rather than protection of creditors and stockholders
of broker-dealers (see "Item 3 Legal Proceedings").
HDVIS is a member of the Securities Investors Protection Corporation. SIPC
provides protection to customers (but not
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shareholders) if a SIPC member fails financially. customers (NOT INCLUDING
INVESTORS IN THE STOCK OF THE COMPANY) of HDVIS that have securities and/or cash
on deposit with HDVIS, would be protected up to a maximum of $500,000, including
up to $100,000 on claims for cash.
HDVIS is subject to the SEC's Uniform Net Capital Rule (Rule 15c3-1), which
requires the maintenance of minimum net capital and requires that the ratio of
aggregate indebtedness to net capital, both as defined, shall not exceed 15 to
1. Minimum net capital can never be lower than $250,000 or 6 2/3% of aggregate
indebtedness, as defined, whichever is greater. In computing net capital under
the Uniform Net Capital Rule, various adjustments are made to net worth to
exclude assets which are not readily convertible into cash and to conservatively
state other assets, such as a firm's position in the securities that it holds in
its own account. To that end, a deduction is made against the market value of
such securities to reflect the possibility of a market decline prior to their
disposition. For each dollar that net capital is reduced, by means of such
deductions or otherwise (for example, through operating losses or capital rules,
which are unique to the securities industry), financial restrictions are imposed
upon the Company which are more severe than those imposed on corporations
engaged in certain other types of business (see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources"). HDVIS had net capital, required net capital and excess net capital
for the years ended september 30, 1995, 1996 and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
NET CAPITAL $1,449,906 $1,409,407 $1,992,987
REQUIRED NET CAPITAL 250,000 392,490 381,470
---------- ---------- ----------
EXCESS NET CAPITAL $1,199,906 $1,016,917 $1,611,517
========== ========== ==========
</TABLE>
H.D. VEST ADVISORY SERVICES, INC. - The financial planning industry is subject
to federal regulation under the Investment Advisor Act of 1940, requiring those
providing fee-based investment advice to register with the SEC. Most states also
have registration and reporting requirements. HDVAS is registered as an
investment advisor with the SEC and 49 state regulatory agencies.
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DEPENDENCE ON A SINGLE CUSTOMER
No material part of the Company's consolidated commission revenues is originated
by a single Representative.
COMPETITION
There is intense competition in the brokerage and insurance industry from large,
diversified, well-capitalized brokerage firms, financial institutions and other
organizations. Retail oriented financial service providers and other financial
institutions are investing substantial funds in advertising and direct
solicitation of customers to increase their market share, and in many cases the
Company is directly competing with such organizations for the same market share.
EMPLOYEES
At September 30, 1997, the Company employed 251 full-time employees who provide
support services to Representatives of the Company. To the extent that the
Company recruits additional Representatives, the number of employees would be
expected to increase proportionately during the fiscal year ending September
30, 1998.
<TABLE>
<CAPTION>
Employees by Department
As of September 30, 1997
<S> <C>
Marketing and Technical Support 97
Administration and Other 26
Operations 116
Educational Services 12
---
Total Employees 251
===
</TABLE>
The majority of employees are college graduates and are securities licensed.
Item 2. Description of Property
- --------------------------------
The Company occupies approximately 34,000 square feet of office space in Irving,
Texas, located at 433 East Las Colinas Blvd. The Company's lease expires in May
1998.
In August 1997, the Company entered into a ten-year operating lease agreement
under which the Company will occupy approximately 80,000 square feet of office
space in a new facility in Irving,
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Texas. The Company intends to relocate its operations to the new facility by the
end of January 1998.
Item 3. Legal Proceedings
- --------------------------
In September 1997, litigation was initiated against the Company and H.D. Vest
Investment Securities, Inc. in regard to the activities of a former Registered
Representative. The plaintiffs seek recovery for alleged out-of-pocket losses
totaling $300,000. In addition, the plaintiffs seek recovery for treble and
punitive damages as well as recovery for pain and suffering. The Company
believes it has a defense against these claims and intends to vigorously defend
them. The Company is unable to determine the likelihood that additional material
claims arising from the Registered Representative's conduct will be made.
Although the Company believes that a defense to any additional claims exists,
and intends to vigorously defend such claims if necessary, a negative result in
multiple claims could have a material adverse impact on the Company.
In September 1997, the Company received notice of two claims against H.D. Vest
Investment Securities, Inc. in regard to the activities of a former Registered
Representative. It is unknown whether these claims, which together total
approximately $800,000, will proceed to litigation. The Company believes it has
a defense against these claims and intends to vigorously defend any lawsuit
filed as a result of the claims. The Company is unable to determine the
likelihood that additional material claims arising from the Registered
Representative's conduct will be made. Although the Company believes that a
defense to any additional claims exists, and intends to vigorously defend such
claims as necessary, a negative result in multiple claims could have a material
adverse impact on the Company.
During the fiscal year ended September 30, 1994, the Securities and Exchange
Commission began an investigation of H.D. Vest Investment Securities, Inc.,
relating to the activities of a former Registered 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.
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Additionally, during fiscal 1994, in connection with the matter described in the
preceding paragraph, a group of clients of the former Registered Representative
commenced a civil action against HDVIS and the former Registered Representative
alleging violations of securities laws, fraud, conversion and related causes of
action. In June 1995, the Company paid for the benefit of the plaintiffs,
approximately $450,000 as reimbursement of what the Company believed to
represent actual out-of-pocket losses plus interest. Subsequently, this legal
action was submitted to binding arbitration before the NASD.
In September 1996, the arbitration panel awarded the plaintiffs approximately
$1.7 million of which approximately $475,000 represented recovery of alleged
economic losses. HDVIS appealed the award but nevertheless accrued and set
aside sufficient net capital to pay the $1.7 million award following the
exhaustion of all appeals. In this regard, the Company made a non-refundable
contribution of $1 million to increase the net capital of HDVIS pursuant to a
previously executed Facility and Services Agreement between the Company and
HDVIS. A fidelity bond issued in favor of HDVIS covered approximately $250,000
of the plaintiff's out-of-pocket losses.
Following a denial of the Company's appeal to a Federal District Court, the
Company, in September 1997, ended its appeal attempts and paid the plaintiff's
award of approximately $1.7 million, thereby ending the litigation.
The Company is subject to other legal proceedings and claims that have arisen in
the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position or results of
operations of the Company.
Item 4. Submission of Matters to a Vote of Shareholders
- --------------------------------------------------------
None.
15
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Part II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------------------
As of September 30, 1997 the Company's stock was listed on the NASDAQ National
Market tier of the NASDAQ Stock Market under the symbol: HDVS. The total
trading volume of the Company's stock for fiscal 1997 was 539,778. There can be
no assurance that a more active market will develop. The following table sets
forth the range of high and low closing bid prices of the Company's Common Stock
as reported by the NASDAQ National Market System during the periods indicated.
The prices set forth below represent prices between dealers, do not include
retail markups, markdowns, or commissions and do not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
High Low
----- -----
<S> <C> <C> <C>
3 Months Ended 9/30/97 $5.50 $4.63
6/30/97 4.88 3.75
3/31/97 5.13 4.13
12/31/96 5.25 3.25
-------- ----- -----
9/30/96 5.50 2.63
6/30/96 3.88 2.75
3/31/96 3.00 1.88
12/31/95 3.00 1.88
-------- ----- -----
9/30/95 3.13 2.75
6/30/95 3.38 2.50
3/31/95 3.38 2.50
12/31/94 3.88 2.25
-------- ----- -----
</TABLE>
As of September 30, 1997, there were 677 holders of record of the Company's
common stock.
The NASDAQ NMS Qualification Standards require any company wishing to remain
listed to have net tangible assets of $4,000,000, public float of shares of
750,000 (which are shares not held directly or indirectly by any officer,
director or beneficial owner of more than 10% of the total shares outstanding),
market value of public float of $5,000,000, $1 minimum bid for outstanding
shares, 400 round lot shareholders and 2 market makers.
If the Company were 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
16
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in obtaining subsequent financing. In such event, a stockholder might encounter
difficulty in selling his or her common stock.
The Company has paid no dividends on its common stock since incorporation. The
Company intends to continue to devote its earnings, if any, to the growth and
development of the Company. Any dividends in the future will depend upon the
Company's financial requirements and other factors.
POTENTIAL FUTURE SALES PURSUANT TO RULE 144 -
Of the 5,423,341 shares of common stock outstanding as of September 30, 1997,
4,083,354 shares of common stock are "restricted securities," as that term is
defined in Rule 144 under the Securities Act of 1933, as amended. Under this
rule, a person (or persons whose shares are aggregated) not affiliated with the
issuer who has satisfied a one-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 two-year holding period. After a two-year holding period, if a
person is not an affiliate and has not been an affiliate for the last three
months, then the person can sell his shares without any restrictions applicable
to Rule 144. Herb D. Vest, the Chairman of the Board and Chief Executive Officer
of the Company, owns 2,442,008 shares, which are subject to Rule 144. Mr. Vest
acquired the majority of his shares in February 1987. Also, Barbara Vest, an
employee and Director of the Company owns 1,467,063 shares that are subject to
Rule 144. Future sales under Rule 144 may have a depressive effect on the price
of the Company's common stock. Herb D. Vest and Barbara Vest currently have
escrowed 20% of their stock with an independent escrow agent in order to meet
certain conditions required by the State of Texas under a previous S-18
registration statement. In addition, Herb D. Vest and Barbara Vest have pledged
portions of their remaining stock on outstanding lines of credit.
Item 6. Selected Financial Data
- --------------------------------
The following summary of certain financial information relating to the Company
for the five years ended September 30, 1997, has been derived from the audited
financial statements of the Company.
17
<PAGE>
Such information should be read in conjunction with the Consolidated Financial
Statements and the report thereon of Arthur Andersen LLP, independent public
accountants, located elsewhere in this document.
<TABLE>
<CAPTION>
Summary of Consolidated Statements of Operations
Years Ended September 30,
- -----------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total
Revenues $46,007,817 $50,287,196 $44,670,051 $67,509,222 $87,824,382
Net Income
(Loss) $ 2,934,722 $ (369,901) $ 1,329,001 $ 1,188,707 $ 2,142,063
Net Income
(Loss)Common
share $ .52 $ (.09) $ .22 $ .20 $ .37
Cash
Dividends
Declared
per common
share $ - $ - $ - $ - $ -
</TABLE>
<TABLE>
<CAPTION>
Summary of Consolidated Statements
of Financial Position
As of September 30,
- ---------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $2,533,029 $ 1,012,016 $ 1,293,871 $ 2,821,115 $ 5,054,298
Total Asset $9,857,018 $12,336,852 $11,666,371 $16,950,759 $19,747,631
Notes Payable
and Obligations
under Capital
Leases (net
of current
maturities) $ 187,858 $ 543,848 $ 430,739 $ 676,844 $ 1,016,257
Total
Liabilities $6,720,687 $ 9,697,957 $ 7,726,010 $11,949,226 $12,699,070
Shareholders'
Investment $3,136,331 $ 2,638,895 $ 3,940,361 $ 5,001,533 $ 7,048,561
</TABLE>
18
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
LIQUIDITY AND CAPITAL RESOURCES
The main sources of liquidity and capital resources for the Company are cash
flows from operations and deferrals of compensation by Registered
Representatives. At September 30, 1997, the Company had working capital of
$5,054,298, an increase of $2,233,183 from the $2,821,115 of working capital at
September 30, 1996. The increase in working capital is primarily the result of
a 30% increase in total revenue for the year ended September 30, 1997, as well
as an increase of $576,022 in current year deferrals from the Representatives
Deferred Compensation Plan.
Cash provided by operating activities decreased by $3,040,514 to $740,271 for
the year ended September 30, 1997 compared to the year ended September 30, 1996.
The decrease in cash provided by operations is primarily due to the reduction of
Accounts Payable and Accrued Expenses, increases in Commission and Account
Receivables net of related Commission Expense, and additions to Prepaid Assets
during the year ended September 30, 1997.
Cash used for investing activities increased by $767,305 to $1,141,856 for the
year ended September 30, 1997. The increase is primarily due to purchases of
property and equipment made by the Company during fiscal 1997. These
expenditures were necessary to support current and projected operating levels of
the Company. Cash used for investing activities of $374,551 and $485,804 for the
years ended September 30, 1996 and 1995 included costs incurred for software
development, designed to improve the productivity of the Company and its
Representatives, and costs related to the formation of the Deferred Compensation
Plan. The Company incurred expenditures of $988,061, $315,179 and $95,145 for
furniture, fixtures and computer equipment for the years ended September 30,
1997, 1996 and 1995, respectively.
Cash provided by financing activities of $51,731 during the fiscal year ended
September 30, 1997 included net advances on the lines of credit to Mr. Vest and
Ms. Vest, payments for capital lease obligations and preferred stock dividends.
Net advances on lines of credit consist of advances to Mr. Vest of $285,714,
payments from Mr. Vest of $285,714, advances to Ms. Vest of $112,090 and
payments from Ms. Vest of $61,688. Cash provided by financing activities during
the fiscal year ended September 30, 1997 included amounts deferred by
Representatives under the Deferred
19
<PAGE>
Cash used for financing activities of $54,448 during the fiscal year ended
September 30, 1996 include net advances on the lines of credit with Ms. Vest of
$135,698, payments for capital lease obligations and preferred stock dividends,
offset by amounts deferred by Representatives under the Deferred Compensation
Plan of $518,286.
Additionally, during 1997, the Company acquired, under various capital lease
agreements, telephone equipment and other property necessary to support the
current and projected operating levels of the Company.
Historically, the Company's growth has been financed through loans, private
placements of preferred and common stock, public offerings of common stock and
cash flows from operations. For the period from inception through September 30,
1997, amounts from these sources have been approximately $2.5 million, $2.6
million, $5.1 million and $8.7 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, thereby postponing recognition
of income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution, as defined in the Plan. As
of September 30, 1997 and 1996, approximately $1,167,000 and $591,000,
respectively, had been deferred under the Plan.
Matching contributions on amounts deferred under the Plan are accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants. Such increases in commission expense will have an
adverse effect on the net income of the Company. To the extent that
Representatives elect to defer receipt of compensation under the Plan, such
compensation will ultimately be paid to the participant in the form of cash. As
of September 30, 1997 and 1996, the Company had accrued matching contributions
of approximately $156,200 and $45,200, respectively.
The Company continually monitors the capital markets for opportunities to obtain
financing to meet its growth needs. Historically, the Company has significantly
increased its
20
<PAGE>
recruiting and development activities upon obtaining such financing. The Company
must expense all costs related to these activities. Additionally, in periods of
increased recruiting and development activities, the Company has experienced
higher general and administrative costs as overhead increased to support the
recruiting and development activities. Consequently, the Company has recorded
substantial expenses subsequent to obtaining financing required to fund further
growth. Should the Company obtain future financing to fund its growth plans, it
is likely the Company would record substantial expenses in the periods
subsequent to obtaining such financing.
RESULTS OF OPERATIONS
REVENUES:
The Company's revenues for the years ended September 30, 1997, 1996, and 1995
were $87,824,382, $67,509,222, $44,670,051, respectively, a 30%, 51%, and -11%
change from the years ended September 30, 1996, 1995, and 1994, respectively.
Management believes that the increase in revenues in fiscal years ended 1997 and
1996 is due in part, to continued strength in the overall financial markets and
to the continued development of training and educational programs by the
Company. Management believes that revenues in 1995 were negatively impacted by
declining financial markets and rising interest rates that made interest-bearing
investments attractive to investors.
Commission revenue as a percentage of gross product sales, and as a percentage
of total revenues, has gradually declined since the Company's formation. This
decline is primarily due to an industry-wide reduction in commissions on
purchases of mutual funds and unit investment trusts. These products comprise
the 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 its volume of products sold to maintain historical commission
revenue levels.
Due to the declining trend of commission revenue as a percentage of gross
product sales, the Company continues to devote significant resources to further
development of its fee-based programs. Portfolio management fees from these
programs were $11,070,632 for the year ended September 30, 1997, a 71% increase
over the year ended September 30, 1996. Portfolio fee revenue for the years
ended September 30, 1996 and 1995, were $6,480,537 and $3,219,574, respectively,
a 101% and 92% increase over the years ended September 30, 1995 and 1994,
respectively.
21
<PAGE>
The reasons for changes in the Company's revenues in the years ended September
30, 1995, 1996, and 1997 are summarized in the following table:
<TABLE>
<CAPTION>
% Change for the Years Ended September 30,
as compared to Previous Years
-----------------------------------------
Source of Revenue 1995 1996 1997
- ------------------------- -------- -------- -------
<S> <C> <C> <C>
Mutual Fund and UITs (1) -17% +47% +21%
Variable Insurance
Products (2) +10% +81% +30%
Limited Partnership
Interests (3) -29% -36% -20%
Stocks, Bonds and
Options (1) -15% +43% +48%
Trading (8) - N/A +664%
Investment Advisory
and Portfolio
Management Fees (4) +92% +101% +71%
Facility and Service
Fees (5) +75% -24% +29%
Marketing and
Educational
Fees (6) -11% +43% +53%
Other (7) -47% -14% +34%
</TABLE>
(1) Revenue increased in 1996 and 1997 due to continued strength in the
financial markets and to the continued increases in product sales resulting
in part from the growth of the number of Representatives. Other
contributing factors include the training programs provided by the Company
and stable or declining interest rates. Revenues in 1995 decreased due to
rising interest rates that made interest-bearing investments attractive to
investors.
(2) Revenues increased due to the increase in the number of Representatives
licensed to offer this product and market conditions that made this product
a more attractive investment.
(3) Revenues decreased due to a decline in demand for this type of product due
to changes in tax laws and the economic viability of these products.
(4) Revenues increased in part due to an increase in the number of
Representatives licensed to offer this product and the development of
additional fee-based services. The division has continued to grow with the
addition of new accounts and new services, VestFlex and VestAdvisor
Investment Programs.
22
<PAGE>
During 1995, 1996 and 1997, the Company has devoted significant resources
to further develop its fee-based programs.
(5) Facility and Service Fees increased in 1995 and 1997 due to an increase in
the resources available to support this product line. Fees in 1996
decreased due to a decline in resources available to support this product
line.
(6) Revenues in 1996 and 1997 increased due to increases in sales and the
expansion of the educational programs and seminars provided by the Company.
Product sponsors assist in the funding of the Company's educational
services. Revenues in 1995 decreased as a direct result of a sluggish
market, which reduced the receipts from product sponsors.
(7) Effective November 15, 1989, the Company began charging a transaction fee
of $10.50 for each transaction processed by the Company, subject to certain
limitations. This policy was discontinued in the first quarter of fiscal
year 1995. Transaction fees for the years ended September 30, 1994, and
1995 were $845,436 and $64,586 respectively. The increase in 1997 is due
to increased interest income received by the Company from increased cash
reserves maintained during the year.
(8) Revenue from trading activities were $29,863 and $228,217 for the years
ended September 30, 1996 and 1997, respectively.
NET INCOME:
Net income for the year ended September 30, 1997 was $2,142,063 compared to net
income of $1,188,707 and $1,329,001 for the years ended September 30, 1996 and
1995, respectively.
General and administrative expenses for the years ended September 30, 1997 and
1996 were $19,394,200 and $16,072,510, respectively an increase of $3,321,690
and $5,261,618 from the prior years ended September 30, 1996 and 1995,
respectively. To meet increased service demands, the Company increased staffing
levels by 33%. The Company's total number of employees grew from 189 to 251,
with additions in the areas of financial planning support, advisory services,
trading, compliance, customer service, and information services. General and
administrative expenses include incentive compensation plans for executive
officers, senior managers, and employees. The Company's Representative base has
increased 16% from 4,471 in September 1995 to 5,197 in September 1997. This
increase as well as the continued strength in the financial markets over the
same period, are the primary reasons for the Company's staff build-up over the
past two years.
23
<PAGE>
Management believes that the Company's investment in the training, development,
and support of its Representative base through proprietary education programs
has contributed to the increase in revenues experienced by the Company.
General and administrative expenses for the year ended September 30, 1995 were
$10,810,892, a decrease of $2,893,060 from the prior year total of $13,703,952.
A substantial amount of the Company's expenses are variable and controllable.
Therefore, as revenues declined during 1995, the Company was able to reduce
certain expenses to maintain its profitability. Additionally, the reduction in
general and administrative expenses for fiscal 1995 is partially due to a credit
to expense of $381,331 related to the cancellation of an officer's severance
agreement.
Included in general and administrative expense are costs related to an
arbitration award to a group of clients of a former Representative. Also
included in the increased expenses are amounts related to incentive compensation
plans for executive officers, senior managers and employees, and additional
administrative and operational staff necessary to support the Company's current
and projected operating levels. The following table summarizes the related
charges to general and administrative expense related to this matter. For a
more detailed discussion see "Item 3. Legal Proceedings."
<TABLE>
<CAPTION>
Year Ended September 30,
---------------------------------------------
1995 1996 1997
--------- ---------- --------
<S> <C> <C> <C>
Professional fees and other
Expenses $ 42,312 $ 665,937 $ 47,393
SEC sanction (150,000) - -
Receivable from bonding
Company - (250,000) -
Payments and arbitration
Awards to plaintiffs 452,292 1,700,000 121,035
--------- ---------- --------
$ 344,604 $2,115,937 $168,428
========= ========== ========
</TABLE>
The Representative development process is the cornerstone of the Company's
concept of providing the client with the most qualified professional
Representative available. The Company has made, and will continue to make,
significant investments in the development of programs to provide
Representatives with training designed 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
24
<PAGE>
procedures in adding financial planning and implementation services to their
practices.
The training and marketing programs offered by the Company to its
Representatives include software support such as an asset allocation and tax
form based investment analysis program, educational events such as RSS meetings
and marketing initiatives that include self-study kits and newsletters, and
various other regional and national meetings sponsored by the Company as well as
the sponsors of products sold by the Company's Representatives. Currently, the
Company holds two national training conferences annually.
Representative development costs for the year ended September 30, 1997 and 1996
were $7,485,266 and $6,506,014, respectively, an increase of $979,252 and
$1,979,377 over the prior years ended September 30, 1996 and 1995, respectively.
Representative development costs for the year ended September 30, 1995 were
$4,526,637, a decrease of $411,490 over the prior year.
At September 30, 1997, the Company has approximately 5,197 fully licensed
Representatives and approximately 1,073 Representatives in various stages of
licensing.
The Company recruits Representatives for its subsidiaries HDVIS and HDVAS and
other affiliated entities. Since its inception, the Company has developed a
recruiting process which it believes results in a larger network for
distribution of financial products and services. Based on its experience in
this area, the Company typically uses methods that have been proven to be the
most effective in the past. These methods include direct mail, recruiting
seminars, telemarketing, trade shows, referral incentive programs, trade
publication advertising and various education events. The Company may employ
additional methods of recruiting in order to develop and determine the
effectiveness of such alternatives.
The Company's recruiting efforts for the years ended September 30, 1995, 1996,
and 1997 resulted in increases in new affiliates of 683, 722, and 1,815,
respectively.
Representative recruiting costs for the year ended September 30, 1997 and 1996,
were $1,677,594 and $773,909, respectively, an increase of $903,685 and $375,072
over the prior years ended September 30, 1996 and 1995, respectively.
25
<PAGE>
Representative recruiting costs for the year ended September 30, 1995, were
$398,837, a decrease of $120,339 from the costs of $519,176 for the year ended
September 30, 1994. The increases in fiscal 1997 and 1996 are the result of
increased activities designed to find prospective Representatives.
The Company's Representatives include Certified Public Accountants ("CPA").
Currently, however, some state boards have regulations prohibiting CPAs from
receiving commissions for the sale or referral of products or services to their
clients. Since 1988, 23 states have changed their rules to allow commission
income by CPAs and several other states have proposed rule changes. CPA
Representatives have been challenged in Louisiana and California, where the
receipt of commissions by CPAs are prohibited. The Company has chosen to
vigorously support these Representatives. The Company has incurred legal costs
of approximately $156,000, $242,000 and $351,000 for the years ended September
30, 1995, 1996 and 1997, respectively, to support these Representatives.
The Company wishes to caution readers that various factors could cause the
actual results of the Company to differ materially from those indicated by
forward-looking statements made from time to time in news releases, reports,
proxy statements, registration statements and other written communications
(including the preceding sections of this Management's Discussion and Analysis),
as well as oral statements made from time to time by representatives of the
Company. Except for historical information, matters discussed in such oral and
written communications are forward-looking statements that involve risks and
uncertainties, including but not limited to general business conditions, the
impact of competition, the seasonality of the Company's business, taxes,
inflation, and governmental regulations.
26
<PAGE>
Item 8. Financial Statements and Supplementary Data
- ----------------------------------------------------
Index
Page(s)
-------
Report of Independent Public Accountants F-1
Consolidated Statements of Financial
Position - September 30, 1996 and 1997 F-2 & F-3
Consolidated Statements of Operations -
Three years ended September 30, 1997 F-4
Consolidated Statements of Shareholders'
Investment - Three years
ended September 30, 1997 F-5
Consolidated Statements of Cash Flows -
Three years ended September 30, 1997 F-6
Notes to Consolidated Financial Statements F-7 - F-22
27
<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, 1996 and 1997, and
the related consolidated statements of operations, shareholders' investment and
cash flows for each of the three years in the period ended September 30, 1997.
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, 1996 and 1997, and the results of its operations and
its cash flows for each of the three years in the period ended September 30,
1997 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Dallas, Texas,
November 12, 1997
F-1
<PAGE>
Page 1 of 2
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
ASSETS
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1997
------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,734,846 $ 6,384,992
Commissions and accounts
receivable 4,509,419 6,642,200
Current portion - notes receivable
related parties 579,660 590,320
Deferred taxes 480,370 -
Receivable from affiliate 130,280 142,145
Prepaid expenses 91,377 503,738
----------- -----------
Total current assets 12,525,952 14,263,395
----------- -----------
Property and equipment, net of
accumulated depreciation
of $2,255,821 at 1996, and
$1,485,366 at 1997 1,673,472 2,755,457
Notes receivable - related parties,
net of current portion 2,084,411 2,127,613
Intangible and other assets, net of
accumulated amortization 666,924 601,166
----------- -----------
Total assets $16,950,759 $19,747,631
=========== ===========
</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,
---------------------------
1996 1997
------------- ------------
<S> <C> <C>
Current liabilities:
Accounts payable and accrued expenses $ 5,583,156 $ 3,930,651
Amounts due on clearing transactions 729,591 539,538
Commissions payable 3,317,096 4,738,908
Payable to officer and directors 74,994 -
----------- -----------
Total current liabilities 9,704,837 9,209,097
----------- -----------
Obligations under capital leases,
excluding current installments 676,844 1,016,257
Other noncurrent liabilities 636,435 1,323,375
Unearned revenue 931,110 1,150,341
Shareholders' investment:
Preferred stock, $6 par value;
10,000,000 shares authorized,
250,067 shares issued and outstanding
in both 1996 and 1997 1,500,402 1,500,402
Common stock, $.05 par value;
100,000,000 shares authorized,
5,423,341 outstanding at September 30,
1996 and 1997 271,167 271,167
Additional paid-in capital 5,080,834 5,113,334
Retained Earnings (Deficit) (1,850,870) 163,658
----------- -----------
Total shareholders'
investment 5,001,533 7,048,561
----------- -----------
Total liabilities and
shareholders' investment $16,950,759 $19,747,631
=========== ===========
</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,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Commissions $37,027,755 $55,624,011 $68,736,399
Portfolio management fees 3,219,574 6,480,537 11,070,632
Marketing and education fees 2,933,055 4,182,201 6,396,111
Facility and service fee
from affiliate 551,379 416,298 538,700
Other 938,288 806,175 1,082,540
----------- ----------- -----------
Total revenues 44,670,051 67,509,222 87,824,382
----------- ----------- -----------
Expenses:
Commissions 25,582,436 38,254,754 48,384,293
Portfolio management fee 1,739,748 4,109,284 7,375,367
General and administrative 10,810,892 16,072,510 19,394,200
Representative development 4,526,637 6,506,014 7,485,266
Representative recruiting 398,837 773,909 1,677,594
Interest 100,280 96,161 222,271
----------- ----------- -----------
Total expenses 43,158,830 65,812,632 84,538,991
----------- ----------- -----------
Net income before state
and federal income tax 1,511,221 1,696,590 3,285,391
Provision for state and federal
income tax 182,220 507,883 1,143,328
----------- ----------- -----------
Net income $ 1,329,001 $ 1,188,707 $ 2,142,063
=========== =========== ===========
Net income
per common share $ 0.22 $ 0.20 $ 0.37
=========== =========== ===========
Weighted average number of
common shares outstanding 5,406,337 5,423,341 5,423,341
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-4
<PAGE>
H.D. VEST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' INVESTMENT
FOR THE YEARS ENDED SEPTEMBER 30, 1995, 1996, AND 1997
<TABLE>
<CAPTION>
Shares of Stock
Outstanding Additional Retained
-------------------- Preferred Common Paid-in Earnings
Preferred Common Stock Stock Capital (Deficit) Total
--------- --------- ----------- --------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 1,188,707 1,188,707
--------- --------- ----------- --------- ----------- ----------- ----------
Balance at
September 30, 1996 250,067 5,423,341 1,500,402 271,167 5,080,834 (1,850,870) 5,001,533
Capital Contribution - - - - 32,500 - 32,500
Preferred Dividends - - - - - (127,535) (127,535)
Net Income - - - - - 2,142,063 2,142,063
--------- --------- ----------- --------- ----------- ----------- ----------
Balance at
September 30, 1997 250,067 5,423,341 $1,500,402 $271,167 $5,113,334 $ 163,658 $7,048,561
========= ========= =========== ========= =========== =========== ==========
</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,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,329,001 $ 1,188,707 $ 2,142,063
Reconciliation of net income to
net cash provided by operating activities
Depreciation and Amortization 850,941 901,093 933,014
Loss on Sale of Assets - 120,716 21,564
Common stock issued as compensation 100,000 - -
Changes in assets and liabilities
Commissions and accounts receivable 350,810 (1,179,550) (2,132,781)
Deferred tax - (480,370) 480,370
Receivable from affiliate 53,611 (31,351) (11,865)
Prepaids and other assets 33,001 (72,702) (415,821)
Payable to officers and directors (205,400) (125,006) -
Accounts payable and accrued expenses (403,862) 2,414,075 (1,727,263)
Commissions payable (168,704) 1,094,661 1,421,812
Amounts due on clearing transactions (1,004,344) 60,404 (190,053)
Unearned revenue (149,385) (109,892) 219,231
----------- ----------- -----------
Net cash provided by operating
Activities 785,669 3,780,785 740,271
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to other assets (390,659) (69,372) (211,645)
Purchases of property and equipment (95,145) (315,179) (988,061)
Proceeds from sale of assets - 10,000 57,850
----------- ----------- -----------
Net cash used for
investing activities (485,804) (374,551) (1,141,856)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Contribution - - 32,500
Preferred stock dividends (127,535) (127,535) (127,535)
Advances from deferred compensation plan 72,857 518,286 576,022
Advances on notes receivable to
related parties (2,073,497) (463,713) (397,804)
Payments on notes receivable from
related parties 1,238,092 338,017 347,402
Payments on notes payable and
capital lease obligations (219,962) (319,503) (378,854)
----------- ----------- -----------
Net cash provided by (used for)
financing activities (1,110,045) (54,448) 51,731
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS (810,180) 3,351,786 (349,854)
CASH AND CASH EQUIVALENTS,
beginning of year 4,193,240 3,383,060 6,734,846
----------- ----------- -----------
CASH AND CASH EQUIVALENTS,
end of year $ 3,383,060 $ 6,734,846 $ 6,384,992
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements
F-6
<PAGE>
H.D. VEST, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1) Organization and Summary of Significant Accounting Policies
(A) ORGANIZATION H.D. VEST, INC. (the "Company") is a Texas corporation formed
in December 1986, to manage the various financial services divisions of the
H.D. Vest Financial Services group. Through its wholly-owned subsidiaries,
the Company provides financial services through tax and accounting
professionals. The Company's services are designed to assist in making
individual tax and accounting professionals financial service centers for
their clients.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All material intercompany
transactions and balances have been eliminated.
(B) CASH AND CASH EQUIVALENTS - Included in cash and cash equivalents are cash
balances and highly liquid investments with an original maturity of three
months or less.
(C) COMMISSIONS AND ACCOUNTS RECEIVABLE - Commissions and Accounts Receivable
is stated net of certain allowances for doubtful accounts. The allowances
at September 30, 1996 and 1997 were $738,227 and $658,154.
(D) PROPERTY AND EQUIPMENT AND OTHER ASSETS Property and equipment is stated at
cost and is depreciated by the straight-line method using estimated useful
lives ranging from five to six years. At September 30, 1996 and 1997,
property and equipment consisted of:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Leasehold improvements $ 128,198 $ 145,081
Computer equipment 1,960,099 1,714,334
Furniture and fixtures 1,225,781 1,762,492
Telephone equipment 579,935 618,916
Other 35,280 -
Less accumulated depreciation (2,255,821) (1,485,366)
----------- -----------
Total property and equipment, net $ 1,673,472 $ 2,755,457
=========== ===========
</TABLE>
F-7
<PAGE>
Other assets consist primarily of capitalized software development costs and
training materials, as well as security deposits. Depreciable assets are stated
at cost and are amortized by the straight-line method using an estimated useful
life of five years. At September 30, 1996 and 1997, other assets and accumulated
amortization are as follows:
<TABLE>
<CAPTION>
September 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
Other assets $1,457,260 $1,521,904
Accumulated amortization (790,336) (920,738)
---------- ----------
Total other assets, net $ 666,924 $ 601,166
========== ==========
</TABLE>
(E) AMOUNTS DUE ON CLEARING TRANSACTIONS - The Company remits customer funds on
certain clearing transactions on a settlement date basis rather than on a
trade date basis. Under the settlement date basis of remittance, the
Company holds customer funds from the trade date until the time at which
the trades are cleared by the product sponsor (not to exceed three business
days). During fiscal 1995, an industry-wide regulatory action changed the
clearing time from five to three business days.
(F) REVENUE RECOGNITION - Commission revenue and related commission expense are
recognized on a trade date basis. The Company charges its Representatives
licensing renewal processing fees. These fees are unearned until the first
quarter of each fiscal year. Marketing and education fees are charged to
various product wholesalers, the Company's Registered Representatives, and
new licensees for Company-sponsored educational seminars and materials.
Portfolio management fees represent fee-based revenues and are recognized
based on the value of client investment balances during the period.
(G) REPRESENTATIVE DEVELOPMENT - Representative development expenses consist of
incremental salaries, office expenses, telephone expenses, educational
events and promotional expenses directly related to training Registered
Representatives.
(H) REPRESENTATIVE RECRUITING - Representative recruiting expenses represent
the incremental costs incurred by the Company to recruit potential
Registered Representatives. Recruiting expenses include certain salaries,
office expenses, referral incentive programs, advertising, direct mail and
telemarketing costs.
F-8
<PAGE>
(I) INCOME TAXES Deferred income taxes are provided for temporary differences
between the tax bases of assets and liabilities and their financial
reporting amounts. Deferred taxes are recorded based upon enacted tax
rates anticipated to be in effect when the temporary differences are
expected to reverse.
(J) NET INCOME PER COMMON SHARE Net income per common share is based on the
weighted average number of shares issued and outstanding during each period
presented.
(K) SUPPLEMENTAL CASH FLOW INFORMATION - Cash interest payments for the years
ended September 30, 1995, 1996 and 1997 were $100,280, $96,161 and $222,271
respectively. Cash payments for federal income taxes for the years ended
September 30, 1996 and 1997 were $8,328 and $1,463,950 respectively.
During the fiscal years ended September 30, 1995, 1996 and 1997 the Company
acquired assets through capital leases amounting to $106,853, $690,191 and
$828,949 respectively.
(L) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS - The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(M) PRIOR YEARS' STATEMENTS - Certain reclassifications have been made to prior
years' statements in order for the amounts to be comparable with the
current year presentation.
2) 401(K) RETIREMENT PLAN
In March 1993, the Company formed a 401(k) retirement plan for eligible
employees. To be eligible for the plan an employee must be employed on a
continuous full-time basis for one year and work a minimum of 40 hours per week.
The Company matches contributions made by employees at a rate of 20%, up to an
annual limit of $1,848 per employee. Company contributions to the plan for the
fiscal years ended September 30, 1995, 1996 and 1997 were $46,568, $55,077 and
$87,776 respectively.
F-9
<PAGE>
3) NOTES PAYABLE
In September 1997, the Company entered into a lease line of credit with a bank
under which the Company may borrow up to a maximum of $2,000,000. Each lease
will have a maturity of no greater than 5 years and will require level monthly
principal and interest payments set in accordance with the bank's lease matrix.
The collateral for each lease will be the equipment it finances.
In February 1997, the Company also renewed its line of credit with a bank for
$500,000. The line bears interest, payable monthly, at prime plus 1% (9.50% as
of September 30, 1997). 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, 1998.
At September 30, 1997, 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, 1996 and 1997 the capitalized basis of the
leases included in property and equipment was approximately $1,812,499 and
$1,592,226 and accumulated amortization applicable to the leased equipment was
approximately $795,091 and $903,144, respectively.
In August 1997, the Company entered into a ten year operating lease agreement
under which the Company will occupy approximately 80,000 square feet of office
space in a new facility in Irving, Texas. The Company intends to relocate its
operations to the new facility in January 1998.
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, 1997, are as follows:
F-10
<PAGE>
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
---------- ----------
<S> <C> <C>
Year ended September 30:
1998 $ 559,624 $2,492,176
1999 443,597 2,014,712
2000 341,502 1,808,054
2001 242,340 1,795,608
2002 151,357 1,795,608
---------- ----------
Total minimum lease payments 1,738,420 $9,906,158
==========
Less amount representing interest 281,636
----------
Present value of net minimum
capital lease payments 1,456,784
Less current installments
included in accounts payable 440,528
----------
Obligations under capital
leases, excluding current
installments $1,016,256
==========
</TABLE>
Rent expense for the years ended September 30, 1995, 1996 and 1997 was
approximately $594,756, $667,126 and $796,991 respectively.
(B) LITIGATION AND CONTINGENCIES - In September 1997, litigation was initiated
against the Company and H.D. Vest Investment Securities, Inc. in regard to
the activities of a former Registered Representative. The plaintiffs seek
recovery for alleged out-of-pocket losses totaling $300,000. In addition,
the plaintiffs seek recovery for treble and punitive damages as well as
recovery for pain and suffering. The Company believes it has a defense
against this claim and intends to vigorously defend them. The Company is
currently unable to determine the likelihood that additional material
claims arising from the Registered Representative's conduct will be made.
Although the Company believes that a defense to any additional claims
exists, and intends to vigorously defend such claims if necessary, a
negative result in multiple claims could have a material adverse impact on
the Company.
F-11
<PAGE>
In September 1997, the Company received notice of two claims by purchasers of
investments against H.D. Vest Investment Securities, Inc. in regard to the
activities of a former Registered Representative. It is unknown whether these
claims, which together total approximately $800,000, will proceed to litigation.
The Company believes it has a defense against these claims and intends to
vigorously defend any lawsuit filed as a result of the claims. The Company is
currently unable to determine the likelihood that additional material claims
arising from the Registered Representative's conduct will be made. Although the
Company believes that a defense to any additional claims exists, and intends to
vigorously defend such claims as necessary, a negative result in multiple claims
could have a material adverse impact on the Company.
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. 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 appealed the award, but
nonetheless accrued and set aside sufficient net capital to pay the $1.7 million
award following the exhaustion of 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.
F-12
<PAGE>
As a result of the award, the Company and HDVIS recorded a combined $1,450,000
charge to earnings. A fidelity bond issued in favor of HDVIS covered
approximately $250,000 of the total amounts paid to the clients. Following a
denial of the Company's appeal to a Federal District Court, the Company, in
September 1997, ended its appeal attempts and paid the plaintiff's award of
approximately $1.7 million, thereby ending the litigation.
The Company has incurred professional fees and other charges related to this
matter that have been included in general and administrative expenses as
follows:
Year Ended September 30,
-------------------------------------
<TABLE>
<CAPTION>
1995 1996 1997
--------- ---------- -----------
<S> <C> <C> <C>
Professional fees and other
Expenses $42,312 $665,937 $47,393
SEC sanction (150,000) - -
Receivable from bonding
Company - (250,000) -
Payments and arbitration
Awards to plaintiffs 452,292 1,700,000 121,035
--------- ---------- --------
$ 344,604 $2,115,937 $168,428
========= ========== ========
</TABLE>
The Company is subject to other legal proceedings and claims, which have arisen
in the ordinary course of its business and have not been finally adjudicated.
Management believes, based on the advice of legal counsel responsible for such
matters, that these actions, when finally concluded and determined, will not
have a material adverse effect upon the financial position of the Company.
5) SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and the officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month and
continuing for 30 months, in exchange for an agreement restricting the use of
Company materials and information for a period of 48 months. In connection with
these agreements the Company charged $1,000,000 to general and administrative
expense during the fiscal year ended September 30, 1994.
F-13
<PAGE>
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter
of fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the officer
resigned as President of the Company. Under the officer's existing employment
agreement, the Company agreed to pay the former officer $16,600 per month until
October 1, 1996, in exchange for the former officer agreeing, among other
things, to not solicit clients of the Company's Representatives and to not
compete with the Company through that date.
The Company had related severance payable liabilities at September 30, 1996 and
1997 of $74,994 and $0, 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 1995, 1996, and 1997, dividends of
$127,535 ($0.51 per share) were declared and paid.
In August 1997, Herb D. Vest, principal common shareholder, purchased 166,667
shares of the Company's outstanding non-voting Series A Convertible Preferred
Stock in a private transaction.
F-14
<PAGE>
7) NET CAPITAL REQUIREMENTS
The Company's main operating subsidiary, H.D. Vest Investment Securities, Inc.,
is subject to the Securities and Exchange Commission Uniform Net Capital Rule
15c3-1, which requires the maintenance of minimum net capital and requires that
the ratio of aggregate indebtedness to net capital, both as defined, shall not
exceed 15 to 1. Minimum net capital can never be lower than $250,000 or 6 2/3%
of aggregate indebtedness, whichever is greater. HDVIS had net capital, required
net capital, and excess net capital for the years ended September 30, 1995, 1996
and 1997 as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Net capital $1,449,906 $1,409,407 $1,992,987
Required net capital 250,000 392,490 381,470
---------- ---------- ----------
Excess net capital $1,199,906 $1,016,917 $1,611,517
========== ========== ==========
</TABLE>
8) RELATED-PARTY TRANSACTIONS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest
provides for a management fee per year plus an annual bonus based on the
Company's performance related to revenue and net income goals, additions of
Company U4's and Fee Based Assets under Management, as established by the Board
of Directors. Effective January 1, 1997, the Company increased the annual
management fee due to Mr. Vest to $900,000 from $750,000. The 30% increase in
the Company's revenues combined with positive earnings after consideration of
the bonus, as well as the other factors used to determine the bonus resulted in
the payment of $1,869,497 bonus under the plan in fiscal 1997. The Company paid
a bonus of $1,500,000 in fiscal 1996. No bonus was accrued or paid under the
plan for the fiscal year ended September 30, 1995. Management fees under these
agreements were $500,000, $2,187,500 and $2,731,997 for the years ended
September 30, 1995, 1996 and 1997, respectively.
F-15
<PAGE>
The Company has an agreement to provide Herb Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement interest accrues on
unpaid principal balances at a rate of 11%. At September 30, 1997, Mr. Vest had
drawn $2,000,000 in principal against the line of credit. As of September 30,
1997, the Company has recorded $190,039 of accrued interest on this line.
The Company also had a consulting agreement with Ms. Barbara Vest through
October 1996. In November 1996, Ms. Vest was employed by the Company as its
Representative Relations Director, thereby terminating her consulting contract.
Amounts paid to Ms. Vest during the years ended September 30, 1995, 1996, and
1997, under these arrangements were $200,000, $200,000, and $300,834,
respectively.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by Ms. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement, interest accrues
on unpaid principal balances at a rate of 11%. At September 30, 1997, Ms. Vest
had drawn $482,216 in principal against the line of credit. As of September 30,
1997, the Company has recorded $45,679 of accrued interest on this line.
F-16
<PAGE>
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest.
HDVIns general insurance agency appoints Representatives with various insurance
companies to enable them to sell insurance products to their clients. The
Company, in accordance with the terms of a facilities and services agreement,
provides certain management and other services to HDVIns and is paid a fee for
these services. The value of these services for fiscal year ended 1997 has been
determined based on the prorata portion of certain relevant expenses as a
percentage of HDVIns revenues to total consolidated revenues. To the extent the
Company renders services to HDVIns for which it is not compensated, such action
could constitute a conflict of interest since Mr. Vest is both the principal
common shareholder and Chairman of the Board of Directors of the Company. The
services provided to HDVIns by the Company are summarized below.
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 $551,379, $416,298 and $538,700 for the
years ended September 30, 1995, 1996, and 1997 respectively, for management
services rendered. As of September 30, 1997, the Company had a receivable of
approximately $142,145 from HDVIns.
In March 1997, Herb D. Vest, principal common shareholder, purchased options to
acquire 150,000 shares of common stock with an exercise price of $5.00 from two
former executive officers in a private transaction. Generally accepted
accounting principals require that equity transactions of this type involving an
entity's principal shareholder be recorded on the entity's financial statements.
Accordingly, the Company has recorded a capital contribution and general and
administrative expense of a like amount to reflect this transaction.
In August 1997, Herb D. Vest, principal common shareholder, purchased 166,667
shares of the Company's outstanding non-voting Series A Convertible Preferred
Stock in a private transaction.
F-17
<PAGE>
9) INCOME TAXES
Income tax expense consisted of the following components:
September 30,
------------------------------------
1995 1996 1997
---------- ---------- ----------
<TABLE>
<S> <C> <C> <C>
Current:
Federal $ 14,220 $ 692,741 $407,628
State 168,000 295,512 255,330
Deferred:
Federal - (411,458) 411,458
State - (68,912) 68,912
---------- ---------- ----------
$ 182,220 $ 507,883 $1,143,328
========== ========== ==========
</TABLE>
The effective income tax rate differs from the statutory federal income tax rate
for the following reasons:
<TABLE>
<CAPTION>
September 30,
----------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Statutory rate 34.0% 34.0% 34.0%
State taxes, net of
Federal 11.1 13.4 9.9
Fines and penalties (3.4) - -
Other (3.5) 10.2 (9.1)
Alternative minimum
Taxes 0.9 (5.9) -
Reversal of deferred
tax asset valuation
allowance - (6.0) -
Utilization of net
Operating loss
Carryforward (27.0) (15.8) -
---------------------------------------------
Effective rate 12.1% 29.9% 34.8%
=============================================
</TABLE>
F-18
<PAGE>
The following table presents the components of the net deferred tax asset:
<TABLE>
<CAPTION>
Deferred
October 1, Expense September 30,
1996 (Benefit) 1997
---------- -------------- ----------
<S> <C> <C> <C>
Accrued severance $ 12,517 $ 12,517 $ -
Accrued judgement 392,760 392,760 -
Depreciation (47,039) 102,279 (149,318)
Unearned Revenue 39,434 39,434 -
Other 82,698 (66,620) 149,318
-------- -------- ---------
Net deferred tax
asset $480,370 $480,370 $ -
======== ======== =========
</TABLE>
The Company's tax effected net temporary differences result in a deferred tax
asset reflecting a benefit expected to be utilized in the future. As a result
of (i) the Company fully utilizing its previously existing tax credit and loss
carryforward and (ii) its ability to carry back future losses, if any, against
fiscal year 1996 taxable income, the Company reversed its deferred tax asset
valuation allowance in fiscal year 1996.
10) STOCK OPTION PLANS
In fiscal 1997, the Company adopted SFAS No. 123, "Accounting for Stock-Based
Compensation." SFAS No. 123 encourages, but does not require, companies to
record compensation cost for stock-based employee compensation plans at fair
value. The Company adopted the disclosure provisions of SFAS No. 123. The
Company continues to apply the accounting provisions of APB Opinion 25,
"Accounting for Stock Issued to Employees," and related interpretations to
account for stock-based compensation. Accordingly, compensation cost for stock
options is measured as the excess, if any, of the quoted market price of the
Company's stock at the date of grant over the amount an employee must pay to
acquire the stock.
F-19
<PAGE>
The Company has a Nonqualified Stock Option Plan ("Nonqualified Plan"). The
Nonqualified Plan is for all employees, as defined in the Nonqualified Plan, and
the Company has reserved 800,000 shares of common stock for this plan. As of
September 30, 1997, 365,454 options are outstanding under the Nonqualified Plan.
In 1992, the Company agreed to give two independent directors options to
purchase 2,000 shares of common stock each quarter. As of September 30, 1997,
68,000 options remain outstanding to independent directors.
A summary of the status of the Company's outstanding stock options as of
September 30, 1995, 1996, and 1997 and changes during the years then ended are
as follows:
<TABLE>
<CAPTION>
1995 1996 1997
- -----------------------------------------------------------------------------------------------------
Exercise Exercise Exercise
Shares Price (1) Shares price (1) Shares price (1)
------------ ------------- ------------ ----------- ---------- -----------
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 544,372 $5.87 470,450 $5.63 407,454 $5.61
Granted 16,000 2.92 16,000 3.19 16,000 4.74
Exercised - - - - - -
Expired and
cancelled (89,922) 6.66 (78,996) 5.18 - -
Outstanding at end
of year 470,450 5.63 407,454 5.61 423,454 5.58
Exercisable at end
of year 34,000 3.74 62,000 3.62 328,000 4.73
Fair value of
options granted $ 2.60 $ 3.82
- ------------------------------------------------------------------------------------------------------
</TABLE>
1) weighted average per option granted.
The 423,454 options outstanding as of September 30, 1997 have exercise prices
between $2.38 and $8.50, with a weighted average exercise price of $5.58 and a
weighted average remaining contractual life of 10 years. 328,000 of these
options are exercisable with a weighted average exercise price of $4.73. The
remaining 95,454 unexercisable options have an exercise price of $8.50.
F-20
<PAGE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997 for both the Nonqualified Plan and
Directors Plan.
<TABLE>
<CAPTION>
1996 1997
------ ------
<S> <C> <C>
Risk free interest rate 6.62% 6.50%
Expected dividend yields - -
Expected lives in years 10 10
Expected volatility 68.83% 70.17%
</TABLE>
Had compensation costs been determined consistent with SFAS No. 123, the
Company's net income and earnings per share would have been recorded in the
following pro forma amounts:
<TABLE>
<S> <C> <C>
Net income - as reported $1,188,707 $2,142,063
Net income pro forma 1,113,082 2,127,088
Earnings per share as reported .20 .37
Earnings per share pro forma .18 .37
</TABLE>
Because the SFAS No. 123 method of accounting has not been applied to options
granted prior to January 1, 1995, the resulting pro forma compensation cost may
not be representative of that to be expected in future years.
11) DEFERRED COMPENSATION PLAN
In July 1995 the Company began accepting contributions to the Deferred
Compensation Plan ("the Plan") for its Representatives. Pursuant to the Plan,
Representatives may forego current compensation, thus postponing recognition of
income otherwise currently taxable, and subsequently receive the deferred
compensation plus a Company matching contribution as defined in the Plan.
Amounts deferred as of September 30, 1997 and 1996 were $1,167,165 and $591,143,
respectively, and are included in other noncurrent liabilities.
Matching contributions of amounts deferred under the Plan must be accrued as
additional commission expense on a straight-line basis from the period deferred
until the Representative is paid the deferral amount and matching contribution.
Accordingly, participation in the Plan by Representatives will have the effect
of increasing commission expense in the years in which commissions are earned
and deferred by participants.
F-21
<PAGE>
Such increases in commission expense will have an adverse effect on the net
income of the Company. To the extent that Representatives elect to defer
receipt of compensation under the Plan, such compensation will ultimately be
paid to the participant in the form of cash. Matching contributions accrued as
of September 30, 1997 and 1996 approximated $156,200 and $45,200, respectively,
and are included in other noncurrent liabilities.
F-22
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosures
- ----------------------
None.
28
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------------------------------------------------------------
The following table provides certain information about each of the Company's and
its subsidiaries' current members of the board of directors, officers and
directors of certain divisions of the Company as of September 30, 1997.
<TABLE>
<CAPTION>
Name Age Position with the Company
---- --- -------------------------
<S> <C> <C>
Herb D. Vest 53 Chairman of the Board of
Directors, President and
Chief Executive Officer
Barbara Vest 51 Representative Relations
Director, and Board of
Directors
Kenneth E. Reynolds 68 Board of Directors
Jack B. Strong 67 Board of Directors
Jerry M. Prater 55 Board of Directors
Phillip W. Mayer 55 Board of Directors
Lynn R. Neidermeier 44 Board of Directors
Roger Ochs 36 Marketing Director
Shannon A. Soefje 38 Senior Vice President and
Corporate Secretary
W. Ted Sinclair 33 Vice President and Chief
Financial Officer
</TABLE>
29
<PAGE>
KEY EMPLOYEES
HERB D. VEST, CHAIRMAN OF THE BOARD OF DIRECTORS, PRESIDENT AND CHIEF EXECUTIVE
OFFICER. Prior to assuming his present position with the Company and HDVIS in
June 1983, Mr. Vest practiced public accounting and financial planning for ten
(10) years as the sole proprietor of Herb D. Vest, CPA. Prior to June 1983, Mr.
Vest was also registered with a National Association of Securities Dealers firm.
He was a principal with that firm and managed a branch office. Mr. Vest is a
Certified Public Accountant, Certified Management Accountant, Certified
Financial Planner, Chartered Financial Analyst, Certified Fund Specialist,
Certified Investment Management Analyst, Chartered Life Underwriter, Registered
Health Underwriter, Chartered Financial Consultant, Accredited Personal
Financial Specialist and Certified Employee Benefit Specialist. He holds
certificates in Pension and Executive Compensation and Estate Planning &
Taxation. Mr. Vest holds a Bachelor of Science Degree in Political Science and
Masters of Science Degrees, in Taxation, Financial Services and Management. He
holds a Juris Doctorate and is licensed to practice law in California. Mr. Vest
holds a Doctorate in International Business Administration. He is a National
Association of Securities Dealers General Securities Principal, Registered
Options Principal, Municipal Securities Principal, and Financial and Operations
Principal. He is a licensed real estate broker and licensed life, health and
accident insurance agent as well as a master fellow of the International Society
for Philosophical Inquiry. Mr. Vest is also a Registered Representative of
Hartford Equity Sales which is located in Dallas, Texas. Following graduation
from college in 1966, Mr. Vest served as an infantry officer in the U.S. Army,
including two (2) tours of duty in Vietnam. He has served as a lecturer at local
colleges and universities including the University of Texas at Arlington and the
Seminar for Financial Analysts held at the University of Windsor, Ontario. He is
also a member of the American Institute of Certified Public Accountants and the
Texas Society of CPAs. Additionally, Mr. Vest has written on international
trade, taxation, portfolio management and the financial services profession for
such publications as Global Custodian, Business Mexico, Personal Financial
Planning, Accounting Today, CFP Today, Real Estate Securities & Capital Markets,
and The Dallas Business Journal. In 1994, 1996 and 1997, Mr. Vest was voted
among the 100 Most Influential People in Accounting by Accounting Today
Magazine.
BARBARA VEST, BOARD OF DIRECTORS, REPRESENTATIVE RELATIONS DIRECTOR. She has
been involved in every phase of developing the Company. Her responsibilities
include expanding the Company's Representative force and developing
Representative services. Ms. Vest was integrally involved in Herb Vest's
private CPA practice for ten years in Irving, Texas and was an independent
consultant to the Company until October 1996 when she was employed by the
Company as Representative Relations Director. She is qualified to
30
<PAGE>
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 a NASD General
Securities Principal. Ms. Vest is also a member of the Texas Woman's Alliance
and Sales and Marketing Executives associations.
KENNETH E. REYNOLDS, BOARD OF DIRECTORS. He started his Norman, Oklahoma-based
Certified Public Accounting practice in 1965. He is past Chairman of the
Personal Financial Planning Committee of the Oklahoma Society of 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, BOARD OF DIRECTORS. He was elected to the Texas State Senate in
1962, where he served until his retirement in 1971. Since leaving the Senate, he
has served on various state committees, boards and commissions, including
chairing Lt. Governor Hobby's Blue Ribbon Committee on Ethics Reform, the
Regional Medical Program of Texas, and the Texas State Board of Education, and
currently serves on the Interstate Oil Compact Commission. Mr. Strong serves as
President of Texas-based General Equities, Inc. and Strongworth, Inc. From
January 1992 to January 1993, Mr. Strong served as an advisor to the Company's
Board. He has been a Director of the Company since fiscal year 1993.
JERRY M. PRATER, BOARD OF DIRECTORS. He has been a practicing Certified Public
Accountant since 1983. He has held positions with agencies of the U.S.
Department of Defense, Continental Electronics Mfg. Co., Hill & Wilkinson and
Quazon Corporation, prior to founding his own Dallas, Texas-based public
accounting practice in 1983. Mr. Prater was elected to the Board of Directors of
the Company in 1994.
PHILLIP W. MAYER, BOARD OF DIRECTORS. He has held a variety of command and
staff positions as an Infantry Officer in the United States Army prior to his
retirement in 1982. Mr. Mayer holds two master's degrees and was designated a
Certified Public Manager by
31
<PAGE>
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, BOARD OF DIRECTORS. Ms. Niedermeier was an employee of the
Company from 1987 through 1993. During that time she was the Company's Vice
President of Marketing responsible for managing the Company's sales, marketing,
recruiting and educational programs. She was promoted to the position of
Executive Vice President in February 1993 and held that position until her
resignation in April 1994. In November 1994, Ms. Niedermeier rejoined the
Company as its President. In December 1995, Ms. Niedermeier resigned as
President. Ms. Niedermeier is a Certified Public Accountant and was a Manager at
Arthur Andersen, LLP prior to joining the Company. Ms. Niedermeier is a former
City Councilwoman for Grapevine, Texas. She was elected to the Company's Board
of Directors in 1994.
ROGER OCHS, MARKETING DIRECTOR. Mr. Ochs was employed by the Company in 1987 and
was promoted to Marketing Director in 1995. He is responsible for directing the
Company's Recruiting and Development, Field Support, Educational Services,
Marketing, Advisory Services and Financial Planning Support Departments. Mr.
Ochs previously served as Manager of the Technical Services Division, which
included Advisory Services, Retirement Services, Estate Planning Services and
the Banking Division. He graduated from Angelo State University with a bachelor
of business administration, a master of business administration from Trinity
University and a juris doctor degree from Southern Methodist University School
of Law. He is licensed to practice law in the state of Texas. He is a General
Securities Representative, General Securities Principal, Registered Options
Principal, Municipal Securities Principal, General Life Insurance Agent,
Certified Financial Planner and a Chartered Life Underwriter.
SHANNON A. SOEFJE, SENIOR VICE PRESIDENT/CORPORATE SECRETARY. Ms. Soefje was
employed by the Company in 1990. In fiscal 1995, she was promoted to Senior
Vice President and is responsible for the management of corporate resources
which includes the strategic design and implementation of promotional campaigns
and the development of corporate and Representative marketing materials. She has
held other management positions in the Company including the following
departments: Operations, Compliance, Licensing,
32
<PAGE>
Recruiting and Research departments. She graduated from Oklahoma City University
with a Bachelor of Science degree in business administration. Since 1977, Ms.
Soefje has worked for various investment firms. She is a Certified Funds
Specialist, General Securities Principal, Registered Options Principal,
Municipal Securities Principal and Financial and Operations Principal.
W. TED SINCLAIR, VICE PRESIDENT/CHIEF FINANCIAL OFFICER. Mr. Sinclair was
employed by the Company in fiscal 1987 and was promoted to Vice President in
fiscal 1993. He is responsible for the financial management of the Company and
financial, tax and management reporting and budgeting. Mr. Sinclair previously
served as Controller and was responsible for coordinating and controlling all
financial reporting and tax activities. He graduated from the University of
North Texas with a Bachelor of Science degree in Accounting. He is a Certified
Public Accountant, Certified Management Accountant, Certified Financial Planner
and a Certified Fund Specialist. He is a General Securities Representative,
General Securities Principal, Registered Options Principal, Municipal Securities
Principal and Financial and Operations Principal.
33
<PAGE>
11. Executive Compensation
- ---------------------------
The following table sets forth all remuneration earned in salary and bonus in
the current year to the Chief Executive Officer, the highest paid members of
the Board of Directors, Officers and key Senior Managers each receiving in
excess of $100,000.
Summary Compensation Table
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
All
Name & Principal Fiscal Restricted Stock Other
Position Year Salary Bonus Stock Awards Options(1) Compensation
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest 1997 $862,500 $1,869,497 - - $ 45,774
Chairman of the 1996 687,500 1,500,000 - - 21,996
Board of Directors, 1995 500,000 - - - 20,766
President and
Chief Executive
Officer(2)
Barbara Vest 1997 $284,167 - - - $ 43,793
Director and 1996 - - - - 220,008
Director 1995 - - - - 218,937
Of Representative
Relations(4)
Lynn R. Niedermeier 1997 - - - - $ 27,126
Director(3) 1996 - - - - 20,004
1995 $245,834 - $100,000 - 86,004
Roger Ochs 1997 $150,000 $ 155,791 - - -
Marketing Director 1996 136,045 125,000 - - -
1995 107,000 - - - -
Shannon Soefje (5) 1997 $135,000 $ 65,851 - - -
Senior Vice 1996 125,500 62,500 - - -
President and
Corporate Secretary 1995 - - - - -
W. Ted Sinclair (5) 1997 $140,000 $ 73,753
Vice President and 1996 130,625 62,500 - - -
Chief
Financial Officer 1995 - - - - -
- -----------------------------------------------------------------------------------------------------
</TABLE>
1) All officers are covered under a stock option plan (see "Management -Stock
Options" and "Certain Transactions - Stock Options").
2) See Management Agreements for a description of the terms of Mr. Vest's
current management agreement.
3) In December 1995, the officer resigned as President of the Company. She is a
member of the Board of Directors.
34
<PAGE>
4) Was employed by the Company in November 1996 as the Director of
Representative Relations.
5) Compensation below disclosure requirement in prior years.
EXECUTIVE OFFICER COMPENSATION PLAN
During April 1994, the Board of Directors of the Company adopted an Executive
Officer's Compensation Plan. The purpose of the Executive Officers Compensation
Plan is to provide additional compensation to a select group of management
employees of the Company in order to motivate and retain them, as well as to
provide them an incentive to guide the Company in attaining higher revenue
goals. The Company will provide this additional compensation under the
Executive Officer's Compensation Plan in the form of salary, restricted stock,
incentive cash and restricted stock bonuses, as well as severance and change-in-
control benefits.
As an unfunded plan of deferred compensation, it is administered by the Chief
Executive Officer of the Company, who is presently Herb D. Vest. Eligibility to
participate in the Executive Officers Compensation Plan is determined in the
sole and absolute discretion of the Company, which establishes eligibility
provisions of the executive officer compensation plan that it may change at any
time in its sole and absolute discretion.
Currently, to be eligible to participate in the Executive Officer's Compensation
Plan, an individual must be an executive employee of the Company, have completed
at least two full years of Company service, and be part of a select group of
management employees designated by the Company's Board of Directors. The
individual employee must also sign an Officer's Deferred Compensation Agreement
and an Officer Agreement as a condition precedent to becoming a participant in
the Executive Officer's Compensation Plan.
Under the Restricted Stock portion of the Executive Officer's 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-
35
<PAGE>
control" of the Company (as that term is defined in the executive officer's
deferred compensation plan). No stock was earned under the Executive Officer's
Compensation Plan for the fiscal year ended September 30, 1997. Under the
Executive Officer's Compensation Plan, the Board of Directors also annually sets
three revenue goals - a threshold, target and maximum goal. If attained, the
revenue goals will generate a set cash bonus for the participant, payable unless
certain losses are also incurred.
In addition, bonus stock will be credited to participants' accounts in the form
of restricted stock on the basis of the Company's attaining three-year
cumulative revenue goals. Each year these goals are set by the Board of
Directors for the upcoming three years and are based in part on the previous
year's goals that consist of a threshold, a target and a maximum cumulative
revenue goal. Upon attaining one of these goals, bonus stock credited in the
form of restricted stock to the participant's plan vests and will become
distributable only upon retirement, long term disability or death of the
participant, or the date of a "change-in-control" of the Company (as that term
is defined in the Executive Officer's Compensation Plan). No awards were earned
in 1995, 1996 or 1997.
STOCK OPTIONS
The Board of Directors of the Company adopted a Stock Option Plan as of October
1, 1987, in order to attract, retain, motivate and encourage stock ownership by
employees, officers and directors of the Company and its subsidiaries. The
Stock Option Plan is administered by a stock option committee ("Committee"),
appointed by the Chief Executive Officer, consisting of one to three members.
The members of the Committee shall be eligible to receive options under the
Stock Option Plan.
The Committee currently consists of one member, Herb D. Vest. Options granted
under the Stock Option Plan are not intended to qualify as Incentive Stock
Options under Section 422(a) of the Internal Revenue Code of 1986, as amended
from time to time. The Company has reserved up to 800,000 shares of its common
stock for options under the Stock Option Plan. The options must be 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.
36
<PAGE>
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 that must lapse before options are eligible to be
exercised.
(d) Permit options to be granted which expire beyond the period provided in the
Stock Option Plan.
(e) Withdraw administration of the Stock Option Plan from the Committee.
(f) Permit granting of options at less than the option price.
Anti-dilution provisions in the Stock Option Plan provide for adjustment of the
Option exercise price and the number of shares of common stock issuable upon
exercise to prevent dilution of their value upon the occurrence of certain
events.
Options covering 191,497 shares were granted at an option price of $8.50 per
share as of October 1, 1987 to employees; 95,454 of these options remain
outstanding as of September 30, 1997.
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. 260,000 of these options remain outstanding as of September 30,
1997. In March 1997, Herb D. Vest, principal common shareholder, purchased
150,000 options from two former employees of the Company in a private
transaction. The options are included in the 260,000 outstanding options at
September 30, 1997.
In November 1992, the Company resolved that the independent directors are to
receive stock options for 2,000 shares of common stock to be exercisable at the
price of the common stock on the date of issuance and to be issued quarterly to
the independent directors. At September 30, 1997, 68,000 options have been
issued and remain outstanding.
37
<PAGE>
As a result of the foregoing, options covering 397,752 shares of common stock,
with exercise prices ranging from $5.00 to $8.50 per share have been issued to
officers and directors of the Company. The following table provides information
with respect to the named officers and directors concerning the options
outstanding as of September 30, 1997:
Aggregated Option Exercises in Last Fiscal Year
End and Fiscal Year End Option Values
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Number of Unexercised Options Value of Unexercised,
Shares Held At In-The-Money Options at Fiscal
Acquired Fiscal Year End Year End (1,2)
Through ------------------------------ -------------------------------
Name Options Value Exercisable Unexercisable Exercisable Unexercisable
Exercised Realized
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Herb Vest - - 250,000 45,148 15,000 -
Barbara Vest - - - 45,148 - -
Wesley T. Sinclair - - - 1,456 - -
Jerry Prater - - 28,000 - 39,600 -
Phillip Mayer - - 28,000 - 39,600 -
</TABLE>
(1) Represents the difference between the closing price of the Company's common
stock on September 30, 1997 and the exercise price of the options.
(2) The current fair market value of the stock at September 30,
1997 was below the option exercise price.
COMPENSATION OF DIRECTORS
The Company's Board of Directors holds formal and informal meetings throughout
the year with management and shareholders to discuss Company affairs.
The Company's Board of Directors has an Audit Committee. The function of the
Audit Committee is 1)to oversee the Company's system of internal control and the
financial reporting process; 2)to review the internal audit function; 3)to
approve the selection of the Company's independent accountants; and 4)to review
audit reports. The members of the Audit Committee during fiscal 1997 were Jerry
Prater, Jack Strong and Phillip Mayer.
The Company's Board of Directors has a Compensation Committee. The Function of
the Compensation Committee is to review, discuss and advise management and
officers of the Company regarding compensation and other employment benefits
afforded officers and
38
<PAGE>
employees of the Company. The current members of the Compensation Committee are
the members of the Board of Directors: Herb D. Vest, Barbara Vest, Lynn R.
Niedermeier, Jack Strong, Kenneth Reynolds, Jerry Prater and Phillip Mayer.
Directors are reimbursed for travel and other expenses related to attendance at
Board and committee meetings. Total compensation to the Directors for the year
ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
Name Title Compensation
---- ----- ------------
<S> <C> <C>
Herb D. Vest Chairman of the Board of Directors $45,774
Barbara Vest Director 27,126
Jack Strong Director and Member-Audit Committee 30,126
Kenneth Reynolds Director 27,126
Jerry Prater Director and Chairman of the Audit
Committee 31,626
Phillip Mayer Director and Member-Audit Committee 30,126
Lynn Niedermeier Director 27,126
</TABLE>
Also, independent Board members are entitled to receive quarterly stock options
for 2,000 shares of Common Stock, exercisable at the price of the Common Stock
on the date of issuance. Mr. Strong and Strongworth, Inc., an entity with which
Mr. Strong is affiliated, received approximately $30,000 in professional fees
for services performed for the Company.
39
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following information is furnished as of September 30, 1997, to indicate
beneficial ownership of more than 5% of the Company's Common Stock, as well as
beneficial ownership by each director and certain executives, individually and
directors of the Company, as a group, of shares of the Company's Common stock.
<TABLE>
<CAPTION>
# OF SHARES
OWNER BENEFICIALLY OWNED % OF SHARES
----- ----------------- -----------
<S> <C> <C>
Herb D. Vest (1)(2)(3) 3,028,440 52%
Barbara Vest (1) 1,499,301 28%
Jerry Prater (4) 30,000 *
Phillip Mayer (4) 28,000 *
Lynn R. Niedermeier 21,337 *
Shannon A. Soefje 1,339 *
Kenneth E. Reynolds 550 *
Jack B. Strong 100 *
W. Ted Sinclair 25 *
Roger Ochs 1,909 *
Officers and Directors
as a Group 4,609,092 78%
</TABLE>
* Less than one percent.
(1) Herb D. Vest and Barbara Vest currently have escrowed 20% of their stock,
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. In addition, Herb D. Vest and Barbara Vest have pledged
portions of their remaining stock on outstanding lines of credit.
(2) Includes 250,000 exercisable Common Stock Options with an exercise price of
$5.00.
(3) Includes 166,667 exercisable Convertible Series A Preferred Stock with an
exercise price of $6.00.
(4) Includes 28,000 exercisable Common Stock Options with an exercise price
ranging from $2.38 to $5.06.
40
<PAGE>
Item 13. Certain Relationships and Related Transactions
- --------------------------------------------------------
MANAGEMENT AGREEMENTS
The Company has an agreement with Herb D. Vest (principal common shareholder)
for management services to the Company. The agreement with Herb D. Vest
provides for a management fee per year plus an annual bonus based on the
Company's performance related to revenue and net income goals, additions of
Company affiliates and Fee Based Assets under Management, as established by the
Board of Directors. Effective January 1, 1997, the Company increased the annual
management fee due to Mr. Vest to $900,000 from $750,000. The 30% increase in
the Company's revenues combined with positive earnings after consideration of
the bonus, as well as the other factors used to determine the bonus resulted in
the payment of $1,869,497 bonus under the executive officer's compensation plan
in fiscal 1997. The Company paid a bonus of $1,500,000 in fiscal 1996. No
bonus was accrued or paid under the executive officer compensation plan for the
fiscal year ended September 30, 1995. Management fees under these agreements
were $500,000, $2,187,500 and $2,731,997 for the years ended September 30, 1995,
1996 and 1997, respectively.
The Company also had a consulting agreement with Ms. Barbara Vest through
October 1996. In November 1996, Ms. Vest was employed by the Company as its
Representative Relations Director, thereby terminating her consulting contract.
Amounts paid to Ms. Vest during the years ended September 30, 1995, 1996, and
1997, under these arrangements were $200,000, $200,000, and $300,834,
respectively.
H.D. VEST INSURANCE SERVICES
H.D. Vest Insurance Services is a sole proprietorship owned by Herb D. Vest.
HDVIns general insurance agency appoints Representatives with various insurance
companies to enable them to sell insurance products to their clients. The
Company, in accordance with the terms of a facilities and services agreement,
provides certain management and other services to HDVIns and is paid a fee for
these services. The value of these services for fiscal year ended 1997 has been
determined based on the prorata
41
<PAGE>
portion of certain relevant expenses as a percentage of HDVIns revenues to total
consolidated revenues. To the extent the Company renders services to HDVIns for
which it is not compensated, such action could constitute a conflict of interest
since Mr. Vest is both the principal common shareholder and Chairman of the
Board of Directors of the Company. The services provided to HDVIns by the
Company are summarized below.
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 $551,379, $416,298 and $538,700 for the years
ended September 30, 1995, 1996, and 1997 respectively, for facilities and
management services rendered.
LINES OF CREDIT
The Company has an agreement to provide Herb D. Vest a revolving line of credit
in an amount not to exceed $2,000,000, collateralized by Mr. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement interest accrues on
unpaid principal balances at a rate of 11%. At September 30, 1997, Mr. Vest had
drawn $2,000,000 in principal against the line of credit. The Company has
recorded $190,039 of accrued interest on this line at September 30, 1997.
The Company has an agreement to provide Barbara Vest a revolving line of credit
in an amount not to exceed $700,000, collateralized by Ms. Vest's unrestricted
Company common stock in an amount equal to the unadjusted current balance of the
line of credit based on the stock's current ask price. The terms of the
agreement require an annual payment to be made on November 30 of each year equal
to one-seventh of the then outstanding principal plus accrued interest. The
final payment of all outstanding principal and accrued interest shall be due and
payable on or before November 30, 2001. Under the agreement, interest accrues
on unpaid principal balances at a rate of 11%. At September 30, 1997, Ms.
42
<PAGE>
Vest had drawn $482,216 in principal against the line of credit. The Company has
recorded $45,679 of accrued interest on this line at September 30, 1997.
SEVERANCE AGREEMENTS
During 1994, two Executive Vice Presidents resigned their positions with the
Company. The Company and these officers entered into severance agreements that
provided for the payment of severance to each officer of $16,667 per month and
continuing for 30 months, in exchange for an agreement restricting the use of
Company materials and information for a period of 48 months. In connection with
these agreements the Company charged $1,000,000 to general and administrative
expense during the fiscal year ended September 30, 1994.
During fiscal 1995, a former Executive Vice President rejoined the Company as
President. In connection with the officer's return, the Company and the officer
agreed to rescind the officer's severance agreement. During the first quarter
of fiscal 1995, the Company credited the then remaining unpaid severance of
$381,331 to general and administrative expenses. In December 1995, the
officer resigned as President of the Company. Under the officer's existing
employment agreement, the Company agreed to pay the former officer $16,600 per
month until October 1, 1996, in exchange for the former officer agreeing, among
other things, not to solicit clients of the Company's Representatives and not to
compete with the Company through that date.
EDUCATION COSTS
The Company maintains a formal policy for reimbursement of continuing education
expenses incurred by officers and employees. Employees are generally reimbursed
for expenses incurred in the pursuit of professional designations, undergraduate
degrees, graduate degrees or specialized training. The Company promotes
personal and professional growth of its employees in order to provide a
qualified staff to its Representatives.
401(K) RETIREMENT PLAN
In March 1993, the Company formed a 401(k)-retirement plan for eligible
employees. To be eligible for the 401(k) retirement 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
43
<PAGE>
annual limit of $1,848 per employee. Company contributions to the 401(k)
retirement plan for the fiscal years ended September 30, 1995, 1996 and 1997
were $46,568, $55,077 and $87,776 respectively.
44
<PAGE>
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
- ---------------------------------------------------------------------------
a) 1. Index to Consolidated Financial Statements
Report of Independent Public Accountants
Consolidated Statements of Financial Position
Consolidated Statements of Operations
Consolidated Statements of Shareholders' Investment
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules:
Schedule I - Amounts Receivable from Related Parties
3. Exhibits
Exhibit
-------
Number Exhibit
------ -------
3.1 Articles of Incorporation and Bylaws *
3.2 Second Articles of Amendment to Articles
of Incorporation +
10.1 Non-Qualified Stock Option Plan *
10.2 Facilities and Service Agreement with H.D. Vest
Insurance Services *
10.3 Registered Representative Sales Agreement +
10.4 Management Agreement with Herb D. Vest +
10.5 Management Agreement with Barbara H. Vest *
10.6 Termination Agreement with Barbara H. Vest +
10.7 Severance Agreement with Lynn R. Niedermeier o
45
<PAGE>
10.8 Severance Agreement with Steven C. Hastings o
10.9 Line of Credit Agreement with Herb D. Vest o
10.10 Line of Credit Agreement with Barbara Vest o
22 Subsidiaries of the Registrant
* Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1988.
+ Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1991.
O Incorporated by reference from the annual report filed on Form 10-K for the
fiscal year ended September 30, 1994.
b) Reports on Form 8-K (None).
46
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
H.D. VEST, INC.
---------------------------------------------
(Registrant)
Date: December 12, 1997 By: /s/ Herb D.Vest
------------------------------------------
Herb D. Vest
Chairman of the Board, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: /s/ Herb Vest By: /s/ Barbara Vest
-------------------------------- ---------------------------------
Herb Vest Barbara Vest
Chairman of the Board, President Director
and Chief Executive Officer
By: /s/ Phillip W. Mayer By: /s/ Lynn R. Niedermeier
-------------------------------- ---------------------------------
Phillip W. Mayer Lynn R. Niedermeier
Director Director
By: /s/ Wesley Ted Sinclair By: /s/ Jerry M. Prater
-------------------------------- ---------------------------------
Wesley Ted Sinclair Jerry M. Prater
CFO and Vice President Director
(Principal Financial and
Accounting Officer)
By: /s/ Kenneth E. Reynolds By: /s/ Jack B. Strong
-------------------------------- ---------------------------------
Kenneth E. Reynolds Jack B. Strong
Director Director
47
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FORM 10-K
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-START> OCT-01-1996
<PERIOD-END> SEP-30-1997
<CASH> 6,384,992
<RECEIVABLES> 9,502,278
<SECURITIES-RESALE> 0
<SECURITIES-BORROWED> 0
<INSTRUMENTS-OWNED> 0
<PP&E> 3,356,623
<TOTAL-ASSETS> 19,747,631
<SHORT-TERM> 0
<PAYABLES> 9,209,097
<REPOS-SOLD> 0
<SECURITIES-LOANED> 0
<INSTRUMENTS-SOLD> 0
<LONG-TERM> 2,339,632
0
1,500,402
<COMMON> 271,167
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 19,747,631
<TRADING-REVENUE> 0
<INTEREST-DIVIDENDS> 0
<COMMISSIONS> 68,736,399
<INVESTMENT-BANKING-REVENUES> 0
<FEE-REVENUE> 11,070,632
<INTEREST-EXPENSE> 222,271
<COMPENSATION> 55,759,660
<INCOME-PRETAX> 3,285,391
<INCOME-PRE-EXTRAORDINARY> 2,142,063
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,142,063
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
